Dairy crisis: How Wisconsin trading partners Canada and Mexico are surviving – eDairyNews
United States Canada Mexico |23 octubre, 2019

Dairy | Dairy crisis: How Wisconsin trading partners Canada and Mexico are surviving

Alfredo Gutiérrez wakes up some nights, so worried about how to keep his family’s small dairy farm going that he can’t get back to sleep.

A decade ago, he had high hopes for growing the business, located in Polotitlán, two hours north of Mexico City. He and his father designed and built a milking parlor for 250 cows. His brother, Ricardo, started a small artisan cheese plant on family land that would produce gourmet products with hints of nutmeg, rosemary or perhaps a taste of red wine.


Why are U.S. dairy farms struggling while those in Canada are making a profit? Bill Schulz, Milwaukee Journal Sentinel

The plan was for Alfredo to run the farm and Ricardo to use the milk for his cheese.

Today, the outdoor cattle pens are half empty; some cows had to be sold to buy feed for those that remain. Gutiérrez says the $1.17 he receives for a gallon of milk doesn’t meet his costs. His 75-year-old father regularly dips into savings to cover the losses.

His brother’s business lasted seven years. Undone by a 13% interest rate on his loan, competition from cheap products imitating cheese and several clients who didn’t pay him, the cheese plant now sits idle, its floor strewn with discarded furniture and equipment.

The Dairyland in Distress series is produced with the support of the Pulitzer Center. The center, a nonprofit organization that supports in-depth journalism projects, played no role in the reporting, editing or presentation of the project.
Gutiérrez is discouraged about the future of small dairy farms across Mexico. Many have been handed down for generations, part of a cherished way of life. Now, their owners lose money or barely break even.

“One sees this more as romanticism, because as a business, no,” he says.

Some 2,700 miles north, in Canada, Norman McNaughton’s 54-cow operation is thriving. The fifth-generation dairy farm sits on the edge of London, Ontario, surrounded by freshly-built homes, condos and golf courses. It sports a new barn and a robotic milking system.

His cows milk themselves when they feel like it. One at a time they stroll up to the milking station, nudge open the gate and step inside. A robotic arm swings down, sanitizes each teat and then attaches laser-guided suction cups to extract the milk. The cow munches on a snack dispensed by the machine as an incentive to cooperate.

If something goes wrong, McNaughton gets an alert on his smartphone. Sometimes he can solve the problem by sending commands. He can also tap into a live video stream and see whether it’s serious enough to drop what he’s doing and head to the barn. The robot’s manufacturer in Germany also can look in to see what’s happening.

McNaughton runs the farm with his 28-year-old son, Mike. Its success, he says, is a tribute to Canada’s milk supply management system. Under it, the amount of milk that farmers produce is limited to keep the supply in line with consumer demand. Milk prices are set to cover production costs and provide farmers with a nice profit.

“Our system isn’t perfect. But it does have stability,” McNaughton says.


Norman McNaughton purchased a robotic milking machine to increase the efficiency of his small dairy farm in London, Ontario. Mark Hoffman, Milwaukee Journal Sentinel

Countries’ fortunes intertwined
Wisconsin and its battered dairy farmers sit in the middle, eyeing the stability of Canada, wary of a future that looks more like Mexico.

At a time when transformative change is upending the United States dairy industry and family dairy farms in Wisconsin are dropping at a rate of more than two a day, Mexico and Canada are virtual opposites.

Yet the fortunes of U.S. dairy are intertwined with those of its closest neighbors and two largest export markets.

Twenty-five years ago, the North American Free Trade Agreement rewrote the rules of trade between the three countries. The new U.S.-Mexico-Canada Agreement, intended to replace it, has been signed by all three countries’ leaders and has been ratified by Mexico’s legislature, but it hasn’t yet been ratified by the legislatures of the United States and Canada. Even if that happens, improvements for the U.S. dairy industry would be modest.

Mexico’s borders are open to free trade, which has meant a flood of imports, primarily from the United States. Mexican farmers say the imports drive down the prices they receive for their milk. They are also hurt by products that imitate real milk and cheese – often made with imported dairy components, like powdered milk or whey. Lack of access to credit, high interest rates, scarce training programs and technical support, and poor infrastructure compound the problems.

