Canada cannot expect to have both a protected system and compete globally, U.S. Dairy Export Council CEO Tom Vilsack said in an interview.

“They have decided to go significantly into the export market by undercutting the world price for milk powder,” said Vilsack, who was U.S. agriculture secretary under former President Barack Obama.

Canadian exports of skim milk powder more than tripled to 71,880 tonnes in 2017 from a year earlier, worth $173 million, according to Statistics Canada data. Still, Canada accounts for less than three per cent of global trade, according to Agri-Food Economic Systems.

Canada controls dairy supplies and prices and limits imports through high tariffs and has been long criticized by dairy-producing countries such as the U.S. and New Zealand. It recently become the main target of Trump’s verbal attacks on Canada amid talks toward a new trade agreement.

Dairy farmers have an outsized influence in Canadian politics, as they are concentrated in the vote-rich provinces of Ontario and Quebec.

Their main lobby group, Dairy Farmers of Canada (DFC), met privately with Prime Minister Justin Trudeau on Tuesday and left feeling comforted.

“He clearly understands our concerns. He stated that not only does he support supply management, he is also committed to our dairy farmers, and a robust dairy sector,” said DFC president Pierre Lampron.

Faced with fast-rising volumes of U.S. milk proteins not subject to high tariffs into Canada, Canadian processors and farmers implemented a new pricing system, called Class 7, for milk ingredients starting in 2016.

The new class allowed processors to produce skim milk powder at a low enough price to compete globally.

“They are essentially transferring the problems that are created by their system,” Vilsack said.

The underlying reason for Canada’s new price class is that demand for butterfat, used to make butter and cream, is outpacing that of dairy proteins – leaving processors with surpluses of the latter.

Mathieu Frigon, chief executive of the Dairy Processors Association of Canada, whose members include Saputo and Parmalat Canada, said he was surprised by the U.S. complaints.

“If we talk about contradiction, the U.S. faces the same issue,” Frigon said, adding the U.S. also limited dairy imports with high tariffs, albeit much lower than Canada’s. “It’s not like their market is wide open.”

The U.S. ships five times more dairy to Canada than vice-versa, Frigon said.

U.S. concerns about Class 7 are overblown, said Al Mussell, research lead at Canadian think tank Agri-Food Economic Systems.

Canadian sales are “a drop in the bucket,” and while skim milk exports grew fast, that growth cannot continue because Canada’s system restricts production, Mussell said.

— Reporting for Reuters by Rod Nickel in Winnipeg and Julie Ingwersen in Chicago.

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Canada cannot expect to have both a protected system and compete globally, U.S. Dairy Export Council CEO Tom Vilsack said in an interview.

“They have decided to go significantly into the export market by undercutting the world price for milk powder,” said Vilsack, who was U.S. agriculture secretary under former President Barack Obama.

Canadian exports of skim milk powder more than tripled to 71,880 tonnes in 2017 from a year earlier, worth $173 million, according to Statistics Canada data. Still, Canada accounts for less than three per cent of global trade, according to Agri-Food Economic Systems.

Canada controls dairy supplies and prices and limits imports through high tariffs and has been long criticized by dairy-producing countries such as the U.S. and New Zealand. It recently become the main target of Trump’s verbal attacks on Canada amid talks toward a new trade agreement.

Dairy farmers have an outsized influence in Canadian politics, as they are concentrated in the vote-rich provinces of Ontario and Quebec.

Their main lobby group, Dairy Farmers of Canada (DFC), met privately with Prime Minister Justin Trudeau on Tuesday and left feeling comforted.

“He clearly understands our concerns. He stated that not only does he support supply management, he is also committed to our dairy farmers, and a robust dairy sector,” said DFC president Pierre Lampron.

Faced with fast-rising volumes of U.S. milk proteins not subject to high tariffs into Canada, Canadian processors and farmers implemented a new pricing system, called Class 7, for milk ingredients starting in 2016.

The new class allowed processors to produce skim milk powder at a low enough price to compete globally.

“They are essentially transferring the problems that are created by their system,” Vilsack said.

The underlying reason for Canada’s new price class is that demand for butterfat, used to make butter and cream, is outpacing that of dairy proteins – leaving processors with surpluses of the latter.

Mathieu Frigon, chief executive of the Dairy Processors Association of Canada, whose members include Saputo and Parmalat Canada, said he was surprised by the U.S. complaints.

“If we talk about contradiction, the U.S. faces the same issue,” Frigon said, adding the U.S. also limited dairy imports with high tariffs, albeit much lower than Canada’s. “It’s not like their market is wide open.”

The U.S. ships five times more dairy to Canada than vice-versa, Frigon said.

U.S. concerns about Class 7 are overblown, said Al Mussell, research lead at Canadian think tank Agri-Food Economic Systems

Canadian sales are “a drop in the bucket,” and while skim milk exports grew fast, that growth cannot continue because Canada’s system restricts production, Mussell said.

— Reporting for Reuters by Rod Nickel in Winnipeg and Julie Ingwersen in Chicago.

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A letter to producers last Friday from Dairy Farmers of Ontario board chairman Ralph Dietrich, intended to “put to rest the rumour” that DFO was being forced to dump raw milk, instead wound up as a lead story this week at the Globe and Mail as it detailed the circumstances leading to skim milk dumping.

