People on both sides of the border could be forgiven for assuming that Canada’s powerful dairy cartel, prone to marching cattle up and down Parliament Hill when things don’t go their way, had convinced the Justin Trudeau government to slap some new tariff on U.S. milk imports.
After all, Canada’s supply management system keeps out foreign milk and ensures we all pay artificially high dairy prices.
In this case, though, nothing could be further from the truth. Canada’s 12,000 dairy farmers are being criticized for taking the opposite strategy: they allowed the price of some domestic milk ingredients to go down.
This means Canadian cheese makers who had been importing U.S. milk ingredients tariff-free under a NAFTA loophole can now buy the same ingredients at home for the same price.
“We adjusted the price of some dairy proteins,” said Murray Sherk, who milks 125 dairy cows in Plattsville, Ont., about 120 kilometres west of Toronto. “The industry has decided to make the price competitive.”
As the lower milk protein prices roll out across Canada, big dairy processors, such as Parmalat Canada and Gay Lea Foods Co-op Ltd., say the deal gives them the incentive to invest money in new technology to process Canadian milk.
Since this newfound enthusiasm for Canada’s milk results from lower domestic prices rather than tariffs, it appears that, in the short term, there is very little that Trump can do to stop them.
“We have unprecedented growth in butter, cream and ice cream in Canada,” said Graham Lloyd, a lawyer who is a spokesperson for the Dairy Farmers of Ontario. “Domestic processors are investing in significant infrastructure for Canadian dairy. These are long-term, stable jobs that stick around.”
Make no mistake, Canada’s dairy farmers had initially asked the government of Canada to help them fight the cheap milk ingredient imports.
On June 2, 2016, hundreds of dairy farmers from Quebec and Ontario stormed Parliament Hill in a raucous protest. Some drove tractors, and one farmer from St. Isidore, Ont., brought a spunky Holstein cow named Ninja.
The farmers demanded that Trudeau “put on his boxing gloves” to defend them against the import loophole, which they said took about $220 million out of their pockets in 2015.
At the same time, Canadians’ demand for butter fat has gone through the roof. Milk contains two things: cream and skim. Even as cheap imports undercut the Canadian farmers, the demand for fat, to use in cheese, yogurt and other milk products, left oceans of unwanted skim milk sloshing around Canada.
But then the dairy farmers and the dairy processors sat down and worked it out among themselves, although the negotiations were not easy.
“There is a unique relationship between dairy farmers and processors,” said Mike Barrett, chief executive at Gay Lea, which is owned by dairy farmers in Ontario and Manitoba. “It was not without tears and frustration and anger and ripping each other’s hair out. But they did finally come together with a compromise.”
The deal to create a new class of dairy products, called Class 7, and lower the price of milk protein, also soaks up the skim milk surplus.
“It’s a mechanism to restore balance in this market, which was so surplus skim,” said Al Mussell, an agricultural economist who operates Agri-Food Economic Systems in Guelph, Ont.
Mussell said he doesn’t see what leg Trump has to stand on in fighting Canada on this particular point.
“At the end of the day, it’s competition,” he said. “We will compete with the imports. It’s not like we’re making imports illegal or putting on a tariff. It’s just competition. It would be a shame if they really raised a stink about this. The worry here is that the president is looking for a win here and anything will do.”
Added Sherk, “We are somewhat miffed by Donald Trump’s comments because the dairy trade surplus is about $450 million in favour of the United States.”
U.S. Department of Agriculture statistics show that total U.S. dairy exports to Canada rose to US$593 million in 2016 from US$423 million in 2012.
But even as U.S. dairy exports to Canada have risen, the U.S. has faced challenges with its other export markets.
“China has backed away from importing dairy from everywhere,” Mussell said. He said U.S. dairy exports to India, Indonesia and Vietnam have also slipped.
Meanwhile, as U.S. dairy struggles, Canada’s dairy sector is getting new investments.
Gay Lea Foods, based in Mississauga, Ont., is pouring $60 million in what is called a “dryer” in the hamlet of Teeswater, Ont., near Lake Huron. This machinery will transform skim milk into esoteric byproducts such as milk protein concentrates, milk protein isolates, whey power, neutriceuticals, pharmaceuticals and even infant nutrition products.
These products are precisely what were pouring in from the U.S. tariff-free until Canadian dairy farmers dropped their prices.
“Without that [price drop], we would not be making this investment,” Barrett said.
Overall, Gay Lea is investing $140 million over four years at its plants across Ontario, in such small towns as Ivanhoe and Stirling, and installing new filling and processing equipment, packaging lines and receiving bays.
The company also has a 50-50 joint venture with Vitalus Nutrition Inc. of Abbotsford, B.C., to build a new dairy processing plant in Winnipeg.
“This will allow Manitoba dairy farmers to grow,” Barrett said. “A lot of their milk was being shipped for processing to Alberta.”
Parmalat is also investing in a new ultra-filtered production line in Winchester, Ont., where the company makes the famed Balderson cheddar.
“It’s kinda neat that everyone has come together on this ingredients strategy,” said Robbie Beck, who with his wife and two teenagers milk 40 dairy cattle in Shawville, Que., west of Gatineau. Those cows include Lia, who became a star during a protest at Parliament in September 2015.
“This program has given us the opportunity to produce a slightly higher volume,” Beck said. “There is a lot of buzz around potential investment and processing capacity. I think it’s a good thing for the Canadian dairy industry to look after itself.”
Source: Financial Post