From the state of Veracruz on the east coast to Jalisco on the west, owners of many small and medium-sized farms are exiting the business. Like their neighbors in the U.S., they are often unable to expand their herds or modernize equipment at a time when success increasingly depends on the efficiencies that come with larger size and technologies.

Alberto Ruíz sold his dairy herd in Tizayuca, Hidalgo, to a couple of larger operations about two years ago. His father had started it with 180 cows brought in from Wisconsin and Canada. The business, which had once reached about 650 cows, was losing the equivalent of about 10 cents per gallon of milk.

Ruíz now owns a real estate and construction business, but the loss of the dairy operation hurt deeply.

“You feel powerless, you feel the failure, you feel hatred, that because of a situation beyond you, you are bankrupting the family business that was in your hands,” he says.

In contrast, Canada allows only a small amount of imported products into the country duty-free or at low tariffs. Higher amounts are subject to steep tariffs – 245% on cheese or 298% on butter – essentially shielding Canadian farmers from foreign competition.

Without supply management, “many Canadian family farmers would simply go out of business,” the trade group Dairy Farmers of Canada says.

But many farmers carry high debt, and the system that protects them also constrains their growth and makes it very costly to get started.

“We have a huge debt load, no question about it. But we will chip away at it. We see a future,” McNaughton says.

Wisconsin farmers, many desperate and barely hanging on, may look north of the border with envy. But they need to look south as well.

“In the midst of our own struggles in the U.S., we usually don’t think about the farmers in other countries who we pushed underwater in an attempt to save ourselves,” says Kara O’Connor, government relations director for Wisconsin Farmers Union.

«If we do think about our Mexican counterparts who have lost their farms, we steel ourselves with the idea that ‘it’s just the cost of doing business’ or ‘they needed to get more efficient like us.’ ”

Mexico largest buyer of U.S. dairy

Mexico has imported dairy products for at least a half-century. But even with production growing at an annual average rate of 1.3% over the past decade, the country isn’t close to producing enough milk to meet its demand for dairy. There aren’t enough cows, given that the production per animal is less than it is in the U.S.

But imports have grown significantly in the last decade, pouring into the market after tariffs disappeared as part of NAFTA.

Álvaro González, president of the National Front of Producers and Consumers of Milk, a farmers association, says the Mexican government has traded the interests of its dairy farmers for the interests of its manufacturing industry, which benefits from open borders.

“For us, it’s the worst thing that could have happened,” he says.

Mexico is the largest buyer of U.S. dairy, last year accounting for nearly half of all U.S. exports of powdered milk and 28% of exported cheese. The value of U.S. dairy exports to Mexico in 2018 was $1.4 billion – eight times higher than when NAFTA went into effect in 1994.

The Mexican government estimates that dairy imports equate to a third of the national dairy consumption. Powdered skim milk is by far the biggest import. It is made by evaporating liquid milk until it’s dry and is used as an ingredient in food products.

Powdered milk has a much longer shelf life than liquid milk, and unless it’s mixed with water to make regular milk, it doesn’t need to be kept cold. Consumers can find it useful if they don’t have refrigerators – not uncommon in Mexico.

Mexico buys eight times more powdered skim milk than it produces, according to United Nations and Mexican government data. And Mexican farmers get paid about 20 cents less per gallon of milk than U.S. farmers.

A 2016 study by researchers at Universidad Autónoma de Coahuila found that since the late 1990s, prices paid to Mexican farmers for milk adjusted for inflation decreased in correlation to the increase in imports. Companies that used powdered milk as a raw material for their products benefited, as did distributors and retailers.

Farmers were the big losers.

“If the imports of large amounts of powdered milk and dairy byproducts continue, the price of fresh cow milk … will continue to be affected, causing the bankruptcy of more producers,” the study warned.

The solution, many farmers say, involves the government limiting imports or, at least, making sure that products destined for social programs come only from Mexican farms.

Supply management levels out prices
Canadian dairy farmers have little of the risk that Mexican farmers – or American ones, for that matter – accept as a part of daily life.

Supporters of Canada’s supply management system say it levels out the highs and lows of milk prices that have hammered farmers in other countries for years, allowing them to make long-term investments in their operations.

