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The U.S. dairy industry continues to be a strong exporter, though market disruptions following the European Union's move to abolish milk quotas caused some difficulties. (U.S. Dairy Export Council graphic)

What's to blame in dairy trade spat? UM prof says butterfat started it.

What started the trade spat between the U.S. and Canada over dairy?

Blame consumer demand for higher fat products.

Marin Bozic, assistant professor in the department of applied economics at the University of Minnesota, explains that as nutrition science has pointed out some positives of full-fat products, demand for lower-fat products has fallen while demand for things like butter has increased, both in the U.S. and in Canada. That led to Canada relaxing its supply management and creating a new milk classification to meet the domestic demand for butterfat, which in turn led to a surplus of skim milk powder that Canada began exporting.

Canadian tariffs on certain milk products had been in place for years and were in no way a violation of the North American Free Trade Agreement, Bozic explains. He says the Canadian measures to keep their dairy industry a "fortress" were not a big deal until they started to enter the export market. Since the U.S. dairy industry had become a largely export market, that led to market disruptions for U.S. producers.

Basically, Bozic explains, Canada was trying to "sit in two chairs" by both protecting higher prices in its domestic market and making money in the export market.

"That becomes a huge problem for us," Bozic says.

He finds the Trump administration's negotiating tactics over NAFTA intriguing, calling them "shrewd." The president's willingness to withdraw from the decades-old agreement brings other industries and other complications into the matter, which may make Canada more willing to consider change in its dairy industry, he says.

Negotiating changes to dairy along with other trade discussions is where Bozic sees a solution to the problem. What he cautions against, though, is the idea that Canada should be forced to get rid of supply management.

The United States, Bozic explains, had a "great run in dairy exports" from 2005-14. During that time, the European Union was under supply management and couldn't "dump their surpluses on the world market."

In 1996, 3.6 percent of U.S. production of total milk solids was exported, according to the U.S. Dairy Export Council. The U.S. Department of Agriculture's Economic Research Service says the value of U.S. dairy product exports more than quadrupled from 2004-14, and the United States became the world's third-largest dairy product exporter, behind New Zealand and the European Union.

Then, on April 1, 2015, the European Union abolished the milk quotas that had been in place since 1984. That allowed European dairy producers to produce more milk and for European countries to put more into exports.

"Our competition is more fierce" now, Bozic says.

While the percentage of U.S. production sold into export markets fell slightly after the European Union change, still 14.7 percent of U.S. production of total milk solids — 4 billion pounds — was exported in 2017. The value of the exports, however, fell off after the European quotas went away.

If Canada were to get rid of its supply management program, some dairies in that country likely would go out of business that otherwise would not have, Bozic expects. However others would expand and new dairies may start up. The cold conditions there generally are good for cows to flourish.

"We could see a lot more cows in Canada," he says.

That's why Bozic doesn't see pushing Canada to get rid of its supply management program as the answer to the problems of the U.S. dairy industry.

"When we publicly request for them to remove supply management, I think we should be careful what we wish for," he says.

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