The U.S.-Canada Dairy Dispute

President Donald Trump has said that what Canada has “done to our dairy farm workers is a disgrace” and that “dairy farmers in Wisconsin and upstate New York … are getting killed by NAFTA.” But that trade agreement isn’t what’s hurting farmers in the current dispute. Whether Canada’s actions are unfair is a matter of opinion.

We’ll explain what’s going on with this cross-border dairy disagreement.

Trump has commented on the issue several times. In a speech in Kenosha, Wisconsin, on April 18 — just before he began criticizing NAFTA — he said he would “stand up for our dairy farmers.”

Trump, April 18: We’re also going to stand up for our dairy farmers in Wisconsin — and I’ve been reading about it, and I’ve been talking about it for a long time — and that demands, really, immediately fair trade with all of our trading partners, and that includes Canada. Because in Canada, some very unfair things have happened to our dairy farmers and others. … What’s happened to you is very, very unfair. It’s another typical one-sided deal against the United States. And it’s not going to be happening for long.

A few days later, on April 20, he again lamented a raw deal for U.S. dairy farmers, saying that what Canada has “done to our dairy farm workers is a disgrace. It’s a disgrace. … And our farmers in Wisconsin and New York State are being put out of business, our dairy farmers.”

Trump isn’t the only politician to complain about unfair treatment from the Canadians.

Republican Wisconsin Gov. Scott Walker and Democratic New York Gov. Andrew Cuomo wrote a joint letter to Trump April 18, accusing “the Canadian dairy industry and government” of “plotting a trade war against our nation’s dairy farmers.” Last October, Cuomo had written to Canada Prime Minister Justin Trudeau, saying that regulatory changes in Ontario “could effectively block New York exports of ultrafiltered milk — potentially violating World Trade Organization (WTO) commitments.”

The Canadian ambassador, David MacNaughton, told the governors in an April 18 response that financial losses for U.S. dairy farmers are “due to U.S. and global overproduction,” not Canada’s actions.

Democratic Sen. Chuck Schumer, of New York, has said he would work with Trump on retaliatory actions against Canada if need be. “Because our dairy farmers are more productive and more efficient, Canada should not think it’s going to get away with this,” Schumer told USA Today last week.

On April 21, in an interview with the Associated Press, Trump blamed NAFTA.

Trump, April 21: Most people don’t even think of NAFTA in terms of Canada. You saw what happened yesterday in my statements, because if you look at the dairy farmers in Wisconsin and upstate New York, they are getting killed by NAFTA.

Trudeau responded to the U.S. criticism in an April 20 interview with Bloomberg News, saying: “Let’s not pretend we’re in a global free market when it comes to agriculture. Every country protects, for good reason, its agricultural industries.”

The product at the center of the dispute is ultrafiltered milk, used to make cheese, and it’s not governed by any tariffs under NAFTA. And that was part of the problem for Canadian dairy farmers.

The issue deals with both countries’ desire to protect their industries, an oversupply of milk, the world market and consumer demand.

The Dairy Dispute

Ultrafiltered milk has become an issue, says Michael von Massow, an assistant professor in the College of Business and Economics at the University of Guelph, because “eating butter is cool again.”

“For a while when butter was bad, we had warehouses of butter we didn’t know what to do with,” Von Massow told us in a phone interview. But now there’s high demand for the fat content of milk — Time magazine had an “eat butter” cover story a few years ago, in 2014, he notes — so farmers are shipping milk to creameries. And what’s left over is ultrafiltered milk, or milk protein.

U.S. dairy farmers have been selling that ultrafiltered milk — duty-free — to Canadian processors.

Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin-Madison, said it was in the early 2000s when the product started being exported into Canada, and it has increased in volume. It became a “noticeable line from Canada’s point of view,” he told us.

Canada does have a “protectionist dairy industry,” with quotas on milk production and regulated pricing on milk products, Stephenson said in a phone interview. But that system “can only really be functional if they can keep a pretty tight reign on a product coming in.” Other dairy products imported into Canada are subject to tariffs, but since ultrafiltered milk is a relatively new phenomenon in the milk industry, it’s simply not on the list.