“You can go to the bank and say here’s what my income will be for the next 12 months,” says David Wiens, a dairy farmer from Manitoba and vice president of Dairy Farmers of Canada.

McNaughton’s new robotic milking machine is a luxury born of that confidence in the future. Dairy farmers say about half of the new farms built in Canada now have robots, reducing the need for hired help and lessening the workload on farm families.

“We like being in the barn,” McNaughton says. “We just don’t like milking cows.”

In 2018, the average net income of dairy farms in Canada was about $130,000 in U.S. dollars, according to the data firm Statista. That’s probably on the high side, according to farmers, but Statista said “there is a long-term upward trend in dairy farm net income,» with an increase of more than $26,000 (U.S.) on average since 2013.

“Supply management allows the farmer to receive a fair share of the consumer dollar, which often doesn’t happen in an unregulated environment,” Wiens said. “I look at it as a very civilized way to run an industry, getting back to the disciplines of production controls.»

Critics say the system results in Canadian consumers paying higher prices for dairy products. A gallon of milk that on average sells for $2.90 in the U.S. would cost approximately 50% more in Canada. Cheese, butter and yogurt are also more expensive.

If Canadians could buy dairy and poultry products from the United States without high tariffs, the average household would save $438 per year, says Vincent Geloso, a researcher with the Montreal Economic Institute.

The system especially hurts low-income families, according to Geloso.

“A one-dollar increase in the price of milk or chicken means much more to a household earning $25,000 a year than it does to someone earning $100,000,” he says. “Supply management actually has the effect of pushing many Canadians close to or below the poverty line.”

Low-cost alternatives pervasive

Many U.S. agriculture officials simultaneously want the Canadian market more open, while brushing aside blame for the problems in Mexico.

“The beneficiaries of this system are the consumers in Mexico because they have access to products that are reasonably priced,” says Tom Vilsack, president and CEO of the U.S. Dairy Export Council and U.S. agriculture secretary under President Barack Obama.

“That’s the whole point of trade. It provides choice, and competition leads to reasonably priced food.”

But in Mexico, where the median after-tax household income is less than one-third of what it is in the U.S., fresh milk and other dairy products can be too expensive for many consumers. And low-cost products imitating milk and cheese are pervasive – be it in remote village markets or at big urban retailers.

On the shelf of a typical Bodega Aurrera discount store – owned by American retail giant Walmart – 50-ounce cartons of Nutri are decorated with a cartoon of a friendly dairy cow and smiling children.

Until recently, the product was known as Nutri Leche, a word combination that implies “nutritious milk.” Next to Nutri stands a similar product, branded as “Forti Leche,” which suggests “strong milk.”

Both products are in the store’s dairy section, but neither is real milk. They contain cheaper vegetable oil, milk components and other ingredients. They have less protein and calcium than real milk – ingredients that are especially valuable for children and women.

At the bottom of the carton, the packages state they are dairy products with vegetable oil and added vitamins. But many farmers think the marketing of these and other products suggest the contents are fresh milk or the products they imitate, such as cheese.

Grupo LALA is the largest player in the Mexican dairy market, according to market research company Euromonitor International. The processor was founded by farmers in 1949 and sells all kinds of dairy products.

It also manufactures Nutri and other products that imitate dairy under the brand Nutri Leche, which it refers to in its most recent annual report as “a highly successful national brand that is designed to attend to segments of the population of medium and low socioeconomic level.”

Ramiro Pérez, executive director with the Association of Dairy Development in neighboring Guatemala, says that since LALA landed in his country about a decade ago, products imitating dairy are pouring into the market, just as they did in Mexico. “Those products do supply some nutrients, but they are displacing dairy products, which have a higher nutritional quality,” Pérez says.

Grupo LALA representatives declined to say whether powdered milk from the U.S. is in its Nutri Leche products. Research done at the Technologic University of Central Veracruz indicates that powdered milk from Dairy Farmers of America, Land O’Lakes and Darigold has been used in the company’s products. All are American businesses owned by co-ops or farmers.

Stan Ryan, Darigold’s CEO, wouldn’t confirm whether it supplies LALA, but says his company delivers quality products that meet high standards.

