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There is a mood of discontent in dairy country.

And it's not just about the concessions Canada made to join the Trans-Pacific Partnership (TPP), a massive Pacific Rim trade deal struck earlier this month.

In recent weeks, frustrated Quebec and Ontario farmers have blockaded dairy processing plants and staged a handful of protests near Canada-U.S. border crossings. Farmers are angry about a spike in U.S. imports of both liquid milk and concentrated milk protein. They blame these imports for causing a growing skim milk surplus and a sharp drop in farm-gate prices this year.

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Ottawa's recent announcement of a $4.3-billion compensation package for dairy, chicken and egg farmers will mitigate some of the damage from pending trade agreements. But it won't stem the import tide.

Imports of milk protein, mainly used to make cheese and yogurt, are up about 60 per cent in volume terms through June of this year. Imports of these highly concentrated ingredients are now on a pace to reach nearly $200-million this year, displacing at least 10 per cent of Canadian milk consumption.

The fight is pitting dairy farmers against their own. Among the plants targeted by recent protests are ones owned by Quebec-based Agropur, a co-operative controlled by the province's dairy farmers.

Dairies use imported protein concentrates because they're significantly cheaper than Canadian milk. Low-cost concentrates now enter Canada duty free from the United States, skirting prohibitive tariffs of up to 270 per cent applied to other countries.

It's not the only reason imports are up. Farmers also complain that dairies are abusing a duty deferral system to bring significant quantities of milk and milk ingredients into the country – a loophole that the federal government has now promised to close.

It's all evidence of a once-cloistered system facing external pressures. Dairy products (along with chicken and eggs) have been tightly regulated in Canada since the 1970s under a system known as supply management. The regime depends on three essential pillars: keeping most imports out, fixing prices paid to farmers at relatively high levels and then carefully matching production to consumption. Weaken just one of these, and the system becomes distinctly unmanageable.

The more domestic milk that gets displaced by imports, the more difficult it becomes for provincial marketing boards to prop up prices and manage production.

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Trade Minister Ed Fast insisted that he managed to preserve the "pillars" of supply management in the TPP negotiations. But he salvaged a foundation that was already wobbly.

The increasingly leaky tariff wall is an intractable problem for farmers. Ottawa agreed in the TPP to open up 3.25 per cent of its dairy market to duty-free imports. What officials did not make clear is that Canada is also eliminating tariffs on milk protein concentrates as soon as the agreement comes into force. That means TPP members Australia and New Zealand will join the United States in being able to ship virtually unlimited quantities of these ingredients into Canada, once the deal comes into force. Ottawa made a similar concession in its free-trade deal with Europe.

Protein ingredients create "ominous" gaps in the tariff wall, according to an analysis of the TPP by Agri-Food Economic Systems, based in Guelph, Ont. These trade agreements will encourage the world's leading dairy exporters to "gear up" for the Canadian market, the report said.

Facing internal dissent, the Canadian dairy industry is under growing pressure to hold back the import surge. Dairy Farmers of Canada, the national voice of the industry, said it is now exploring "different ways" to address what it argues is an unfair hole in Canada's protective tariff wall created by protein concentrates.

And this past week, the Dairy Farmers of Ontario announced that it has applied to provincial regulators to create a new, and lower, "world" price for much of the surplus milk that's been accumulating in the system. The plan, which it hopes will be adopted nationally, is seen as a way to compete with imported milk ingredients by giving dairies a significant discount on the skim milk they buy. DFO officials said lower wholesale prices will also give processors added incentive to modernize aging Canadian dairies.

"We're optimistic that it will stabilize the system and give processors a good opportunity to invest and compete," said Graham Lloyd, DFO spokesman and general counsel.

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But it's not clear whether the new pricing scheme will mollify farmers angry about falling farm-gate prices.

And forget about consumers. No one is promising that lower wholesale prices will ever reach grocery shelves.

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