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In dairy, a cutthroat U.S. business versus a Canadian cartel

A little comparison shopping goes a long way toward explaining why President Trump decided to wage a trade war with Canada.

A gallon of milk cost $2.89 at the Tops Friendly Supermarket on Niagara Street last week, while the same product at the Avonmart on Garrison Road in Fort Erie cost $3.35 in American dollars. And Fort Erie shoppers are getting a bargain: According to Numbeo, a crowd-sourced comparison price guide, the average cost for a gallon of milk throughout Canada is $6.32 in American dollars, nearly twice the U.S. price.

And it's all because the United States and Canada operate their dairy industries in ways that are as different as a bald eagle and a maple leaf.

The U.S. dairy industry, which is 10 times the size of its Canadian counterpart, runs like a cutthroat business. And plenty of farmers, including hundreds in Western New York, are getting their throats cut. The eight counties of Western New York lost 205 dairy farms between 2012 and 2017 amid a milk glut that farmers themselves are helping to create.

Meanwhile, Canada's dairy industry is run like a cartel, where the farmers fix prices and limit supply while the government sets strict limits on imported milk, all with the goal of keeping the Canadian dairy industry profitable.

Now President Trump is trying to break the Canadian cartel in hopes that it will open a new market to the north for American dairy farmers – a move that, experts say, is likely to fail due to the dynamics of Canadian politics.

It's also a Trump move bathed in irony. Experts say Canada milk cartel would have probably collapsed under the multinational trade deal called the Trans-Pacific Partnership – but then Trump pulled out of that trade deal, prompting Canada to revert to its half-century tradition of treating its dairy farmers like sacred cows.

Canadian Prime Minister Justin Trudeau, right, greets President Trump during a welcoming ceremony at the Group of 7 summit meeting in La Malbaie, Quebec, on June 8, 2018. After the disastrous finale of the G-7 meeting, Trudeau is now caught in a tight spot between the unpredictable Trump and the powerful Canadian dairy industry, the current target of Trump’s escalating trade threats. (New York Times)

Here's a closer look at each one of those stories within the story of America's sudden trade war to its neighbor to the north:

America's dairy doldrums

Jeffrey Simons looks around the countryside in South Wales and sees only four dairy farms left, including his own, down from 13 or 14 when he was growing up.

And it's all for one reason.

"Our dairy industry is a bit of a mess," said Simons, president of the Erie County Farm Bureau.

Canada didn't make the mess, either. The vagaries of the U.S. dairy marketplace did, along with the federal government's fitful efforts of regulating it.

The dairy industry is like many others, Simons explained. Technology is changing how dairy farmers do their work. Improvements in livestock management means virtually every cow produces more milk than its mother did. And with farm labor in short supply, some dairy farmers are buying robots to milk their cows.

The result? Dairy farms, locally and nationally, are producing more milk than ever. In fact, state figures show that milk production in Western New York increased 15.5 percent between 2012 and 2017 even though the number of farms dropped dramatically.

Some farmers are selling out to their neighbors to create bigger, more efficient farms, Simons said. Others are simply shutting down operations because the children of some farmers don't want to enter the family business.

Those moves have accelerated in the past four years thanks to two factors:

First, milk prices started falling around 2014 as the Greek yogurt fad faded and as more customers turned to nondairy alternatives such as almond "milk."

And second, Congress voted in 2014 to modernize the way it tries to help dairy farmers through the cycles of what's always been a boom-and-bust industry. Between 2002 and 2014, the federal government made farmers eligible for a subsidy when milk prices dropped too low. But in 2014, Congress replaced that effort with a program whereby farmers could buy insurance that supposedly would cover them when milk prices tank.

The new Market Protection Program hasn't worked, Simons said. Its payouts are so low that many farmers don't even bother buying the insurance, leaving them without a safety net when milk prices fall.

The bottom line? It now usually costs U.S. dairy farmers more to produce milk than they get when they sell it, driving some of them out of the business.

"The entire pricing system for milk in this country is a disaster," Ramsay Adams, executive director of Catkill Mountainkeeper, said in a note last week to the environmental group's members. "Farmers are allowed to charge a price for their milk based upon a federally designed formula, and that formula does not include the costs of actually producing milk."

White House aide Conway defends tariffs against Canada

The Canadian cartel

Maurice Doyon looks around the Quebec countryside and sees what he's seen there for decades: small dairy farms that have operated for generations, supporting strong rural communities.

It's a scene that seems stolen from America's past, and it appears all across Canada's dairyland – rural Quebec and Ontario – because the nation decided a half century ago to allow farmers to control the Canadian dairy industry like OPEC oil shiekhs.

"If we didn't have any coordination, we'd have bubble and bust cycles like you guys," said Doyon, an economist at Universite Laval in Quebec City and an expert in Canada's dairy supply management system. "We're not looking for that."

In Canada, unlike the U.S., a series of dairy industry marketing boards control both dairy prices and the amount of milk farms produce. The industry instituted the system in response to a 1960s dairy glut, said Bruce Muirhead, a historian at the University of Waterloo and an expert in the Canadian supply management system.

"The system is entirely run by farmers," Muirhead said. "And it allows farmers to at least make a bit of a living."

