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Why Milk Matters in U.S.-Canada Trade Feud

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09/01/2018 | 06:14am EDT

By Heather Haddon and Paul Vieira Sometimes it's hard to say what is fair in trade and war. Few spats demonstrate that more amply than U.S. disagreements with Canada over the international dairy market.

The U.S. exported $637 million worth of milk, cheese and other dairy products to Canada in 2017, enough to run a $418 million trade surplus in the category, according to U.S. Department of Agriculture data.

Is that a win for U.S. farmers? No, says the Trump administration. Dairy trade is a central grievance of U.S. negotiators with Canada as they debate a rewrite of the North American Free Trade Agreement.

Talks between the U.S. and Canada on resolving differences concluded Friday without a deal, but both sides agreed to continue negotiations next week. The U.S. Trade Representative issued a statement saying Canada had yet to offer any concessions on agriculture, a U.S. priority.

The Trump administration says U.S. farmers are treated unfairly by the complex "supply management" system that governs Canada's dairy market, under which the government sets milk prices and imposes quotas on domestic producers to keep supplies in check. As part of this system, Canada limits dairy imports and imposes steep tariffs of more than 200% on products that exceed those limits.

President Trump has called Canada's dairy protectionism a disgrace. New York Gov. Andrew Cuomo, a bitter political rival, has taken his side on this one. Mr. Cuomo wrote the president a letter last year accusing a Canadian decision to shut off U.S. exports of ultrafiltered milk -- a high-protein concentrate used in cheese making -- a "blatant violation of international trade agreements."

Critics say Canada's system unfairly limits market access and distorts prices. "The president has stated numerous times that the U.S. needs to address Canada's dairy issues," said Jaime Castaneda, senior vice president at the National Milk Producers Federation trade group. The industry wants to see "an agreement that addresses Canadian dairy policies that hinder U.S. exports."

The U.S., Australia, Europe and other countries with large dairy sectors have long wanted greater access to Canada's robust consumer sector. The U.S. dairy industry is trying to cultivate global markets as U.S. milk consumption falls and more-efficient production methods contribute to persistent oversupply. Last year U.S. farmers exported around 2 million tons of product, much of it to Mexico and China.

However, Canada's 11,000 commercial farms hold substantial political sway. The bulk of them are in vote-rich pockets of rural central Canada, especially French-speaking Quebec.

Supporters of Canada's supply management system say it helps keep prices stable and has limited Canada's contribution to a dairy glut now plaguing world markets.

Dairy farming "is a motherhood issue here," said Jon Johnson, senior fellow at Toronto-based C.D. Howe Institute and former government trade negotiator.

If Canada agreed to abandon its regime of supports and restrictions, "our dairy industry would probably be wiped out," he said. "The state of Wisconsin could easily supply all of Canada's needs."

Canadian Prime Minister Justin Trudeau said Friday that Canada's dairy regime works for farmers and consumers. "We know the Americans would love for us to eliminate supply management. We will not do that. We will not give in."

The Canadian government is hardly a lone actor in its deep involvement in its domestic dairy industry. Milk supply in the U.S. has in the past been seen as a national security interest, important to the well-being of babies and children. The U.S. government, for that reason and others, has had a long and historic involvement in domestic dairy farming, with a pricing system whose roots go back to the Great Depression.

U.S. dairy imports are restricted through quotas, tariffs and licensing requirements. Prices are regulated through a complex system managed by the USDA, which sets minimum prices. When prices fall below regulated minimums, farmers can apply for federal assistance.

Additionally, the industry got a cut of the Trump administration's initial round of aid to help farmers suffering from depressed prices as a result of g lobal trade spats. Dairy farmers were allocated $127 million through direct payments and $85 million in government purchases of surplus dairy goods.

Canada has internally debated the merits of its own supply management program for years. It made concessions to open up its dairy market in other recently negotiated trade pacts. Most notably, in the Trans-Pacific Partnership deal involving Pacific Rim countries, Canada agreed to increase foreign access to its market in the amount of 3.25% of its annual milk production.

Mr. Trump, however, pulled the U.S. out of that deal, irking Canadians. "They got their backs up," said Matt Gold, a former deputy assistant U.S. Trade Representative for North America under President Barack Obama. "A problem that had been solving itself instantly became unsolvable."

The U.S. is now looking for new concessions from Canada in talks over rewriting Nafta. That could include a new agreement to open access to its market, including the ultrafiltered milk restrictions that have recently incensed U.S. farmers and farm-state politicians.

But increased access isn't free trade, nor is it easy to judge whether it will be fair. That's because any agreement that emerges is unlikely to fundamentally alter long-running and entrenched government involvement in the industry on both sides of the border.

Write to Heather Haddon at heather.haddon@wsj.com and Paul Vieira at paul.vieira@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
CHEESE FUTURES (CSC) - CMG (ELECTRONIC)/C1 0.00% 1.811 End-of-day quote.31.47%
CLASS III MILK FUTURES (DC) - CMG (ELECTRONIC)/C1 0.12% 17.35 End-of-day quote.25.38%
CLASS IV MILK?FUTURES (GDK) - CMG (ELECTRONIC)/C1 0.36% 16.91 End-of-day quote.11.91%
DRY WHEY?FUTURES (DY) - CMG (ELECTRONIC)/C1 0.00% 34.775 End-of-day quote.-25.69%
EURO / CANADIAN DOLLAR (EUR/CAD) -0.31% 1.46501 Delayed Quote.-6.10%
NONFAT DRY MILK FUTURES (GNF) - CMG (ELECTRONIC)/C1 -0.14% 104.25 End-of-day quote.15.15%
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