How butter's surge in popularity led to Trump's attack on the Canadian dairy industry

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Three years ago, a team of researchers published in the Annals of Internal Medicine an innocuous-sounding study titled: Association of Dietary, Circulating, and Supplement Fatty Acids With Coronary Risk: A Systematic Review and Meta-analysis.

That study, which disputed the commonly held notion that saturated fat leads to heart disease, sent the food world into a frenzy. "Butter is Back," a New York Times headline proclaimed. "Julia Child, goddess of fat, is beaming somewhere," the paper wrote. In Canada, butter sales skyrocketed, to the point where producers had trouble meeting supply and parts of the country experienced shortages.

But the fallout was just beginning. Butter's surge in popularity would also play a role in the events that landed the Canadian dairy industry in U.S. President Donald Trump's crosshairs this week. It is also one reason the two countries may be catapulting towards a trade dispute.

In media appearances this week, Mr. Trump championed the dozens of Wisconsin dairy farmers who blame Canada for more than $150-million in losses in the past year. In Mr. Trump's eyes, the problem is Canada's "disgraceful" protectionist policies, and "very unfair" international trade deals such as the North American free-trade agreement. Other critics piled on, blaming Canada's controversial supply-management system, which strictly regulates the price and production of milk across the country.

But according to experts, the problem is actually a simpler one: Changing consumer tastes.

"I'm not sure anyone did anything wrong," said Mike von Massow, a professor of agricultural economics at the University of Guelph. "It's just the market condition changed."

At issue, Prof. von Massow said, is simple supply and demand. Milk is made up of two components: fat (also referred to as "butterfat"), and skim (or "protein"). Farmers cannot produce one without producing the other. And in recent years, demand for fat has outpaced demand for skim.

Producers have struggled to find uses for it – in Canada, selling it as skim milk powder, or in animal feed. Export has not been an option since a World Trade Organization ruling capped Canadian exports of dairy products.

Such an issue would usually be addressed by dropping prices. But in Canada's supply-managed system, prices are closely regulated.

"If you try to fix the price and not let the pricing mechanism operate, then you have these kinds of problems," said Rick Barichello, a professor of agricultural economics at the University of British Columbia. "It's like squeezing a balloon. You squeeze a balloon, and it has to pop out somewhere."

In 2015, when the problem was further exacerbated by inadequate processing facilities, some Canadian farmers dumped milk on farms and into sewage systems.

In the United States, producers turned to a relatively new technology from Europe that converts skim into a product called diafiltered milk – a high-protein ingredient that can be used to make cheese and yogurt. Because the ingredient did not exist when NAFTA was enacted, U.S. producers could export it to Canada tariff-free, and sell to Canadian dairy processors as a lower-priced substitute for local skim.

"This immediately created a pretty big loophole in which importers or processors could access these imports and use them, say, in cheese-making," said Al Mussell, research lead at Agri-Food Economic Systems.

And while this became lucrative for the U.S. farmers, it exacerbated matters for Canadian producers. The Dairy Farmers of Canada estimates that imported diafiltered milk has led to losses of about $200-million annually in sales.

To counter this, the Dairy Farmers of Ontario last year created a new category of milk that would capture diafiltered products, and based the pricing on global prices to become competitive with the United States. Other provinces are following suit.

This change led to tensions between U.S. farmers and the Canadian dairy industry, and is what now rankles Mr. Trump.

So far, Canadian officials have held their ground. Dairy Farmers of Canada spokeswoman Isabelle Bouchard pointed to comments Prime Minister Justin Trudeau has made in support of the industry. "We are confident that the Canadian government will defend and protect its dairy industry," she said. In an e-mail, she also took issue with using the word "surplus" in relation to Canadian skim – emphasizing that skim is used in cheese, yogurt and animal feed.

And in a letter to Wisconsin Governor Scott Walker, Canada's ambassador to the United States, David MacNaughton, disputed the claim that Canadian policies are to blame, writing instead that "poor results in the U.S. sector are due to U.S. and global overproduction."

Experts say the move to balance out the long-standing issue of surplus skim in Canada is worth fighting the United States over. "This is a crucial issue for Canada," Mr. Mussell said. "We can't go on. We have to have a way to deal with our skim. It really is a hill worth dying on, to put it that way."

And although the United States has claimed the change has cost U.S. farmers millions of dollars, Mr. Mussell said the latest trade data do not reflect this.

The United States exported about $631-million worth of dairy products to Canada in 2016 – up from about $553-million the year before, according to the United States Department of Agriculture.

Since Mr. Trump's comments on Tuesday, confusion has swirled over which aspects of Canadian policy in particular he takes issue with. In the absence of details, much of the discussion has focused on the polarizing issue of supply-management.

Earlier this week, federal Conservative leadership candidate Maxime Bernier, a critic of the system, slammed supply management in an op-ed for The Globe and Mail and vowed to dismantle it.

But it is too early for such discussions – at least in response to Mr. Trump's vague comments, Prof. von Massow said. "People who don't like supply management, as soon as there's an issue, bring up supply management," he said. "Even if this issue isn't related to supply management."

Mr. Mussell, too, said he is eager to hear specifics on the U.S. concerns.

"They haven't been really precise with regards to what exactly they're concerned about, nor what they're prepared to do with it," he said.

"I worry that what we've got here is a whole lot of rhetoric and not much substance."

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