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High tariffs, ultrafiltered milk and supply management play key roles in the dispute

Dairy cows are shown in a barn on a farm in Eastern Ontario on Wednesday, April 19, 2017.

Why are U.S. dairy farmers mad at Canada?

Canada has long maintained a high tariff wall on most dairy products. The duty on milk is 270 per cent. That keeps most imports from the United States and elsewhere out of Canada, while helping to prop up higher domestic prices. One notable exception is ultrafiltered milk and other protein-rich dairy ingredients used to make dairy products such as cheese and yogurt. North American free-trade rules do not cover these ingredients, so they enter Canada duty-free. And in recent years, U.S. dairies have developed a booming business selling these low-cost products to dairies in Canada ($133-million last year). That all changed about a year ago, when Canadian dairy farmers and producers moved to close the breach in the tariff wall with a new "ingredients strategy." They persuaded regulators to create a new lower-priced class of industrial milk as an incentive to get dairies to produce protein substances in Canada, using Canadian milk. The result was predictable: U.S. imports fell in 2016, and are declining sharply so far this year.

What is ultrafiltered milk?

Milk is made up of three main components – milk fat, protein-rich solids and water. New technology has made it easier to separate milk into its component parts and concentrate them by reducing water content. This makes protein substances easier and cheaper to ship compared with raw milk. It also increases the efficiency of cheese production, particularly if the ingredients include cheaper U.S. milk.

Read more: The milk war: How a letter in Wisconsin set off a trade dispute between the U.S. and Canada

What is supply management?

Supply management is the uniquely Canadian regime that governs virtually every aspect of milk, chicken and egg production. The system depends on three "pillars" – a tariff wall to block imports, strict quotas that determine how much each farmer can produce and fixed prices paid to producers. The system was created in the 1970s to help stabilize farmers' incomes. But as the food industry has gone global, supply management has faced mounting internal and external pressure, including persistent trade complaints from the United States, Europe, Australia and New Zealand. The World Trade Organization has ruled that the high prices paid to Canadian farmers are subsidies, making exports very difficult. For Canadian consumers, supply management also means consistently higher retail prices for dairy, chicken and eggs.

Will the United States push for an end to supply management in renegotiating NAFTA?

Not likely. When U.S. President Donald Trump rails about the "very unfair things" Canada is doing to U.S. dairy farmers, he is mostly talking about issues such as ultrafiltered milk. The Trump administration set out its priorities for renegotiating the North American free-trade agreement (NAFTA) in a recent letter to members of Congress. In it, the administration said it would seek to reduce various non-tariff barriers to agricultural trade, including rules limiting imports and "unjustified trade restrictions" on new technologies. That is an apparent reference to Canada's ingredients-pricing scheme. But the letter also pledges to "eliminate all export subsidies on agricultural products," which could be interpreted as a challenge to the pricing regime that underpins Canada's dairy industry. That has prompted speculation that Canada could trade away supply management for free trade in softwood lumber.

Why did Donald Trump choose Wisconsin to deliver his dairy tirade against Canada?

Wisconsin is a major dairy-producing state. It is also a state Mr. Trump won narrowly in the November election. And it is home to Republican House speaker Paul Ryan, a key ally for the President's legislative agenda in Washington. The tough talk on dairy is also a sop to key Congressional Democrats such as Senate leader Charles Schumer of New York, who has led the charge against Canadian dairy policies. Mr. Trump will likely need the support of Mr. Schumer and other key Democrats to renegotiate NAFTA, but also on tax reform and health care.

Why is supply management so entrenched in Canada?

The dairy industry's political clout should be waning. Just 13 federal ridings have more than 300 dairy farms – eight in Quebec and five in Ontario. When the supply-management system was created, Canada had nearly 140,000 dairy farms. Today, it has fewer than 12,000, and every year, a few hundred disappear as farmers leave the business and sell their quota. And yet, all three major political parties (and virtually every MP) have vowed to support the system. The industry is heavily concentrated in Quebec and Ontario, which together produce about 70 per cent of the country's milk. Quebec alone is home to nearly half of Canada's dairy farms – 5,894 – and pockets nearly 40 per cent of dairy revenues.

How is the growing global milk glut exacerbating Canada-U.S. trade friction?

Canadian ambassador to Washington David MacNaughton has insisted that a global oversupply of milk, not Canada, is to blame for the problems of U.S. dairy farmers. And yet, Canadian dairy farmers have been struggling to contain a deepening crisis that is threatening the long-term survival of the carefully calibrated supply-management regime. That balance has been upended by the surge of milk-protein imports, a glut of skim milk and underinvestment in dairy processing. Canada is producing too much milk, but not enough butter, and that is putting downward pressure on overall farm incomes. U.S. farmers, meanwhile, are suffering from overproduction and falling global milk prices. The United States enjoys a large dairy trade surplus with Canada.