Politic?

Marketplace 101: Oversupply? Dial Back Production

"It is very unusual. I am guessing -- [U.S.Trade Representative Robert] Lighthizer may have worried that unrestricted Canadian exports globally could suppress global and hence U.S. prices, and putting a cap on them would prevent this."
Robert Litan, fellow, Brookings Institution, Washington

"A Canadian cheese processor who was buying from the U.S. could suddenly buy from a Canadian producer just as cheaply. So it changed things."
"If everything had been left the way it was, the Canadian milk industry would have been left to drown in its own skim."
"We found a way to clear it, now we'll have to find something else."
Al Mussell, lead researcher, Agri-Food Economic Systems

"So when the U.S. negotiated to get rid of Class 7 pricing, it clearly also sought to put limits on how much of that milk could be exported to third parties."
Andrew Novakovic, professor of agriculture, Cornell University

"[The changes in the USMCA reflect an ongoing effort by the U.S. administration to] manage and reduce trade, not increase it."
"This is clearly designed to deal with the underlying problem which is the potential for excess production of those products in Canada leading to incentives for Canadian producers of those three products to dump them on to global markets."
Chad Bown, senior fellow, Peterson Institute for International Economics, Washington

The new United States-Mexico-Canada Agreement includes greater access to the Canadian market for dairy products from south of the border. (CBC)

The year of trade talks to refurbish the NAFTA free trade agreement between Canada, Mexico and the United States was a tense, dramatic and often Byzantine affair, the United States as the 'senior' partner in terms of size and influence, power and determination, conducting the orchestra, putting the minor instrumental players in their subordinate place throughout the process while re-arranging the seating order in the orchestral pit. What the big guy wants is what the big guy gets.

"We're extremely disappointed with what we understand has been agreed to, with the almost 3.6 per cent access — dairy market access — being given to the U.S., as well as eliminating some of our competitive dairy class, so that will obviously have a majorly negative impact on our industry."

"It's death by 1,000 cuts. Every time there's a trade deal, they're giving another portion of our markets away. It seems as though they wait until the 11th hour and then they give away a portion of it and it simply is devastating for the industry."
"[While Americans get more access to the Canadian market, the USMCA decreases Canada's access to the U.S. market]. So it'll have a double impact. It's a major blow for dairy farmers in Canada but also for the other 200,000 people who are, in one way or another, involved in the dairy industry."

David Wiens, dairy producer, Grunthal, Man., chair, Dairy Producers of Manitoba

Canada's supply management was not exactly eviscerated to rescue Canada from its solitary side-lining, but the inroads made of surrendering 3.6 percent, hasn't delighted the dairy industry one bit, foreseeing a future when the agreement will begin to noticeably bite. Canadian dairy farmers and their organizations found truly inventive ways to skirt whatever inroads their American counterparts relied upon in bringing their products to Canada. Among the issues was an abundance of protein concentrates and powders.

A Class 7 designation was brought to bear linking to reduced pricing; at one time when American milk products like excess skim milk flooded the Canadian market, Canadian farmers began to produce their own basic product upon which processing of higher-level dairy products could rely, and the importation of the U.S. variety was reduced; a kind of milk-war between nations. At the same time the glut of skim milk from domestic markets was solved for Canadian dairy farmers.

The issue of U.S. dairy producers being stuck with their own oversupply infuriated them no end, and they lobbied furiously in Congress to have Canada's supply market system opened and to have access to the Canadian market for their skim milk surplus for protein concentrates and powders. The thing of it is, the U.S. dairy oversupply problem wouldn't be solved even if it could supply all of Canada's Class 7 skim milk, since Canada hasn't a large enough market to absorb all the U.S. product to begin with.

The American problem is oversupply altogether; in most instances with such a huge population, ten times that of Canada's, the U.S. can absorb most of everything it produces in all consumer areas. Now restrictions have been placed on Canada's global exports of some dairy products, signed into the USMCA through unrelenting pressure. At one time the global community was obsessed with fat-free dairy products and skim milk powder was in high demand. Now, despite obesity a growing public health problem, suddenly people are turning away from lighter products, wanting creamier dairy.

And supply management itself which should logically move farmers to produce less of an unpopular product hasn't yet seemed to kick in. It's a problem shared both by Canada and the U.S. The answer to which is to shed whatever warehoused surplus there is, however that will be managed, and then to gear down production to match market demand. The Class 7 designation meant that Canada could sell its low-fat products at home and abroad, far different from other Canadian dairy products with their higher prices reflecting supply management.

The result on the global scale of undercutting U.S. dairy prices enraged U.S. dairy farmers who didn't appreciate the competition in international markets leading to lost sales; Canada was taking advantage of high dairy prices for some products in exchange for selling others at lower prices. A new remediating scheme is now installed under USMCA, incorporating U.S. pricing, Canadian processor margins and yields with the final price analogous to Class 7.

The hitch for Canada, however, is that exports are now limited to 55,000 tonnes of milk protein concentrates and skim milk powder in the first year of the agreement and reduced to 35,000 in the second year, the threshold increasing by 1.2 percent each following year with exports in excess of the stipulated amount subject to export taxes of 54 cents per kilogram Canadian.The Canadian dairy industry shipped 75,000 tonnes of skim milk powder in 2017 and that differential reduction stings.

And the problem on both sides of the border of a huge excess of skim milk hasn't been solved to anyone's satisfaction, nor could it be through this mechanism. Is the American dairy industry happy? Despite the introduced restrictions to Canada's dairy exports there are those in the U.S. who feel the restrictions don't address the severity of the issue.