Canada's dairy trade and the supply management system

Wow, it's been a while since my last post! I was away for a couple of weeks, but as for the rest, I can only put it down to political lethargy and a surfeit of Trump news, which has recently become an instant repellent for me.

So what has prompted this sudden renewal of interest? Canadian dairy economics and supply management? Sounds unlikely, but it's an issue I have never really understood and wanted to get my head around, and a recent article about Canada's dairy trade woes with the USA has provided me with some answers at least.

Mr. Trump is currently blowing hard about Canada's "unfair" dairy policies, bleating that American dairy farmers in Wisconsin and New York are "getting killed" by the current provisions of NAFTA on the dairy trade. And, unusually, he may actually have a point, although as usual his language is characteristically exaggerated and excessive, and the story is predictably much more complicated than he suggests. Ground zero in the allegations being throw around is the state of Wisconsin, known as the dairy capital of America, and coincidentally instrumental in Donald Trump's narrow election victory (as well as the home state of the influential Republican House speaker Paul Ryan).

The current dispute has been precipitated by a recent decision by Canadian milk marketing boards to introduce a new classification for a type of milk concentrate used to make cheese, a classification that apparently makes it much more beneficial for Canadian cheese companies to use domestic milk rather than import cheaper milk from the USA. As a result of this new policy, the American milk processor Grassland Dairy Products summarily cancelled 58 contracts with dairy farms in Wisconsin and another 9 in Minnesota, arguing that it has suffered a "severe loss" and been "forced to cut back on our milk intake volumes on a very short notice".

But further contributing to the problem is the fact that the world, the USA, and Wisconsin in particular, is currently facing a huge glut and oversupply of milk - a problem clearly not of Canada's making - and so farmers like those in Wisconsin just have nowhere else to go, and many are faced with selling off their cows where possible, or even slaughtering them for meat.

While dairy practices in the USA are even more egregious than those in Canada, the machinations currently at work in the industry are almost entirely economic and not related to the environment or animal welfare. Somehow, NAFTA notwithstanding, Canada has managed to maintain a huge 270% duty on most imported dairy products, which keeps most imports out (and also props up artificially high dairy prices at home). Up until recently, "ultrafiltered milk", a milk concentrate primarily used to make cheese and yoghurts, has been exempt from this duty, and this is the loophole that many Canadian cheese and yoghurt manufacturers have been taking advantage of in using cheaper American ultrafiltered milk. It is the reversal of this exemption, then, that has precipitated the current crisis.

Although not immediately to blame for the current situation, the infamous Canadian regime of "supply management" is also implicated in the fracas. The dairy industry in Canada, as well as the chicken and egg industries, has since the 1970s been protected by a tariff wall to block imports, strict production quotas and centrally fixed prices. The practice has faced mounting criticism from abroad, particularly from America, Europe, Australia and New Zealand, and is even under fire internally, as it leads to artificially high prices for Canadian dairy, eggs and chicken. Although Canada had nearly 140,000 dairy farms at the time the policy was implemented, that number is now down to  about 12,000 and falling annually, so one would have thought that it might be an idea whose day has passed. Nevertheless, all three major political parties still strongly support it, and the dairy lobby is still disproportionately powerful.

The official Canadian response to the current American spat over dairy tariffs is that the global oversupply of milk is the main culprit, but the supply management system is most definitely the elephant in the room, and it would frankly surprise me if it survived the current negotiations. And that may not actually be a bad thing (unless you are a Canadian dairy farmer, of course).
Not that the USA is not also subsidizing its own dairy industry, but that's another story....