Milking It: Canadian Dairy, USMCA Squabbles, and a History of Peeved Presidents

By. Michael Marion

DOI. 10.57912/28785845

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Amidst the chaos of on-again, off-again U.S. tariffs on its North American neighbors and the world at large, one Canadian industry is well-accustomed to the disapproval of successive presidents: dairy. Canadian dairy is regulated through a system of supply management, one that checks dairy overproduction to facilitate a price that is reasonable for farmers. Ottawa’s dairy system, built on production quotas, minimum pricing, and import controls, is significantly different from the U.S. approach, which relies on direct payments, government purchases, and revenue support. Every USMCA renegotiation, U.S. representatives consistently pressure for dairy deregulation. In 2020, President Trump managed to forcefully negotiate a 3.59% market opening in Canadian dairy for American imports, a substantial blow to Canada’s system. However, it must be stressed that supply management reflects the country’s unique position next to one of the largest dairy producers in the world; its advent was derived from considerations of national security and farmer livelihoods, and its initial purpose is still being fulfilled today. Canadian dairy should be off the chopping block of U.S.-Canada trade liberalization.

Dairy policies in each respective state were largely devised during the postwar era. Massive advancements in technology and productivity per cow had created a vicious cycle of overproduction. To remedy this  ‘race to the bottom [of prices],’ 1958 saw Canada introduce legislation providing minimal cash payouts to supplement the income of struggling dairies. Yet the $50-$55 million spent annually proved fiscally untenable, leading to the formation of the Canadian Dairy Commission (CDC) in 1966. Since then, the CDC has had a mandate to enforce four functions of supply management: setting a goal price per class of milk, determining the appropriate domestically-produced quantity to sustain said price, allocating provincial quotas on production, which provincial marketing boards divide between farmers, and limiting foreign access to the dairy market. Around $1.5 billion in dairy products were imported into Canada in 2023, compared to around $8.56 billion in net cash receipts to Canadian farmers from dairying.

Since the system’s inception, the U.S. government has repeatedly demanded an end to supply management as unfair to American producers. For example, in 1989, the U.S. (speaking for a collection of states advocating agricultural free trade) was advocating for an end to the system. In 2002, it joined Australia and New Zealand in filing a complaint to the World Trade Organization, citing Canadian supply-managed-firms’ disproportionate advantage in Canadian markets. Interestingly, Washington’s own sprawling subsidization regime was not examined. 2017 saw Trump call the Canadian import quota “‘another typical one-sided deal against the United States,’” in a Kenosha, Wisconsin speech, representing a more spur-of-the-moment yet just as biting opposition to Ottawa's status quo. Meanwhile, American producers have been comfortable in their own biased market.

As Canada curated its dairy production around an explicitly domestic consumer base, the U.S. incentivized its farmers to not only supply national demand but also accommodate the excess. The USDA has developed a complex system of support for the industry centered on ensuring a minimum is paid by processors for milk, compensation for certain economic conditions (ex. when cattle feed prices fall below a certain price), and the purchasing of dairy by the federal government for use in schools, prisons, shelters, etc. All of these programs allowed American dairy farmers to overproduce but still earn a reasonable living, as the U.S. government made up the difference from abysmally low pricing. Consumers are another huge winner, paying increasingly cheap amounts for their dairy. On exportation, the Dairy Export Incentive Program was passed by Congress in 1985, giving a bonus/subsidy on a bid basis to producers planning to export certain dairy products. American comparative advantage on the global dairy market was solidified: U.S. farmers were the third largest exporter of dairy in 2020, accounting for 7.9% of the international total.

Two different approaches to dairy regulation have yielded distinct sectoral characteristics. In 2023, U.S. dairy exported $756,195,961 worth of dairy to Canada alone, compared to the $488,073,714 total Canadian dairy exports (Canadian import quota applied). 45% of the 24,470 U.S. dairy farms have 2,500+ cows, while the average number of cows per the 9,000 Canadian dairies rests at around 74. This may account for more corporate-favoring policy in the U.S. compared to supply management’s farmer-centric rationale. The average U.S. dairy received $23,052 in government payments in 2022, around $2,000 more than the average American farm, and totalling $564,082,440 if multiplied by said 24,470 dairies. That said, 94% of U.S. farms are family-owned, undermining a common criticism of U.S. dairy as being overly corporate. On price per liter, the Canadian $2.14 is double the American $1.05, a result of production quotas. Yes, the Canadian consumer pays more for their dairy, yet this price is more accurate as it factors in the whole production process without distortion from government subsidization. Ottawa’s dairy farmers earn a fair living without directly relying on tax dollars, the national security necessity of producing one’s own sustenance is maintained, and equal farmer access to the market is preserved.

Faced with a far richer, overtly subsidized dairy industry on its massive border, blaming Canada for limiting market access is unreasonable, especially once the hundreds of millions of dollars worth of American dairy it already imports is considered. Perhaps the most striking lesson from the outlined Canadian dairy debacle is the fundamental importance  of empathy on the global stage. Being able to rationally understand the motivations of a perceived adversary can lead to more nuanced government responses to disadvantageous developments and the establishment  of mutual respect born out of understanding. If seen through the Canadian perspective, a separate picture of supply management is painted: it is one born from the realities of bordering an overly-agriculturally-endowed neighbor, a minor area of protectionism in an otherwise persistently-liberalizing trade relationship. With that in mind, a minute loss in the potential market for American dairy is worth satisfying an otherwise constructive partner. The U.S. is already extensively economically-intertwined with Canada, and leaving supply management’s status up to Canadians is a sign of both cooperation and goodwill.