Cows stand in a barn at the Mount Kolb dairy farm in Caledon, Ontario, Canada, on Wednesday, Nov. 18, 2015.James MacDonald/Bloomberg
Charles Schumer is not the kind of guy you want to cross.
He's the third-ranking Democratic senator and heir-apparent to Harry Reid as party leader in the U.S. Senate. If Hillary Clinton becomes the next president, the well-connected Mr. Schumer would be among her most trusted allies on Capitol Hill.
That's important because the New York senator isn't very happy with Canada right now. He's agitated about what he calls "bogus rules" that threaten to keep U.S. milk out of the Canadian market. Speaking recently at a dairy plant in Batavia, N.Y., Mr. Schumer mused about possible trade retaliation.
"If we were to threaten to put a similar tariff on some of the stuff they sell us, there'd be meetings in Canada … saying get this undone," he told reporters. "We have leverage here."
So what's Mr. Schumer all frothed up about?
The U.S. dairy industry has been grumbling in Washington about persistent efforts by Canada's dairy industry – with Ottawa's help – to shore up the massive tariff wall (up to 270 per cent) that protects the domestic market from foreign competition.
Keeping foreign milk products out of Canada is becoming increasingly difficult. Recently negotiated trade deals, with Europe and the Trans-Pacific Partnership, will eventually open up as much as 6 per cent of the Canadian dairy market, costing farmers up to $360-million a year in lost revenue, according to estimates by the Dairy Farmers of Canada.
The other big threat to the stability of the supply-managed dairy industry is a surge of imported concentrated milk protein, which enters Canada duty-free from the United States. Protein imports reached nearly $200-million this year, displacing at least 10 per cent of Canada's milk supply in the making of cheese, yogurt and ice cream. Much of that milk comes from dairies in New York State.
In the mid-2000s, Canada introduced compositional standards for cheese, effectively limiting the use of foreign milk ingredients. Canadian farmers want these rules, worth hundreds of millions of dollars a year to the industry, better enforced and extended to other dairy products.
But it hasn't stopped the influx of protein concentrates, also known as ultrafiltered milk. So starting April 1, dairy farmers in Ontario dropped the price of industrial milk by creating a new "milk class" for dairy ingredients. The aim is to undercut the price of imported U.S. milk protein and entice Canadian dairies, such as Gay Lea Foods and Parmalat, to make these ingredients themselves, rather than import them from the United States.
The problem – as the Dairy Farmers of Ontario readily acknowledge – is that the new pricing scheme may be an illegal subsidy. "It is clear that the risk of a [World Trade Organization] challenge cannot be eliminated," the DFO said in a document outlining the plan, obtained by The Globe and Mail.
But the group, which controls production and pricing throughout the province, concluded that the economic benefits of creating a "competitive ingredient class" outweigh the trade risks.
That's like waving a red flag in front of a large cow. Jim Mulhern, head of the U.S. National Milk Producers Federation, complained in recent testimony to the U.S. Senate finance committee that Canada is consistently and intentionally trying to diminish the value of the concessions won by the United States in various trade agreements.
"Canada's milk-class system is regularly evolving in order to constrain imports," Mr. Mulhern told senators. "The way in which Canada is operating its milk-class pricing system suggests an intent to erect trade barriers."
The U.S. milk lobby wants Congress to ratify the TPP. But support hinges on the U.S. government being vigilant about preserving and expanding access to key markets, such as Canada.
Unmentioned by Mr. Mulhern and Mr. Schumer, Canadian dairy farmers are already in line to be fully compensated for any revenue they lose because of recent trade agreements. The Americans might well see additional protectionist measures in Canada as unfair double-dipping. Stephen Harper's Conservative government pledged to pay out $4.3-billion over 10 years to the supply-managed dairy, chicken and egg sectors. The Liberal government has yet to confirm if it will proceed with the payouts.
Saving supply management is likely to cost Canadian taxpayers dearly.
The U.S. dairy industry and its powerful allies in Washington are sending a warning shot – the price of saving supply management should not also come out of their pockets.