MONTREAL — American farmers have been frothing against Canada's strict management of its dairy supply for years — so it was not entirely surprising that when hopes of reworking a NAFTA deal evaporated this week, they did so over milk products.
Under the dairy supply management system, Canada sets quotas for production and regulates prices. Protecting that system has always taken outsize importance in Canadian trade negotiations, but a few new circumstances brought tensions to a boil this time around.
First, most of Canada’s dairy farms are in Quebec, a politically crucial province that traditionally makes and breaks the country’s federal elections. They also happen to be concentrated in a few swing electoral districts, or ridings, said Avery Shenfeld, a senior economist at Canadian bank CIBC.
“Even though this does affect a relatively small number of people … there's a vocal group of people in the industry that keep the pressure up on politicians to side with maintaining the existing system,” he said.
On top of the normal political concerns, Quebec just began a provincial election campaign. The incumbent leader, Philippe Couillard, is a Liberal, like Trudeau, and he’s been struggling in the polls.
Two months ago, Couillard advocated for flexibility, telling Bloomberg that when it comes to a particular American grievance around “ultrafiltered” milk, used in cheese production, “let us see how we can approach that separate from” the bigger system.
This week, he’s stuck firmly to the message that protecting dairy farmers is nonnegotiable.
“We have all the political leaders in Quebec coming out to say that we need to protect Canada's dairy industry from dumping from the U.S.,” Shenfeld said.
Another recent change came from new technology, said Mike von Massow, a food economist at the University of Guelph in Ontario.
The Canadian dairy industry is only about a tenth the size of the U.S. industry, he said. There’s always been a fear of how a glut of American dairy could affect the Canadian market, if the product were able to cross the border more easily.
Milk on its own “doesn’t travel well,” von Massow said. In the past five years, however, it’s become easier to concentrate milk proteins, creating an ingredient for cheese.
This product is still a “pretty tiny” share of the market, but its advent raised new alarm bells in Canada, said von Massow. It wasn’t subject to dairy tariffs and crossed the border easily until Canada changed its domestic price for that product last year.
That new protection inspired Canadian dairy farmers to invest in ultrafiltering technology, raising the stakes again for the Canadian government, which has offered to compensate dairy farmers in the past for trade deals that hurt them. In 2015, the government offered a compensation package totaling $4.3 billion for two trade deals.
On the other side of the border, however, Trump singled out those protections for Canadian farmers as an unfair blow to their U.S. counterparts, tweeting in March that the country should treat American farmers better. “I think it just stuck in the president’s craw, to a certain degree," von Massow said.
Canada had offered the United States more access to its dairy market under the Trans Pacific Partnership, which it lost when it rejected that deal, von Massow said. "They’re looking for a win on this issue," he said.