It wasn’t restricted when NAFTA or earlier World Trade Organization negotiations occurred, Stephenson said, in terms of a quota or a tariff. So when ultrafiltered milk gets to the border, he explained, custom officials say, “‘Yep, no restrictions on that trade.’”

Canada’s dairy industry overall wasn’t part of NAFTA, something that could change if NAFTA is renegotiated. Instead, NAFTA opened up the dairy trade between the U.S. and Mexico, an issue brief published by Cornell University in April 1994, the year NAFTA went into effect, explains.

Stephenson sent us this chart showing the growth in monthly value of U.S. exports of milk protein isolates, such as ultrafiltered milk, to Canada. That growth recently began to decline, after Canada made changes to its pricing on the product.

Source: Dairy Policy Analysis, University of Wisconsin-Madison

From the Canadian standpoint, its dairy farmers had milk protein that they wanted to sell, too. Everyone has extra, Von Massow said, because of the increased demand for butter.

Canada’s regulation of its dairy industry includes quotas for how much Canadian farmers can produce and pricing set for various milk products. Provincial boards can set the pricing. They’re quasi-governmental organizations, made up of dairy farmers, but the government has to agree that the boards’ actions are reasonable, Von Massow explains. Effective April 1, 2016, the board in Ontario changed the pricing for milk proteins, including ultrafiltered milk, and this year most of the other provincial boards followed suit.

“The Canadian system is a labyrinth of intertwined regulations and a symbiotic relationship between the Federal and Provincial governments,” Andrew Novakovic, the E.V. Baker professor of agricultural economics at Cornell University, explained in an email to FactCheck.org. “While it is true that some things are in the direct control of the Provinces, it is generally the case that a Province could not effectively maintain these controls without the Federal system and sanction.”

The change in price meant that Canadian milk protein would be competitive with the imported U.S. product. “Canada priced at the U.S. price,” Von Massow said. “So Canadian processors said, ‘OK, we’ll buy the Canadian product.’ … All they did was they changed their pricing for one ingredient they get out of milk because they had too much of it and couldn’t sell it.”

That, of course, started affecting U.S. dairy farms. Stephenson describes the pricing change as being low enough that “the U.S. or anybody else couldn’t be competitive trying to send that into Canada.”

The issue garnered news coverage this month when Grassland Dairy Products informed about 75 dairy farmers in Wisconsin that it would no longer buy their milk, effective May 1. Grassland, which bought the milk and then sold the ultrafiltered product to Canadian processors, said the change in pricing in Canada had caused it to lose money.

Grassland’s move left the dairy farmers scrambling to find a new buyer for their milk, reported the Milwaukee Journal Sentinel. “These farms can’t just stop milking the cows,” the paper wrote. “It’s three times a day, 365 days a year, regardless if there’s a buyer for what they produce.”

Dairy farmers in New York, too, told the Buffalo News that Canada’s pricing change is making their business more difficult in what were already trying times. Farmers own milk processors in New York, so the farms won’t be dropped by their own processing companies, Novakovic explained. But they can see a loss of profits.

And there is an oversupply of milk, as the Canadian ambassador said in his response to complaints from U.S. politicians. That has complicated the situation for U.S. dairy farmers.

“We are producing a lot of milk right now, there’s no question about that,” Stephenson told us. Because of that, “it was really bad timing for Canada to change their policy like this.”

In years past, he said, if milk buyers had dropped dairy farms in Wisconsin, those farms would have been able to find another plant ready to take their milk. But with the amount of milk being produced, plants are operating at or near capacity. A change in pricing like this in the past would have been disappointing, Stephenson said, but it “wouldn’t have warranted a footnote in the local paper.”

About half of the milk that had been going to Grassland now has a new processor and half doesn’t, despite the press coverage and pleading from government officials, Stephenson said. In his 30 years in the industry, he said, he hasn’t seen a time when the situation would have played out like this.

Von Massow agrees that an oversupply of milk “is causing problems that otherwise would have been absorbed.” While Canada is somewhat protected from that problem because of the quotas set on production, the issue is worldwide. Russia also stopped buying products from the European Union after it was hit with sanctions over its actions in Ukraine, Von Massow said, and China’s demand for dairy has flattened.

