Blame Canada. That’s what US dairies say about some of the bubbling gluts weighing on the milk market, and they are eager for President Donald Trump to do something about it.
While growers and exporters of US crops and food products have expressed anxiety over Trump’s restrictive immigration policies and determination to renegotiate trade deals, dairies see him as an opportunity to crack what they see as Canada’s protectionist milk practices, and to help ease oversupply in some regions.
A key battleground is the little-known market for ultrafiltered milk, a concentrated ingredient used to boost protein content in cheese and yoghurt. Canada is creating incentives for processors to buy from domestic manufacturers. US producers say that could be a disaster, and they allege the new policy would violate trade agreements. Companies in Wisconsin and New York alone might lose $150 million in sales north of the border.
“[Canada] seems to want to have the free flow of goods south, but are protective of anything going north, so it’s time to sit down and talk,” said Kevin Ellis, chief executive officer of Cayuga Milk Ingredients in Auburn, New York. The company exports $30 million a year of ultrafiltered milk to Canada. “My hope is that the Trump administration takes them on.”
Canadian Perspective
The view is different from the Dairy Farmers of Canada. The Ottawa-based industry group, which represents 12,000 farms, says imports of US ultrafiltered milk causes an estimated C$231 million ($176 million) in annual losses for domestic producers. Under the 1994 North American Free Trade Agreement, which Trump has lambasted as “the worst trade deal ever”, most US dairy products face duties of as much as 300%. Ultrafiltered milk wasn’t part of those rules and arrives in Canada without tariffs.
Any restriction on exports is bad news for American dairy producers, who saw cash receipts drop to a six-year low of $34.2 billion, US Department of Agriculture data shows. Low prices and global surpluses have hurt the entire US farm economy, with net income forecast to drop for a fourth straight year in 2017.
The news isn’t all bad for US producers. Even with expanding record output, domestic prices are expected to rebound in 2017, according to the USDA. Americans are eating more cheese and butter, and US output may be needed to fill supply shortfalls elsewhere in the world.
The new Canadian policy on ultrafiltered milk, dubbed the National Ingredient Strategy, hasn’t been finalised yet, but US dairy groups already don’t like what they’ve seen.
Canada is already “prohibitive” for American farmers, and its “increasingly protectionist” stance isn’t in keeping with trade obligations under World Trade Organisation agreements and NAFTA, the Washington-based National Milk Producers' Federation said in a statement last year. The group urged Trump to push back against the changes.
The president has pledged to renegotiate NAFTA as part of an “America first” policy. House Speaker Paul Ryan emphasised the importance of “breaking down trade barriers and improving market access for America’s dairy farmers” during a 13 February meeting with Canadian Prime Minister Justin Trudeau in Washington.
Canadian Agriculture Minister Lawrence MacAulay, at a Winnipeg industry conference last week, called the country’s supply-management system for dairy a “model for the world” that the government strongly supports. The new ingredient strategy was put together by dairy farmers and manufacturers, he said.
“It’s the Canadians who have vehemently resisted trade with us and fought to slam shut what few doors are open,” said Shawna Morris, vice-president of trade policy at the National Milk Producers' Federation. Still, until a final version of Canada’s new policy is released, no disputes can be officially filed, she said.
Canada controls dairy production through quotas, and imports are restricted with tariffs under a system known as supply management. Regulators have been tight-lipped about the potential changes and when they will officially come into effect. The strategy is still being negotiated, “so we won’t discuss it,” Isabelle Bouchard, a Dairy Farmers of Canada spokeswoman, said in an email. The Canadian Dairy Commission didn’t respond to requests for comment from Bloomberg News.
Losing Customers
Meanwhile, American companies say they have already lost Canadian customers. Grassland Dairy Products, Inc., based in Greenwood, Wisconsin, annually exports $100 million of ultrafiltered milk to Canada. The company probably will lose all those sales in the next few months, said Goedhart Westers, vice-president of business development. It could take two or three years to find sales with similar returns to replace the lost exports, he said.
“Us losing this business, it means we might have to scale down,” Westers said. “It’ll affect employees, and the thousands of farms we buy milk from in the Midwest.”
The new policy would also place a cap on the amount of skim-milk powder that the Canadian Dairy Commission will buy back from dairy processors. That could lead to an estimated 120,000 metric tonnes of extra supply being sold into a two-million-tonne global market, causing a significant disruption in prices, said James McVitty, vice-president of government relations and trade strategy for New Zealand-based Fonterra Co-operative Group Ltd, the world’s biggest dairy exporter.
“We share the concern of the US industry,” McVitty said by phone from Washington.
Compounding Surplus
US dairies are already grappling with gluts. The amount of milk wasted or used for animal feed in the north-eastern US last May and June exceeded 75 million pounds, the most in government data going back to 2000. Production peaks in the spring, and this year there could be even more waste because cow herds have expanded and processing capacity hasn’t kept pace.
Without Canada’s demand for ultrafiltered milk to soak some of the extra supply, dairy farmers will probably see lower paycheques, said Matt Gould, an analyst with Dairy & Food Market Analyst, Inc. Producers normally get paid a government-regulated milk price, with bonuses for quality or volume. If there’s too much milk, premiums will disappear, and they could instead see discounts.
“For some organisations, this is a catastrophic issue,” Gould said. “That milk has to stay in the region and will cause even more enormous dumping and wastage, which will take the spot value of raw milk and drive it right into the ground.”
News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.
