The Canadian Dairy Model: Milking Consumers

They’re in President Trump’s crosshairs.

They live just beyond the border, and the President believes they’re hurting America.

You guessed it: Canadian dairy farmers.

President Trump made headlines for sending this tweet:

Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!

— Donald J. Trump (@realDonaldTrump) April 25, 2017

What the President is referring to is a new, obscure regulation implemented by the Canadian government on milk.

Canada’s control of its milk market would make Lenin proud. Canada sets quotas on how much milk each of its dairy farmers can produce, and how much can be imported. The Canadian government also regulates the prices of milk to make sure dairy farmers are being paid “fairly,” regardless of what the market believes.

Specifically, milk products are divided into six classes, and 22 subcategories. A different quota and mandatory minimum price is set for each category.

Recently, American farmers have popularized “ultrafiltered” milk, a type made by filtering the lactose and fats out of raw milk to create a high-protein product that’s incredibly valuable in cheese production.

Ultrafiltered milk is relatively new, so there are no provisions in NAFTA that govern its trade. Accordingly, Canada did not have set prices or quotas on the exchange of ultrafiltered milk.

Dairy farmers in the U.S. capitalized on that loophole. As you would expect, Canadian farmers were less than pleased.

Dairy Farmers of Canada pointed out that ultrafiltered milk is treated as an “ingredient” in trade, but is treated as “milk” when cheese producers use it to satisfy the Canadian requirement that a certain portion of the protein in cheese must come from milk.

In response, the Canadian government added a seventh class of dairy for ultrafiltered milk to close the loophole. Canada now regulates ultrafiltered milk the way it regulates all milk.

By setting quotas and prices and removing the cost advantage to buying American milk, Canada effectively boxed U.S. ultrafiltered milk producers out of the Canadian market. Grassland Dairy, a Wisconsin-based milk exporter, recently dropped 75 dairy farmers due to its inability to keep selling ultrafiltered milk in Canada.

In Canada’s defense, the reclassification of ultrafiltered milk was consistent with Canada’s approach to the rest of the dairy market. It’s a terrible system, but the move should not have caught U.S. dairy exporters off guard.

The Canadian government, of course, is focused on the well-being of farmers in Canada, not in Wisconsin. But are Canadians really better off because of their government’s dairy strategy?

The answer is no.

Canadian dairy farmers are steadily producing more milk each year. At the same time, Canadians are consistently consuming less milk (except chocolate milk, of course).

When the supply of a product increases and demand for it decreases, the price of that product should drop. Instead, the opposite has happened.

Between 1996 and 2009, Canadian dairy prices skyrocketed 59%. American dairy, during the same period, only rose 19%.

Canadian price setting is costing Canadian consumers, who are being forced to pay a fortune for milk.

Canada’s model is dangerous for farmers, too. In the short term, the plan ensures Canadian dairy farmers are paid handsomely. But in the long term, the model will deteriorate the dairy market.

That is because Canada’s price setting ignores the nation’s demand for milk. The farther the government-mandated price drifts away from the price consumers are willing to pay, the less likely consumers are to buy milk. If dairy isn’t affordable and consumers stop buying milk, the farmers won’t make any money –regardless of how valuable the government determines milk should be.

The Canadian dairy industry is structured in a way that harms both the Canadian consumer and farmer.

To be fair, the U.S. approach to dairy is far from perfect. The U.S. does allow the market to control the price of dairy, but also doles out massive subsidies. U.S. milk is cheaper at the cash register, but Americans pay twice for milk in the form of taxes.

In the interest of consumers and farmers, both nations should pursue free-market strategies to guide their dairy industries. The U.S. should reconsider its dairy subsidization, and Canada should allow consumer demand to set prices and supply.