How Canadian Dairy Farmers Escape The Global Milk Glut

President Trump recently went on a small rampage against Canada for blocking imports of one particular type of milk from the United States.

The details of this particular dispute aren't that interesting or important. What is remarkable, though, is Canada's system for managing its dairy industry, which is the underlying cause of Trump's complaint. When it comes to milk, Canada rejects free markets, free trade and the policy advice of most mainstream economists. And as a result, Canadian dairy farmers live in a completely different world from those in the U.S.

American dairy farmers like Bill Bruins, in Fond du Lac County, Wis., are constantly reacting to shifts in the supply and demand for milk. "You have high prices followed by low prices followed by high prices," Bruins says. Those prices are shaped by global events; about 20 percent of America's milk gets exported, often as powder or cheese.

Right now, prices are low because the world's cows are producing too much milk. They're so low, in fact, that some dairy farmers are giving up and selling their cows. This is the sometimes-brutal way that markets bring supply back in line with demand.

Bruins is surviving, though. "We are making a little bit this year," he says. "Last year, we basically treaded water. We lost a little bit."

A few hundred miles away, on Murray Sherk's farm in Plattsville, Ontario, the milk is the same but the prices are quite different — and it's mainly because Sherk lives on the other side of a border that milk from the U.S. rarely crosses.

Sherk is getting about 25 percent more money for his milk than Bruins is at the moment, and in contrast to Bruins, he pretty much knows what his milk payment will be for years to come. "The prices are fairly stable and predictable," he says.

That's because in Canada, the price of milk that dairy farmers sell isn't based on supply and demand. Rather, a group of people from industry and the government get together and decide what's fair. They set the price high enough to cover a good farmer's costs, plus a little profit. Sherk says it's designed "to provide what you'd call fair returns for efficient producers."

In principle, any competent dairy farmer in Canada should make money every year. But farmers also aren't allowed to expand production to take advantage of those guaranteed prices.

"Each producer has a share of the market. We call it a quota," Sherk says.

Farmers can buy and sell their shares, but they can't sell more than their quota. If cows on a farm suddenly start giving more milk, that farmer either has to buy another farmer's quota or sell some cows.

It's called supply management, and part of it involves keeping out imports of cheap milk from the United States. The system also covers a few other farm products, such as poultry.

Basically, when it comes to those farm commodities, Canada has set aside the normal laws of the market.

"It's a choice. It's like society's choice," says Maurice Doyon, an economist at Laval University in Quebec.

Doyon says Canada's system lets smaller farms survive. Dairy farms with 10,000 cows, which are more and more common in the United States, don't exist in Canada. There's more stability in farming communities.

But there's a cost, too.

Canadian dairy farmers aren't forced to cut costs, per pound of milk production, as much as farmers in the rest of the world. As a result, every Canadian has to pay more for milk and cheese and yogurt. It's like a tax on every milk-drinking family. (The exact amount of this tax is hotly disputed. Doyon, who supports the system, suggests that it's about $100 per family per year.)

This is why most economists think this system is a bad idea. Doyon, though, supports it. "There's obviously a transfer [of money] from the consumer to the farmer. But I think it's worth it," he says.

So far, there have been few widespread consumer protests against milk prices. But Canadians could decide someday that cheaper milk is more important than preserving small farms.

The most immediate pressure to abolish this system, though, is coming from outside Canada. There may soon be North American trade talks again, and U.S. negotiators are likely to insist that Canadians will only be allowed to ship things like lumber to the U.S. if American dairy farmers get to send their milk the other way.

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