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New NAFTA good news for dairy prospects in United States, experts say

October 1, 2018

Canadian dairy farmers say they’re on the losing end of a new trade pact with the United States that will allow Americans to ship more milk north.

The new deal, which also includes Mexico, will give the U.S. greater access to Canada’s protected dairy market and eliminate its new milk pricing system, one that’s been repeatedly attacked by President Donald Trump.

Dairy was one of the core remaining hurdles to striking a renewed North American Free Trade Agreement and Prime Minister Justin Trudeau had vowed to defend the nation’s restricted sector.

“It’s been very, very disappointing they have agreed to it,” said David Wiens, vice-president of the Dairy Farmers of Canada, an Ottawa-based industry group that represents the nation’s 12,000 producers. “It’s a big win for the U.S. and well, for Canada, it’s a loss.”

As part of the deal, Canada will eliminate its Class 7 milk policy that makes it cheaper for processors to buy domestic supplies of ultra-filtered milk, a concentrated ingredient used to boost protein content in cheese and yogurt. While the system helped support a wave of new processing capacity that’s being built across Canada, U.S. farmers complained it effectively blocked imports and dragged down world prices.

The U.S. is grappling with an oversupply of milk and Trump said in April Canada has made business for American dairy farmers “very difficult.” Canada’s concessions will boost the amount of milk, cheese and cream the U.S. can ship tariff-free, including increasing fluid milk exports to 50,000 metric tons by year six of the agreement, according to the office of the U.S. Trade Representative.

The deal is potentially good news in Indiana, which has about 1,000 dairy farms, but has seen dozens of them close since the beginning of the year because they struggled to find enough buyers for their milk. 

Canada will also give the U.S. more access to its supply managed dairy system, which controls output by matching production with demand through quotas and import tariffs. Canada had already given up a cut of its lucrative dairy sector in two previous trade deals, one with the European Union and another with Pacific Rim nations. Canada’s concessions will total 3.59 percent, according to Wiens.

The result will curtail investment in Canada’s dairy sector and likely cause farmers and processors to put any expansions on hold, Wiens said. With more American products on store shelves, demand for Canadian dairy products will fall and some domestic processing and expansion projects may be scaled back, he said.

‘Dumping ground’

“The Canadian dairy market will now be filled by surplus milk,” from the U.S., Wiens said by telephone. “It’s not going to resolve any of their issues but they have another dumping ground for their surplus product.”

The U.S. first proposed phasing out Canada’s dairy system in NAFTA talks and eventually sought more moderate demands. Americans are drinking less milk and total consumption has tumbled as consumers swap dairy for alternatives such as almond milk. At the same time, growing demand for butter and cream has resulted in excess supplies of skim milk that are left over when butterfat is removed.

The Canadian government was prepared to be flexible on dairy as they weren’t going to allow a full dismantling of the nation’s supply-managed system, said Ian de Verteuil, head of portfolio strategy at CIBC Capital Markets. Canada has consistently given quota on trade deals and it “would have been naive to think they wouldn’t do that this time,” he said.

Bruno Letendre, head of the Quebec milk producers association, said Monday the agreement is a bad one for the Canadian industry. Trudeau “negotiated on his knees, and I’m being generous,” Letendre said in an interview with ICI RDI television. “You couldn’t have a worse deal for the milk producers.”

The discontent may play into the Quebec election, taking place Monday.

“We’re disappointed,” Francois Legault, head of front-running Coalition Avenir Quebec, told reporters Monday in L’Assomption, Quebec. “There were compromises made on supply management that will hurt our agricultural producers. I want us to look at all options to defend our producers.”

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