Some dairy farmers fear the worst with new USMCA deal

 Dairy cattle on the Dalhousie University Faculty of Agriculture farm in Bible Hill, N.S. (Submitted photo)

Dairy cattle on the Dalhousie University Faculty of Agriculture farm in Bible Hill, N.S. (Submitted photo)

by Emily Leeson

Alex MacDonald is one of P.E.I.’s newest dairy producers. Nearly two years ago he was approved for the Dairy Farmers of P.E.I.’s new entrant program, which loans daily quota to new farmers, helping them get a foot in the door of the industry. Since then, MacDonald has acquired 40 cows and purchased a 100-acre farm in Campbellton. 

Today, however, his future in the dairy industry is much less certain than it was just a few months ago. Like other dairy producers across Canada, MacDonald is concerned about what the ramifications of the new U.S.-Mexico-Canada Agreement (USMCA) will mean for him and his farm. While he admits that it may be too soon to tell for sure, he fears the worst.

“I’ll be the first one to tell you that if this deal goes through, I’ll be out of business,” MacDonald said recently. “I’ll be bankrupt.”

The new trade deal offers the United States 3.6 percent in market access to Canadian dairy. It will eliminate the relatively new Class 7 category of dairy products which had the dual aim of stemming the flow of the high-protein modified milk ingredients from the U.S. into Canada without tariffs and incentivizing domestic dairy processing investment. The deal would also cap exports from the Canadian dairy market. 

“Disappointed, angry, furious – I don’t know what’s the best way to put it,” said MacDonald.

The fear for MacDonald and dairy producers across the country is that the new deal will erode the very system that the Canadian dairy market is based on and add new problems into the mix for producers who are already maxed out.

SYSTEM COMPROMISED

The Canadian dairy industry has employed the supply management model since the 1970s. Milk production quotas are determined on a national basis and allocated to producers through their provincial marketing boards. The system allows for a degree of financial certainty for producers – the stable production of the perishable product is ensured, fair pricing is guaranteed, and with the proper border controls, the market can be relatively predictable and reliable. 

With the new deal, much is now up in the air for producers who see little room left for expansion of the domestic market. The USMCA is the most recent of three new trade deals in which they’ve lost an increasingly larger chunk of the market share. The earlier deals were the Comprehensive Economic and Trade Agreement (CETA) with the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). According to the Dairy Farmers of Canada, when the three deals are fully implemented, imported milk, conventional dairy products, and dairy ingredients will represent 18 percent of Canada’s milk production and $1.3 billion in total farm gate sales.

“It’s pretty safe to say that the whole concept of supply management is severely compromised once you get to that level,” said Nick Duivenvoorden, who operates Shore-View Holsteins in Belledune, N.B.

Duivenvoorden has been in the dairy business all of his life. His parents, immigrants from Holland in 1952, took over the Belledune farm from a local order of priests. Duivenvoorden now has two of his children working alongside him on a full-time basis. 

Like MacDonald, he’s concerned about the industry’s future stability. 

“Canada is lush in natural resources but if you put your farmers out of business with bad trade deals, those natural resources will lose their value pretty quickly,” said Duivenvoorden. “It’s inevitable that farms will disappear.”

He added that dairy operations across the country were already facing financial challenges due to reduced rates of return.

“Canadian consumers need to be concerned about the fact that with every trade deal, we offer up or we trade away part of our food sovereignty,” said Duivenvoorden. “Canadian consumers are stepping up in droves to find out how they can distinguish between American exports and Canadian dairy products. That’s great – everybody’s in a state of hype – but will that follow them all the way to the grocery shelves? It will for some, but certainly not for all.”

EXPRESSING DISAPPOINTMENT

There are 187 dairy producers in New Brunswick. And according to Paul Gaunce, chairman of the Dairy Farmers of New Brunswick, across the province those producers have been talking to their MPs and registering their disappointment. 

“I guess we feel like we’ve been thrown under the bus,” said Gaunce. He estimates that the market share given up by the Canadian government now equates to the entire production of Saskatchewan and all the Atlantic provinces combined. 