He says cheaper products that mix milk components with vegetable oil can have a beneficial impact in many underdeveloped economies. In a world where hundreds of millions are undernourished, those products can deliver low-cost energy and nutrition.

“Delivering nutrition at lower cost around the world is a good thing,” he says.

When compared based on the amount of protein and calcium, though, the Nutri products that imitate milk can be more expensive than the real thing. For instance, a glass of milk can cost about 25% more than a glass of Nutri, but carries 50% more calcium.

René Fonseca, general director of the National Chamber of Milk Industrial Companies, an association of Mexican dairy processors, doubts that consumers would drink more fresh milk if products imitating milk and other dairy disappear.

“You are going to take away the possibility of many sectors that are consuming dairy at an affordable price,” he said.

Production limits help in Canada

In Sault Ste. Marie, Michigan, a corner of the Upper Peninsula that borders Canada on two sides, dairy farmer David Bell says he’d be living in a better world if his farm were just 10 miles to the north.

“I’ve seen Canadian farms firsthand. … The cows have the best of the best. On my farm, I’ve had to delay maintenance, put off purchases and cut back on minerals, bedding and protein in the feed because of low and unpredictable milk prices,” Bell says.

“Low dairy prices don’t just affect me. … What happens to the neighbors and the young people I hire, the local feed mill, the implement dealer, the veterinarian? And then there are the parts that are harder to see, like the stress farmers face.”

Under supply management, every dairy farm in Canada has a certain amount of market share – called quota – that determines how much milk it can produce. Farmers can buy and sell quota, though it’s very expensive, sometimes the equivalent of $40,000 or more per cow, and the amount available is limited.

Farmers can only produce up to a certain amount of milk based on how much quota they’ve acquired. They can be penalized for exceeding the limit, and they might have to sell cows to remain in compliance.

Some farmers take out millions of dollars in loans to buy quota because it’s the only way they can expand their herds.

Regional milk marketing boards, which represent farmers, negotiate with dairy processors to set farm milk prices – aiming to cover production costs and ensure a profit.

It’s a give-and-take process, according to supporters.

“They don’t just pull a number out of a hat and say ‘That sounds good. We’re all going to make a million dollars,’ ” says Bruce Muirhead, a University of Waterloo history professor who has done extensive research on supply management.

Quota can be transferred between family members when the farm is passed from one generation to the next, and there’s a program for new farmers that provides a certain amount for free.

Canadian dairy farmers say if it weren’t for the protectionist philosophy, their country would see a deluge of cheaper milk from the United States, which has a chronic overproduction problem. The dairy industry in the U.S. is more than four times bigger than in Canada.

“The U.S., with just the amount of milk it spills every day, could supply the Canadian market,” says Wiens, with Dairy Farmers of Canada.

Quota systems vulnerable

Canadian dairy farmers say for years they’ve lived with the threat that supply management could be abolished, though there hasn’t been the political will to do it, especially in Ontario and Quebec where dairy farming is a revered way of life. There’s also a similar system for poultry farming in Canada.

Still, the systems are vulnerable, according to Geloso of the Montreal Economic Institute.

“There will be a point where farmers are so few in numbers, and the costs to consumers have become so high, that a politician will come along who’s willing to throw these farmers under the bus,” he says.

For Mexican farmers, the transition into an open market system was rough.

González, the head of the farmers’ association, says that when the Mexican government used to set milk prices, farmers received more than half the final price of fluid milk. Now, absent any government regulation on prices, they get about one-third. He blames milk processors and retail chains.

Fonseca, the official with the dairy processors, says blaming processors is misplaced. Processors, he says, don’t have a high profit margin. Packaging is a substantial cost, he says, and supermarket chains can push hard to reduce their prices.

Whatever is to blame – and it likely is a combination of factors – Fonseca thinks the solution wouldn’t come from restricting imports. If imports of dairy products were limited or taxed, in theory, that would drive up prices for dairy products in Mexico. But those prices, in turn, would drive down consumption.

He sees no scenario in which Mexico would shift to a more protectionist policy.

“Here, as a country, we took a route of openness and liberalization. That was the bet. And when you make a bet of such nature, it’s total,” he says.

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