To meet growing demand for butter, dairy farmers in five eastern Canadian provinces approved a five percent dairy quota increase, effective July 1. It’s the largest one-time quota increase since the system was implemented nearly two decades ago.
According to AgCanada.com, the quota policy covering Prince Edward Island, New Brunswick, Nova Scotia, Quebec and Ontario – collectively called P5 – previously implemented incremental quota increases totaling 7 percent between August-December 2016.
In a statement, Dairy Farmers of Ontario said the additional increase is needed to meet the growing demand for butter in Canada. Dairy processing capacity has increased since April, but is being closely monitored.
While the P5 quota system seeks to increase butter fat supplies, the increased milk production also yields surplus protein in the form of skim milk powder (SMP).
To deal with the excess protein, Canada has changed dairy ingredient policies, lowering prices on milk protein isolates used in the production of cheese. That made U.S. exports of ultra-filtered (UF) milk and milk protein concentrates uneconomical, essentially slamming the door on shipments to Canada and forcing some U.S. companies to shut down UF milk processing operations. That has further hampered U.S. dairy processing capacity already stretched by large milk supplies.
“The ingredient strategy is a business-to-business agreement which was developed between the processors and the farmers to adapt to ever-changing market conditions in Canada,” said Yves Leduc , director of Policy & Trade for Dairy Farmers of Canada. “In due diligence, we are making sure we are responding to the needs of the Canadian market. We firmly believe that the agreement respects Canada’s international obligations as per the international agreements that Canada is a signatory to.”
International coalition calls for action
The fear of increased dairy proteins on the global market is drawing criticism from a growing number of dairy exporting countries.
On June 27, an international coalition of 10 dairy industry organizations, including three U.S. dairy groups, asked their governments’ trade ministers to intercede in the increasingly acrimonious dispute. The groups co-signed a joint letter requesting their respective trade ministries “pursue all avenues available to challenge these measures, including WTO (World Trade Organization) dispute settlement and bilateral trade agreement relationships.”
The U.S. dairy sector, represented by the International Dairy Foods Association (IDFA), National Milk Producers Federation (NMPF) and U.S. Dairy Export Council (USDEC), together with seven dairy groups from Argentina, Australia, the European Union, Mexico and New Zealand, is insisting Canada remove the policies. They allege the policies are facilitating the dumping of Canadian dairy products in the international market, while making already prohibitive Canadian restrictions on dairy imports more onerous.
Jaime Castaneda, NMPF/USDEC senior vice president, shared similar sentiments in oral testimony before a United States Trade Representative’s Office hearing, June 27.
“For years, Canada has used tariff and nontariff measures to impede dairy trade,” Castaneda said. “Most recently, it has shifted from primarily using those tools to restrict access into its own market and is now actively using policy tools to help its industry dispose of excess milk powder onto global markets at fire-sale pricing.”
Between 2009 and 2015, Canadian exports of SMP increased modestly, from 10,100 tonnes to 13,600 tonnes annually. The adoption of Ontario’s Class 6 policy in April of 2016 saw SMP exports jump 74 percent, to 23,700 tonnes in 2016. In February 2017, Canada implemented a special milk Class 7 pricing policy, lowering milk ingredient prices for Canadian processors and designed to incentivize the substitution of domestic Canadian dairy ingredients for imported ingredients. In the first four months of 2017, Canadian SMP exports totaled 11,900 tonnes, for a year-over-year increase of 273 percent, swelling global supply of milk protein and depress market prices for farmers around the world, according to the letter.
Despite Canadian SMP export increases, Leduc said Canadian SMP volumes remain small in comparison to volumes put on the global market by the U.S. and other exporting counties.
“As far as I’m concerned Canada is far from being a major exporter of skim milk powder on the world market,” he said. “We’re not even a player on the world market when you compare the size of the Canadian dairy industry with the size of the U.S. dairy industry,” Leduc said.
According to U.S. Dairy Export records, U.S. skim milk powder/nonfat dry milk exports in the first four months of 2017 were at record levels, totaling 204,264 metric tons, up 16 percent from the year before.
Jim Mulhern, NMPF president and CEO, said “Canada’s revised dairy policy amounts to a ‘beggar-thy-neighbor’ approach, damaging not just its neighbor to the south, but also causing harm to other major dairy exporting countries around the world. This policy must stop now, before any more damage is done to American farmers and those from other nations seeking to compete on a level global playing field.”
“Canada has been adopting policies that run counter to our longstanding agreements and upending what has until recently been a mutually beneficial trade relationship,” said Tom Vilsack, USDEC president and CEO. “Our trade agreements must be honored and not ignored—or worse—by our closest neighbor.”
Michael Dykes, IDFA president and CEO, said the Canadian policies must be addressed in North American Free Trade Agreement (NAFTA) renegotiations.
The letter was sent to U.S. Trade Representative Robert Lighthizer, as well as to Argentina and Australia’s Ministers for Trade, Mexico’s Secretary of Economy, the EU Commissioner for Trade, and New Zealand’s Minister of Trade. In addition to the U.S. dairy leaders, the letter was signed by the CEOs of the European Association of Dairy Trade (Eucolait), European Whey Products Association (EWPA), European Dairy Association (EDA), Dairy Companies Association of New Zealand (DCANZ), Camara Nacional De Industriales de la Leche (CANILEC), the Centro De La Industria Lechera (CIL) and the Australian Dairy Industry Council (ADIC).
"Our respective dairy industries are firmly of the view that the operation of Ontario’s Class 6 and Canada’s Class 7 contravene Canada’s international commitments,” the letter reads in part. “Canada's increasingly protectionist policies are diverting trade with attendant global price-depressing impacts, and are in conflict with the principles of free markets and fair and transparent trade. We therefore request the authorities of Argentina, Australia, the EU, Mexico, New Zealand, and the U.S. to take all steps available to them to resolve this issue and ensure that Canada complies with its international obligations."
Earlier this month, U.S. Secretary of Agriculture Sonny Perdue conducted a series of meetings with Canadian officials, raising the points of disagreement and reinforcing that these issues need to be resolved, particularly in light of the renegotiation of NAFTA.
Progressive Dairyman Canada editor Karen Lee contributed to this artricle. 
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