Meantime, the government sets quotas limiting imports to a tiny share of the dairy market. Once the quotas are met, imported dairy products get hit with gigantic tariffs: 241 percent for fluid milk, for example, 245.5 percent for cheese and a whopping 298.5 percent for butter.

In spite of those limits, American dairy farmers still manage to sell more dairy products in Canada than their Canadian counterparts do in the United States. Several experts said that's because Canadian processors need that extra milk to turn into cheese and other products for export to third countries.

But the combination of the Canadian dairy market-fixing scheme and those heavy tariffs have long caused resentment among American dairymen, who feel increasingly shut out of the market to the north.

"Dairy trade with Canada tends to be a one-way street," said Craig S. Alexander, vice president for dairy ingredients and regulatory affairs at O-AT-KA, which is owned mostly by Upstate Niagara Cooperative and its farmers. "When it serves their purposes, they import, and when it doesn't, they block it."

Resentment toward the Canadian system only grew two years ago, when the provincial milk marketing board in Ontario decided to allow Canadian farmers to start selling ultra-filtered milk not at the propped-up Canadian price, but at the lowest price that would be available on the world market. Other milk marketing boards across Canada did the same thing in early 2017, essentially pushing American milk producers out of a sliver of the Canadian market in which they had long been able to compete.

"It's exasperating," Alexander said of that latest Canadian move.

And American dairy interests aren't the only ones exasperated by the Canadian system. Canada's Consumer Choice Center estimated last year that Canada's supply management systems for dairy, eggs and poultry cost families an extra $257 to $420 (USD) per year.

"You get people from Canada driving to Buffalo just to buy milk, just because it's so much cheaper," said Christopher Sands, director of the Center for Canadian Studies at Johns Hopkins University.

Trump picks a fight

President Trump, never one to walk away from a trade fight, started lambasting Canada over its dairy trade policies more than a year ago.

"Canada ... what they've done to our dairy farm workers is a disgrace," he told reporters in Wisconsin in April 2017.

The dairy issue lay dormant, though, until Trump slapped tariffs on Canadian steel and aluminum last month – and until his rocky visit with Canadian Prime Minister Justin Trudeau at the G-7 summit in Quebec earlier this month.

New tariffs spark fears in WNY: 'It makes me a lot less competitive'

"Our Tariffs are in response to his of 270% on dairy!" the president tweeted on June 9.

Trump would like Canada to crush its own dairy cartel to let American milk flow north of the border, but Canadian farm interests and experts in U.S.-Canadian relations say that's unlikely to happen.

The Dairy Farmers of Canada, the politically powerful group that oversees the industry, shows no signs of being willing to further open its market to U.S. milk.

"Canadian dairy farmers and their families are concerned by the sustained attacks by President Trump with an aim to wiping out dairy farmers here at home, "said the group's president, Pierre Lampron, in a statement.

 

In addition, Canada's political dynamics work against any proposal to undo Canada's dairy cartel anytime soon, said Muirhead, of Waterloo University. That's because Trudeau is a member of the Liberal Party, so in next year's Canadian election he will depend largely on votes from left-leaning Ontario and Quebec – which just so happens to be where Canada's dairy industry is centered.

Besides, there's no real outcry in Canada to change the dairy system.

"The system works so well for Canada," ensuring a stable milk supply and stable farm communities without any government subsidies, Muirhead said. "The government isn't on the hook for anything."

Then there's the fact that some people in the American dairy industry worry about Trump's tariffs, which also recently hit aluminum and steel from the European Union and Mexico.

"We hope it doesn't affect our good relationship with Mexico," where the U.S. sells twice as much milk as it does in Canada, said Alexander, of O-AT-KA.

Dairy industry pros realize, too, that further opening Canada's milk market would only do so much good. After all, Wisconsin alone produces more milk than all of Canada, and America's share of a worldwide milk glut is way too big for Canada to ever absorb.

"I think it would be fantastic for Canada to open up its market, but I don't think there's a dairy farmer in America who's looking for Canada to bail out the U.S. industry," said John Newton, director of market intelligence for the American Farm Bureau Federation.

What might have been

Canada once seemed to be ready to unravel the protection racket it runs for dairy farmers – but it never did so because of the actions of one powerful leader from across the border: Trump.

On the third day of his presidency last year, Trump signed an executive order withdrawing from the Trans Pacific Partnership, a sprawling 12-country trade deal that included Canada as well as the United States.

As part of that deal, Canada had agreed to open up about another 3.25 percent of its dairy market to imports. And that, Canadian dairy experts said, could have been the beginning of the end of the Canadian dairy cartel.

Canadian dairy farmers would suddenly face more lower-priced foreign competition, thereby forcing them to accept lower prices and probably driving some farmers out of business, just like in America. In fact, the Canadian government was even prepared to offer subsidies to struggling farmers if the current price-fixing regimen began to fall apart.

But then Trump pulled out of the TPP, leaving its other nations working toward a smaller agreement. And with the U.S. out of the deal, sources said, Canada is in no mood to tear apart its dairy system just because Trump wants that to happen.

Canadians are particularly angry that Trump is harping about dairy and saying he slapped tariffs on Canadian steel and aluminum because of it, said Doyon, of Universite Laval.

"It's unrelated," Doyon said. "If you want to renegotiate dairy, deal directly with dairy. From the Canadian point of view, this is very ironic and very upsetting."

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