“Our country is big, but our milk production for our population isn’t huge,” said Gaunce. “Compared to the U.S., we’re just a drop in the bucket,” said Gaunce. While the market share access will hurt Canadian producers, he said it will do little to nothing to solve the problems of oversupply in the U.S.

That’s the way Connor Morse in Harmony, N.S., sees it as well. Having just graduated in April from Dalhousie’s Agricultural Campus, Morse is now working full-time alongside his father Jeff on their farm perched along the ridge of the South Mountain overlooking the Annapolis Valley. For Connor Morse, the situation just doesn’t make sense. 

“It’s just disappointing really because it hurts us more than it will help the U.S.,” he said. “It won’t even touch what their problems are in oversupply. It seems like we’re bailing them out when they should be adopting our system that has worked so well over the years. With supply management, you knew you had a market and somewhere to sell your milk to at a fair price. Now it puts the future of the industry into question. Is the system going to be in place in 20 years or even five years? It really puts a question mark on the whole industry. And for young producers, it might scare some people away. It’s not a good thing for the sustainability of the industry.”

The Morses milk 70 cows, which, according to Brian Cameron, general manager of the Dairy Farmers of Nova Scotia, makes them pretty close to the average size of dairy farms in the province. With just a little more than 200 dairy farms, Nova Scotia producers collectively produce 200 million litres of milk a year for which they receive just above 70 cents per litre. 

“At the farm level, we estimate that is about 550 people working directly on those 200 farms,” said Cameron. “And when you look at the other jobs within the industry – the transportation as well as the workers in the plants – there’s at least another 550 jobs in those other parts. And that’s a low estimate.”

Cameron said the increased access to the Canadian market could mean zero growth or even contraction in the industry. “And this is an industry that has grown two to three percent each year,” he said. “There has been a bit of a renaissance with the dairy market. Canadians are again consuming butter and cream, so that’s been a great news story for our industry that will now be undercut or eliminated considering the access given.”

CLASS 7 ELIMINATED

That’s in part where the issues with Class 7 come into play. As Cameron noted, butterfat has experienced a resurgence of popularity in recent years. In Canada, when raw milk is sold to processors, it is classified and priced based on what the milk will be used for. The Harmonized Milk Classification System covers everything from fluid milk and cream to yogurt, cheese, butter, and a range of special classes sold as ingredients for further processing both domestically and abroad. 

When butterfat is separated from raw milk, skim milk and non-fat solids are left over. Finding a market for those ingredients has become increasingly difficult, especially in recent years as a competitive product – “diafiltered” milk – has been slipping across the border from the U.S. into Canada without being flagged as a dairy product and tariffed appropriately. 

Diafiltration is an additional step in milk processing to achieve a higher protein concentration. The infrastructure for producing diafiltered milk currently only exists in the U.S. It didn’t exist back when NAFTA was negotiated, meaning that the milk ingredients were making their way from the U.S. into Canada without being identified as dairy products and tariffed accordingly. Once in Canada, the diafiltered milk – which is often used in the production of cheese or yogurt – was quietly displacing domestic products. 

That all changed in February 2017 when the industry introduced Class 7, which encompassed the non-fat solid milk ingredients, such as skim milk powder, and priced them at a competitive world market price. Class 7 then became the more cost-effective choice for processors. 

“Class 7 was designed to incentivize regional investment and now we don’t know what will happen,” said Cameron. Reinvestment in the processing infrastructure is particularly important to the industry in the Atlantic provinces given the distance from the majority of the national population. 

“Above and beyond the access, that will cut into the average price that producers get paid for their milk,” said Cameron. 

Beyond the access and the elimination of Class 7, the new deal also caps the amount of skim powder that is exported from Canada. “And that’s not just to the U.S. but to all countries,” said Cameron, adding that the likely result will be a reduction in returns for producers. 

Despite the forecast, Cameron still maintains some cautious optimism that the dairy industry will find its way among these new challenges. 

“Our industry is a very resilient industry,” he said. “Canadian dairy producers work hard. They work 365 days a year and they invest collectively in Canada. Producers invest $100 million a year – every year – in growing the market. And so it’s really disappointing to see that the market they’ve invested in and grown is given away in trade deals. But we have full confidence in the resilience of our industry to carry on and find a way forward.”