DFO, in a separate release Monday, emphasized the product being dumped is a livestock feed-grade byproduct of the demand for butterfat and “if there was excess product to feed people in need, we would provide it.”

Total dairy demand has been strong “for the better part of two years,” Dietrich wrote in last Friday’s letter to farmers, but most of that growth has been in products such as butter, creams, cheese and yogurt.

“The weakest segment of the market is fluid milk, although the trend to lower-butterfat milk seems to have been reversed.”

The result has been “unprecedented” growth in all-milk quota, by 6.5 per cent in just over a year, and “the issuance of incentive days,” said Dietrich, who farms at Mildmay, about 90 km northwest of Guelph.

However, he wrote, “we are currently testing the limits of system capacity, with the limiting factor being the amount of skim milk that can be dried into skim milk powder.”

DFO’s board, he said, has thus been “challenged to market all the milk every day.” However, he added, some plants are able to separate the milk without generating more powder.

Thus, he said, “there have been days in the last couple of weeks when we have had to dispose of skim milk in lagoons… That is obviously not an ideal situation but better than the alternative. There is still a need to make more butter and I don’t see that changing.”

The Globe’s Barrie McKenna on Friday quoted DFO’s communications director Graham Lloyd as saying Ontario farmers have produced 5.4 million litres of excess skim in the past month, and roughly 800,000 litres — worth about $500,000 as livestock feed — have instead gone into farm lagoons since late May.

A “similar situation exists in all parts of the country,” Dietrich said in his letter, noting “there have been days when Ontario has been able to move some milk into Quebec and some days when Ontario has been able to help Quebec.”

Today, however, “we continue to be challenged on a daily basis and there is no obvious end in sight, unless the normal seasonal production trend kicks in or there is a prolonged hot spell.”

Dairy Farmers of Manitoba chairman David Wiens, for another example, told the Manitoba Co-operator’s Shannon VanRaes last month that the province’s dairy sector, strained by both increased demand for dairy and limited processing capacity, has had to ship 75,000 lites of milk west each day.

Part of the challenge was dairy giant Saputo’s move to shut its processing plant in Winkler, while expansions at the company’s Brandon site have faced delays, Wiens said.

Saskatoon processors who’ve handled the Manitoba surplus are now themselves at capacity, he added, leading to a situation where “potentially milk will cascade throughout the provinces right through to Abbotsford (B.C.).”

McKenna on Friday also quoted an internal DFO report, which warned of rising imports of “designer” milk protein ingredients from the U.S. and elsewhere, replacing fluid milk in the making of cheese, yogurt and other goods.

“If milk protein imports continue to grow, the industry will no longer be able to sustain itself as there will be no market for the (skim)… leaving the industry no choice but to dump skim milk or import more butter.”

Critics quoted by the Globe blamed Canada’s supply-managed dairy system for producing such surpluses, but DFO emphasized in its release Friday farmers “are producing the right quantity of milk” for Canada’s needs and suggestions to the contrary are “simply not accurate.”

International dairy values have also fallen in recent months, with average milk powder selling prices dropping Tuesday to US$2,409 per tonne, their lowest level since August 2009, Reuters reported.

“It will become harder for prices to recover as the volume of milk powder on offer increases as the new dairy season progresses,” analysts for New Zealand-based AgriHQ said in a note Reuters quoted Wednesday. — AGCanada.com Network

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Slower growth in milk product consumption, higher yields from modern dairy farms and the excess stocks of imported powders have combined to reduce demand for fresh milk in what has been one of the world’s fastest-growing dairy markets.

Small farmers — many with fewer than 100 cows — in Shandong, Qinghai and Hebei province are pouring milk down drains, according to local media reports, while others are feeding surplus milk to pigs.

The agriculture ministry said in a circular on Thursday that all efforts should be made to avoid milk being destroyed, calling on provincial governments to offer subsidies for the storage of milk.

A scandal over tainted milk in 2008 and years of short supply of quality milk have pushed up prices in China to among the world’s highest, fuelling a massive expansion of the sector and rush of capital into the market.

Companies such as China Modern Dairy Holdings and Huishan Dairy built scores of 10,000-head dairy farms to meet consumer demand.

But high prices last year choked off some consumption, and President Xi Jinping’s anti-corruption campaign may also have dented sales of dairy-based gifts, said Sandy Chen, analyst at Rabobank.

Processors have slashed prices more than a tenth from an average 4.27 yuan (C$0.82) per kilogram in February 2014 to around 3.75 yuan at the end December.

For small farmers, who account for about half of the market, prices are as low as two yuan/kg.

“Prices are still coming down for raw milk in what is supposed to be a peak consumption period,” said Chen.

The larger players are also struggling to sell any surplus fresh milk not already contracted to processors, said a manager at a 10,000-head dairy farm who declined to be identified.

“There was massive demand for milk and then it just dried up in the second half of last year,” he said.

Imports of milk powder rose 62 per cent from January to August 2014 compared with the same months the previous year, partly due to worries about supply because of an outbreak of foot-and-mouth disease in 2013.

The milk powder imports declined sharply from August, however, and now excess raw milk could be powderized, implying a poor outlook for imports in 2015, according to Chen.

— Dominique Patton is a Reuters correspondent covering agriculture and soft commodities from Beijing.

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