Will Canada need to make substantial access concessions on dairy in order to secure support for passage of NAFTA 2.0 from House Speaker Paul Ryan and Senator Chuck Schumer?
Schumer, a Democrat from New York, knows how to play the media and plays it incessantly. Indeed, it is said the most dangerous place in Washington is between Schumer and a television camera. New York has built an important Greek-type yogourt industry. Did it benefit from industrial development funding? Chobani certainly received support for their second plant in Twin Falls, Idaho.
Ryan, a Republican from Wisconsin, reportedly told President Donald Trump and Prime Minister Justin Trudeau that if there is no “fix” on dairy, particularly Class 7 milk, NAFTA 2.0 will not pass. Apparently POTUS has repeated this demand as his own.
One must hope Canadian Prime Ministers do not take marching orders from Congressmen no matter how senior they are. Canada is not a vassal state to the U.S. nor to any American state.
Speaker Ryan is one of the most powerful legislators in the Washington swamp. Dairy is important to Wisconsin, a state where there are more cows than in all of Canada. Identifying reasons for dairy farmer problems in Wisconsin must be focused locally and nationally. There is no reason to blame Canada.
- There are no subsidies to Canadian dairy farmers. Class 7 milk is similar to Class IV in the U.S. milk management and price control system.
- Class 7 milk is available at the same price for all end uses. It is not contingent on export nor on import replacement. It is WTO consistent.
- Canada’s tariff rate quotas are not inconsistent with NAFTA and WTO rules. The U.S. challenged Canada’s TRQs to NAFTA panel in 1996 and lost.
- These tariffs apply to volumes over and above duty-free quota allocations. The WTO has approved the TRQ system.
The U.S. also has tariff rate quotas on dairy products, several of them on cheese. The U.S. also imposes high tariffs to imports above the quota levels, with a similar justification to Canada’s. There are 40 other countries with WTO approved TRQs. Canada is no different.
Clearly, many U.S. dairy farmers, primarily small family farms in New England, are experiencing problems. In Vermont, many farmers have not been able to recover their cost of production and have been forced to abandon dairy farming.
Steel and dairy have many of the same problems – supply glut. And Canada, with less than 1 per cent of the world’s production, is not the cause of the milk glut in the U.S. or globally. There is too much milk and not enough demand in the U.S. Demand in China too is declining, thus there are more dairy products on global markets without a home. Gluts are never good for commodity markets.
Congress has tried to fix the plight of U.S. dairy farmers by modifying the Margin Protection Program for Dairy (MPP-Dairy). The farmers’ share of premiums has been reduced by 42 per cent to make it easier to enrol them and the premium-free benefit has been increased by 25 per cent from US$4/cwt (hundred weight) to US$5/cwt. The cost of this latest cash injection exceeds $1 billion U.S..
Ryan and Schumer will better understand dairy industry problems by looking into the mirror and, indeed, some American politicians have publically recognized the imbalance in supply and demand. U.S. milk production has increased by 16 per cent between 2007 and 2017.
Production of milk in Wisconsin increased by 29.5 per cent and New York by 23.8 per cent over this period. U.S. milk consumption has declined significantly in recent years in large part because of fad diets and increased popularity of plant-based beverages.
Production has exceeded consumption of milk since 2007. From 2012 to 2016, annual sales of conventional milk declined by more than 4 billion pounds — or approximately 8 per cent. There have been increased sales of organic milk but far less than the declines seen for conventional milk consumption.
Canada is the second largest market for U.S. dairy products. U.S. exports have increased rapidly. As the Government of Canada has explained frequently, the trade balance in dairy is 5:1 in favour of the United States.
In 2006, the U.S. shifted from a net importer to a net exporter of dairy products.
Since at least 2006, average farm gate price for milk has been below the fully absorbed cost of producing it. I rely on the fully absorbed cost because that is the standard adopted by the WTO in Canada – Dairy.
At the same time, U.S. consumption of dairy products has increased by 5.4%. Within the overall consumption experience, consumption of fluid milk, which brings U.S. farmers the highest price, has declined by 16.3%. This appears to be due in significant part to consumer taste and fad diets.
In Wisconsin, Secretary Ryan’s home state, the deficit in 2016 was US$10.07 cwt; that is a loss for every pound of milk produced.
In New York State it cost US$16.34 cwt more to produce milk than it returned at the farm gate in 2016.
In its simplest terms, exporting below fully absorbed cost is dumping.
By its marketing orders, USDA establishes minimum prices for sales from dairy farmers to selected processors.
The price of milk used in producing powder is at the lower end of the scale because the fat has been removed and because the powder requires additional processing. It costs more to produce than fluid milk.
The fuss President Trump raised about Canada damaging Wisconsin farmers during his visit to the Dairy State, ignored what Wisconsin dairy farmers actually said at the time and since.
The issue in the dairy farmers’ view was overproduction, and reduced consumption due in large part to the popularity of plant-based dairy products.
Grassland Dairy was already terminating contracts with Wisconsin farmers before it blamed Canada. Class 7 competition was not an overnight surprise. Dallas Weutrich of Grassland Dairy admitted that Grassland had been aware of the issue for over a year before giving its farmers notice. Was this disclosed to POTUS?
The Wisconsin Farmers Union refers to blaming Canada as Milking Scapegoats.
Dean Foods cancelled contracts with more than 100 farmers when Walmart built a plant in Fort Wayne, Indiana which will bottle 100 million gallons of milk annually to serve 600 Walmart stores. Other grocery giants, Publix and Kroger, were already supplying milk to their stores from their own processing plants.
Land O’Lakes encourages its supplying farmers to limit their milk production.
There are less U.S. dairy farmers than there used to be, but each cow is producing more milk and total production is up and the glut increases.
The U.S. dairy industry has made its own problems in an evolving and unfriendly market. Politicians like Schumer and Ryan should not be allowed to fix their problems on the backs of Canadian dairy farmers.