‘Fortress Canada’ intact

American dairy farmers will benefit from the updated North American Free Trade Agreement because they get more access to the Canadian market and because the deal constrains Canadian exports of milk proteins.

However, at the end of the day, Canada’s dairy industry and supply managed system will carry on, an American agricultural economist says.

“Overall, I wouldn’t say one side won and the other side surrendered,” said Marin Bozic of the University of Minnesota.

“You still get to keep the ‘fortress Canada’ approach.”

On Sept. 30, Canada, Mexico and the United States agreed to terms on a new NAFTA deal, now branded as the United States-Mexico-Canada Agreement (USMCA). To get a deal, the federal government gave the Americans access to about 3.6 percent of Canada’s domestic dairy market. The agreement also terminates the controversial Class 7 pricing system, in which Canadian milk proteins and skim milk powder were sold to domestic processors at world prices and exported at world prices, thus blocking imports of milk proteins from the U.S. and undercutting American exports.

In the days after the deal was announced, Canadian dairy producers vehemently complained that the federal government “caved in” to U.S. demands.

“The true damage caused by USMCA is not limited to the access granted to the U.S. Our government has decided to tie our hands on the other side of the equation: constricting the Canadian dairy sector’s ability to export Canadian high quality dairy products, not only to the U.S. and Mexico, but also around the world,” the Dairy Farmers of Canada said in an Oct. 3 statement.

“As part of the USMCA, Canada has agreed to the U.S. demands to cap Canadian exports of skim milk powder, milk protein concentrates, and infant formula.”

Canadian dairy farmers may view USMCA as a huge loss, but Bozic doesn’t agree.

U.S. farmers will be permitted to sell more cheese, milk and other dairy products into Canada, but America will only get a small slice of the Canadian market, Bozic said.

“Yes, there might be some slight opening.… I don’t foresee there will be some dramatic gains for U.S. dairy producers, or dramatic losses for Canadian dairy producers.”

For many American dairy farmers, access to a small piece of Canada’s market isn’t a big deal because the country’s population is relatively small.

Most American producers were frustrated that Canada closed off its domestic market for milk proteins and exported milk protein to the world using the Class 7 pricing system.

“The Class 7 was my biggest beef. That needed to be resolved,” said Pat Lunemann, who manages an 800-cow dairy in central Minnesota. “It may not make Canadian dairy farmers happy, but we think it’s fair.”

Under USMCA, Canadian dairy farmers can still export milk protein concentrates, skim milk powder and infant formula, but the amounts are capped:

  • The threshold for milk protein concentrates and skim milk powder is 55,000 tonnes in year one of the deal and 35,000 tonnes in year two. After that, the threshold grows by 1.2 percent annually.
  • For infant formula, the threshold is 40,000 tonnes in year two and then grows by 1.2 percent annually.
  • In 2017, Canada exported about 70 million tonnes of skim milk powder worth $173 million.

Canadian dairy farmers may still have a strong domestic market for non-fat solids, which are used to make milk protein concentrates, skim milk powder and infant formula. The USMCA spells out a formula for Canadian pricing of non-fat solids, which is based on the U.S. Department of Agriculture price.

Several economists have commented that the U.S. price is essentially the world price, so Canadian dairy farmers can continue selling non-fat solids to domestic processors at the global price, which should prevent a flood of imports from America and elsewhere.

In the big picture, supply management will still exist in Canada and that may be the real benefit of USMCA for America’s dairy industry, Bozic said, because if supply management disappeared, Canadian dairy farms could become large, efficient and globally competitive.

“Those people in the United States that really understand dairy, they don’t want Canada to give up supply management. (If) you guys give up supply management you would be a much fiercer competitor to us … in our own market and even in the world market.”

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