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Dairy cows are shown in a barn on a farm in Eastern Ontario on Wednesday, April 19, 2017. U.S. President Donald Trump sharply criticized Canada's supply-managed dairy sector yesterday, sparking a new cross-border spat.Sean Kilpatrick/The Canadian Press

It was clear for months before Donald Trump finally pointed his finger this week at "some very unfair" dairy policies north of the border that Canada was sleepwalking toward a trade dispute that would threaten, once and for all, the survival of supply management in the milk sector.

Politicians in Wisconsin and New York warned then-trade minister Chrystia Freeland last summer that a move by Canadian regulators to shut out U.S. imports of ultra-filtered milk could trigger a trade war that would bring the whole system of supply management crashing down. But such warnings were simply dismissed by Canadian officials as sour grapes on the part of a U.S. dairy industry upset that a once-lucrative loophole in Canada's dairy tariff wall was being nailed shut.

What the central planners of Canadian milk failed to realize then was that the loophole they sought to close had served as a vital pressure valve for U.S. dairy farmers faced with a glut of domestic milk and declining prices for their product. As long as U.S. farmers could export ultra-filtered milk to Canada, calls to end supply management altogether could be more easily defused.

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That became a lot harder after the U.S. President went to Wisconsin on Tuesday to denounce "another typical one-sided deal against the United States," this one enabling Canada to protect its milk producers from foreign competition. Are the last days of supply management finally upon us?

Ironically, what triggered this possibility was a move by the Canadian Dairy Commission to obey market signals for a change, rather than to continue its usual practice of denying them.

In recent years, Canadian cheese makers and other dairy processors had been turning to suppliers of cheaper U.S. milk as regulators here continued to dictate above-market prices that enabled even the least efficient dairy farmers to survive. This imported class of so-called ultra-filtered milk used in processing did not exist when NAFTA was formulated and is therefore not on the list of foreign dairy products on which Canada slaps tariffs of as much 300 per cent.

Canadian producers were naturally outraged at this violation of the spirit, if not the law, of supply management, so the CDC, following regulators in Ontario, moved last year to create a new class of industrial milk priced at the world level but sold only to processors. Consumers still pay an inflated made-in-Canada rate for the fluid milk they buy at the grocery store.

The CDC initially deemed this Milk Class 4(m) a temporary measure, making it hard for U.S. dairy farmers to challenge as an unfair subsidy. Temporary programs are not typically worth challenging under NAFTA or World Trade Organization rules. But when the CDC announced plans to entrench the Class 4(m) in a new National Ingredient Strategy, U.S. politicians pounced.

"Our Canadian friends must understand that our current and future trade relationships depend on their compliance with the agreements they've signed," Wisconsin Governor Scott Walker wrote in an op-ed published in state newspapers last October. "How they respond to our concerns about dairy may cause us to re-evaluate our trade relationship with Canada as a whole. It is in their long-term interest to keep their word with us on dairy trade."

This month, one of the largest U.S. producers of ultra-filtered milk – Wisconsin-based Grassland Dairy Products – told 75 dairy farmers in the state that it would cease to buy their milk after May 1. Since the CDC's move, it said, Canadian demand for U.S. ultra-filtered milk had dried up.

"The Canadian government has put in place several regulations to prevent this trade from continuing," Grassland said in a letter to the farmers.

The Grassland announcement unleashed a wave of panic among dairy farmers in the state, who are faced with the immediate loss of their biggest customer. The loss adds to the woes caused by a 40-per-cent drop in U.S. milk prices since 2014, the same year the U.S. Congress reformed a key insurance program for the dairy sector that producers decry as far stingier than its predecessor.

"More broadly, tens of thousands of dairy farmers will be affected by the larger scope of what Canada is doing, which is using pricing policy to offload milk powder in global markets where it will be competing with U.S. exports," National Milk Producers Federation spokesman Chris Galen told the Milwaukee Journal Sentinel this month after the Grassland announcement.

This is one fight the CDC was unwise to pick. Mr. Trump's election, in part thanks to a 0.77-percentage-point win in Wisconsin, means the timing could not be worse. The "America First" President is predisposed to court the Badger State. Our politburo of milk has made Canada his perfect foil.

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