by PETER GAUTHIER
by PETER GAUTHIER
There was a time (the period of the 1960s) when Canadian dairy farmers faced a serious crisis; the selling price of milk was significantly less than the cost of producing the product. The government’s answer to this problem was the creation of a Supply Management system. This system has three essential components: heavy tariffs on imports, strict quotas on how much can be produced by each farmer, and fixed prices paid to farmers. In the latest dispute with the USA over dairy products, there are two additional facts that are relevant. First, dairy products are not part of the NAFTA trade agreement Canada has with the USA and Mexico. Second, there was a loophole in the tariff structure that allowed ultrafiltered (industrial) milk used to make products such as cheese and yogurt to enter Canada from the USA duty-free.
A little more than a year ago, there was a change in the Canadian pricing of industrial milk. Canadian regulators created a lower-priced class of industrial milk that encouraged local producers to provide this product at prices competitive with the same products from the USA. Initially, American producers did not complain about this change as they expected to gain significant new markets under the proposed Pan-Pacific trade deal. However, when President Trump signalled that the USA would not partake in any new international trade deal, some American farmers began to complain about Canada’s Supply Management system. Trump responded with a strong attack on the Canadian system. A response to Trump’s attack requires a closer look at the dairy system in both countries.
For the Canadian consumer, the end result of Supply Management seems to be higher prices for dairy products, but there are some additional considerations. The most significant factor in determining dairy prices in the USA is that dairy products are highly subsidised – as much as 40% of an American dairy farmer’s income comes from subsidies paid by their federal government – Canadian dairy farmers do not receive any subsidies. A second factor is the cost of farm labour. In the USA, many farm workers are illegal immigrants and their salaries are well below any minimum wage rates in Canada. A third factor is the use of artificial growth hormones such as recombinant bovine somatotropin (rbST), which are illegal in Canada. The end result is that Americans pay less for dairy products, but pay more in taxes to support its production. A fourth factor is that there is some trade in dairy products between Canada and the USA, with Canada importing more than it exports.
While no system is perfect and our Supply Management system needs constant review in the light of national and international market conditions, Canada must be very careful in its reaction to the American threats to disrupt our system. Responding to the jingoistic and inconsistent pronouncements of President Trump will require firm but reasonable action on Canada’s part. Our dairy farmers deserve this much. A viable Canadian dairy system is essential to our food security now and in the future.