Proposed trade deal a ‘gut punch’ to Canada’s dairy sector, farmers say

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Canada may have saved the country’s protected dairy market for now, but deep concessions made to secure trade peace with the United States put the industry’s future at risk.

The renamed United States-Mexico-Canada Agreement will allow the United States to sell hundreds of millions of dollars’ worth of additional milk products in Canada, duty free. Key Canadian concessions include giving up an additional 3.6 per cent of the domestic dairy market, plus limiting exports and making significant changes to a controversial discounted pricing system for industrial milk ingredients, known as Class 7.

Ottawa will also allow additional imports of duty-free eggs and chicken.

Global Affairs Minister Chrystia Freeland promised on Monday to ease the pain on farmers by “fully and fairly” compensating them for lost market share. The former Conservative government had pledged nearly $4-billion in compensation as a result of earlier trade deals – a package that was put on hold by the Liberals pending the outcome of the North American free-trade agreement’s renegotiation.

At first blush, these concessions might seem relatively innocuous. But Canada’s supply-managed dairy market depends on carefully calibrating production and demand to deliver stable and relatively high prices to farmers. It does that by limiting imports of cheaper foreign milk products with strict quotas and tariffs of 150 per cent to 298 per cent.

Those basic protections remain largely in place, but the significant new U.S. imports of duty-free dairy products could accelerate the unwinding of a protected dairy market that began in the 1970s, when farmers' groups banded together to fix milk prices and limit supplies to prop-up prices and assure steady incomes.

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More imports means less income to share among farmers, who are heavily concentrated in Quebec and Ontario. It would also make it much more difficult for farmers to deal with chronic surpluses of skim milk – the protein-rich byproduct left over after butterfat has been skimmed from raw milk to make cream and butter. And it could render uneconomic several new and expanded Canadian dairy-processing operations – including those owned by Parmalat and Gay Lea – which were built to take advantage of the new lower price for milk ingredients, introduced early last year by provincial marketing boards.

Recent concessions given up in both the Canada-Europe and Trans-Pacific Partnership trade agreements have cost farmers $250-million a year in lost milk production, according to the Dairy Farmers of Canada.

“Supply management is dying a death of a thousand cuts,” said James McIlroy, a Toronto-based trade lawyer and consultant. He pointed out, for example, that this and earlier trade deals will more than triple volumes of imported duty-free cheese in Canada.

Exporting more milk to Canada won’t significantly help U.S. farmers, who have been grappling with low prices and oversupply for several years. But it could seriously upend markets in Canada.

“The state of Wisconsin produces more milk than all of Canada,” pointed out Graham Lloyd, chief executive of the Dairy Farmers of Ontario, which represents 3,600 farms in the province. “Getting a little more access to the Canadian market will not address what their challenges seem to be.”

Ben Loewith, a third-generation farmer who milks 470 cows with his father and uncle near Hamilton, called the deal a “gut punch” and worse than anticipated. He said new supplies of foreign milk will eat into demand for his product and force him to cut the size of his herd.

“Obviously, the processors are going to go with the lowest-cost supplier,” Mr. Loewith said on Monday, predicting farmers facing a drop in sales and prices would be forced to scale back their herds and dump surplus milk in manure pits or feed it to livestock. “There is only so much our system can take before it collapses on itself.”

In addition to granting new market access, the agreement reduces and caps Canada’s global exports of skim-milk powder, baby formula and milk-protein concentrates.

The combined effect of more imports and export limits will force farmers to cut milk production in Canada, warned Al Mussell, an analyst at Agri-Food Economic Systems in Guelph, Ont. The export cap on skim milk and concentrates is just 55,000 tonnes in the first year, far less than last year’s 70,000 tonnes in milk-powder exports alone.

“These caps appear limiting. This is quite a give by Canada,” Mr. Mussell said.

The Dairy Farmers of Canada said the deal would have a “dramatic impact” on farmers and the wider dairy industry. “We fail to see how this deal can be good for the 220,000 Canadian families that depend on dairy for their livelihood,” the group said.