Prime Minister Justin Trudeau and U.S. President Donald Trump take part in a joint press conference at the White House in Washington, D.C., on February 13, 2017. There is talk that the Trump administration may dangle a deal on softwood lumber in exchange for a bigger piece of Canada’s protected dairy sector in the looming renegotiation of the North American free-trade agreement.Sean Kilpatrick/The Canadian Press
Donald Trump isn't alone in taking aim at Canada's dairy industry.
Maxime Bernier, the apparent front-runner to become the next Tory leader, has made dismantling supply management a centrepiece of his campaign.
And Dominic Barton, who is advising the Trudeau government on how to rev up the economy, similarly worries that the regime is thwarting vast food-export opportunities.
There is talk that the Trump administration may dangle a deal on softwood lumber in exchange for a bigger piece of Canada's protected dairy sector in the looming renegotiation of the North American free-trade agreement.
In spite of these external pressures, there is no serious thinking going on in Ottawa or provincial capitals about what a world without supply management would look like.
Without a Plan B, Ottawa risks getting forced into wrenching change by the United States, without properly laying the groundwork.
The Trudeau government's official position is that it fully supports the regime. The protective tariff wall. The strict quotas that limit production. The marketing boards. The generous prices paid to farmers. All of it.
Supply management has been a fixture in Canada since the 1970s. Ending it wouldn't be cheap or easy. The government would have to buy back quota from farmers. Dairy quota, which determines how much farmers can produce, has a market value of $23-billion, but a book value of as little as $3.6-billion (farmers who were around when the system was created paid nothing for their quota), according to a 2014 Conference Board of Canada study.
Farmers and dairies would also need transition assistance to help them grow and develop export markets, or to leave the business. Ottawa successfully did the same for Ontario's wine industry after trade challenges in the 1980s forced the abandonment of protectionist tariffs.
Supply management has become a costly anachronism as global trade in food grows rapidly. It severely limits the industry's ability to export. Large-scale exports of most milk and other dairy products are prohibited by the World Trade Organization, which has determined that the high regulated prices paid to Canadian dairy farmers are a subsidy. And it keeps Canadian farms and dairies relatively small, splintered and inefficient.
Canada is the only developed country that still dictates how much farmers can produce.
Many dairy farmers know their industry is on an unsustainable track, without significant reform.
The system has struggled in recent years to perform its most basic function – managing supply. The country has faced a severe butter shortage and a growing surplus of skim milk – the protein-rich liquid that remains after butterfat has been separated from raw milk. The problem has been exacerbated by surging U.S. imports of low-cost concentrated milk protein or ultrafiltered milk, which has displaced Canadian milk in the production of cheese and yogurt.
The surplus has forced farmers to occasionally dump skim milk and increasingly sell it as cheap animal feed.
It isn't just a problem of waste. The surplus is also putting a dent in the incomes of farmers, who get a blended price for their milk, based on the end use of the product. The more milk that goes to feed animals rather than people, the less money they earn.
The industry's answer has been to create a new pricing regime that encourages dairies in Canada to modernize and expand. The aim is to lower the price of milk destined for the production of cheese, yogurt and other products that use skim milk.
Ontario created a new milk class last year, and the rest of the country followed suit this year. Dairies such as Parmalat and Gay Lea are upgrading their plants in Ontario.
But the pricing change does not sit well with dairies in Wisconsin and New York, who say they have lost sales in Canada of ultrafiltered milk. And they have been urging the Trump administration to take a tough stand against Canada – in NAFTA negotiations or by filing a trade challenge.
That's the dilemma for dairy farmers. The price change may help prop up farm incomes and lead to some modernization on the processing side. But it's coming at the expense of trade peace.
Structured as it is now, the industry can't export, even if it wanted to. And consumers, particularly low-income ones, are bearing the brunt of Canada's inflated dairy, chicken and egg prices.
Through it all, the Trudeau government has become a passive bystander, rather than a catalyst for change.
Want to interact with other informed Canadians and Globe journalists? Join our exclusive Globe and Mail subscribers Facebook group