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WINNIPEG, Manitoba, June 7 (Reuters) - Canada is working on a plan to shore up its sheltered dairy industry, including measures to counter fast-rising imports of milk proteins from the United States, according to the country's agriculture minister.
Any new support risks widening a trade dispute among North America's dairy farmers over $150 million worth of U.S. milk protein isolates used to make cheese and yogurt.
President Barack Obama and Prime Minister Justin Trudeau have become fast friends since the Canadian leader won an election late last year, but the milk spat is one of several commodity-related arguments to flare up, along with wheat and softwood lumber.
"The Americans are quite good at taking care of themselves and in the end we'll be taking care of ourselves too," Agriculture Minister Lawrence MacAulay, said in an interview.
The imports' value pales next to the $663-billion in total annual trade between the countries, but the proteins, sometimes called diafiltered or ultrafiltered milk, spurred protests by Canadian farmers last Thursday because they have reduced demand for domestic milk.
MacAulay plans to make recommendations to cabinet this month to deal with the imports and compensation for farmers for a free-trade deal with Europe.
"What we're trying to do is come to an end result to deal with the diafiltered milk," MacAulay said. "It is a problem, but hopefully we'll end up with as good or better results in the end."
Canadian imports of U.S. milk protein isolates have jumped 10 times by volume over five years to 2,700 tonnes in January 2016, according to Farm Credit Canada. The proteins are a cheap alternative to skim milk for Canadian processors such as Saputo Inc and Parmalat Canada Inc, who must meet federal standards for milk and protein content in cheese.
A move toward consuming more butterfat, through butter and cheese, and less milk, is partly behind Canada's problem. The trend has already generated a surplus of domestic skim milk.
It's also a bureaucratic problem since Canada's border agency treats the proteins differently than its food inspection agency, resulting in tariff-free access. Canada's supply-managed system tightly controls production and imports to support prices.
"Without the government standing strong on (border measures), the sustainability of supply management comes into question," said Wally Smith, president of the Dairy Farmers of Canada. "Put your money where your mouth is."
An industry solution may also be possible.
Ontario's dairy farmers set a new price for certain milk ingredients in April to compete with U.S. proteins. As a result, Canadian dairy co-operative Agropur has stopped importing U.S. proteins and uses Canadian milk to make cheese, said senior vice-president Dominique Benoit.
Saputo still imports proteins, but is talking with dairy farmer groups in Canada about alternatives, said Chief Executive Lino Saputo Jr.
"All we need is an ability to source milk at competitive prices," he said in an interview. "We don't need government interference."
The U.S. dairy industry has noticed a drop in demand from Canada since the Ontario farmers' move, and is also wary of government action, according to Wisconsin-based Grassland Dairy Products Inc, which exports the proteins.
"This is not just about us, it's about thousands of family farms that will lose money over this" if sales to Canada dry up, said Goedhart Westers, Grassland's vice-president of business development.
If Canada stymies U.S. sales, Washington should complain to the World Trade Organization, said Jaime Castaneda, the U.S. Dairy Export Council's senior vice-president of trade policy.
"We have made clear to the Canadian government that we expect that they will not take any action to disrupt current U.S. exports of dairy products," said Matt McAlvanah, spokesman for the U.S. Trade Representative. (Reporting by Rod Nickel; Editing by Alan Crosby)