Alternatives to milk have also gained in popularity. The Buffalo News reported that “more consumers have turned to products that farmers derisively call ‘soy juice,’ ‘almond juice’ and the like.”

Milk production increased when prices were high, so now prices, and demand, are low. That means there’s too much milk, and especially, Von Massow said, too much milk protein, or ultrafiltered milk.

A Trade Violation?

Whether Canada’s pricing change is a trade violation, a case of putting Canada first or a reaction to the milk market is a matter of opinion and an issue that could ultimately be decided by the World Trade Organization’s dispute settlement system.

In his interview with the Associated Press, Trump blamed NAFTA for hurting U.S. dairy farmers. But Sen. Schumer, and the dairy industry, conversely, have said that Canada isn’t living up to its obligations under NAFTA — suggesting that NAFTA could actually protect U.S. farmers. Schumer and Wisconsin Sen. Tammy Baldwin wrote to then-Secretary of Agriculture Tom Vilsack last fall, saying that they had “serious doubts” about Canada’s actions being compliant with “NAFTA and WTO obligations.” And the U.S. Dairy Export Council, a nonprofit industry group headed by Vilsack, has said that Canada’s new “pricing policy is blocking American dairy exports in violation of NAFTA.”

Jaime Castaneda, senior vice president of strategic initiatives and trade policy for the National Milk Producers Federation, told us in an email that Canada’s “pricing scheme” came “after several years of importing this product” and amounts to a violation of previous trade concessions because it undercuts imports from the U.S. “When you have lower tariffs whether because of a trade agreement or because there were always low, no country shall create any policy that is direct to undermine those lower tariffs by creating any scheme to benefit domestic product over imports,” he said.

Castaneda also said that there’s a violation of provisions against export subsidies because the new pricing meant Canada was “able to put surplus Canadian product into the world market.”

The Dairy Farmers of Canada, meanwhile, has said that the pricing change was a “domestic policy” implemented “to allow the Canadian dairy sector to be able to respond to a changing Canadian market environment.” The pricing policy doesn’t “block imports” nor have there been changes to tariffs, Isabelle Bouchard, the trade group’s director of communications and government relations, wrote in an April 7 online posting.

Novakovic, at Cornell, told us that if a diplomatic solution isn’t reached, Canada’s actions “could and quite likely will be challenged under the WTO.”

How strong would the U.S. case be? The experts we spoke with differed on that.

Novakovic and Stephenson both said the timing shows that Canada acted in response to the increased trade from the U.S., and that the price was set to block imports. “That’s where I think it’s challengeable,” Stephenson said.

The Canadians could win in a WTO adjudication, Novakovic said, if the pricing change only pertained to imports. “The WTO panels are randomly chosen among member countries. Who ends up on a panel can make a big differences in a case. Some countries may well believe that as long as Canada keeps their business entirely inside Canada that they can do so,” he said.

But, Canada has sold newly priced nonfat dry milk products to Mexico, Novakovic said. “What this means is that the Canadian system is taking advantage of high prices on other milk uses to be able to afford to set a low price on exported products that is an unfair competition with other countries. In my opinion, this exporting action makes it much more likely that they would lose a WTO petition.”

Von Massow said he doesn’t think the case is a “slam dunk” for the United States, and his guess is that the U.S. would fail. “You could argue that this is Canada protecting its farmers,” just as the U.S. recently protected its lumber industry.

This week, the U.S. put tariffs on imported Canadian softwood lumber, another longstanding trade issue.

“These are sort of regular trade posturing that all countries do,” Von Massow said.

Negotiations that take into consideration dairy, lumber and perhaps other industries could yield a compromise between the two countries. “This is exactly the kind of thing that could bring Canada to a table to find out what it needs to give up on milk to get the US to lighten up on lumber,” Novakovic told us. A dispute settlement from the WTO, meanwhile, can take years.

The U.S. could take the case to the WTO, but Trump’s claim that U.S. dairy farmers are “getting killed by NAFTA” isn’t accurate in this case. Ultrafiltered milk, the product at the center of the dispute, wasn’t part of NAFTA and has been exported to Canada tariff-free since the trade agreement was finalized in the early 1990s.

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