November 4, 2016 / 5:37 PM / 10 months ago

Canadian dairies gear up milk protein output, reduce imports

WINNIPEG, Manitoba, Nov 4 (Reuters) - Canadian dairies are boosting production of concentrated milk proteins for use in cheese-making, and reducing imports from the United States, even as international rivals complain the industry operates unfairly.

Saputo Inc increased production of the proteins this year, while Gay Lea Foods Cooperative is planning a major investment to produce them.

The catalyst is a pricing agreement struck in July that allows Canadian processors to buy milk ingredients from farmers at the lowest of international prices, making it economical to domestically produce milk proteins instead of importing them. Industry groups in the United States, New Zealand, Australia and Europe say it unfairly undercuts their exports and violates World Trade Organization competition rules.

The agreement between Canada’s dairy farmers and processors does not fully take effect until provincial farmer groups ratify it by February, but a “temporary program” is already in effect, said Lino Saputo Jr, chief executive of Saputo.

“There still will be some solids that are imported, but I would say there would be a shift of volume now to Canadian solids because of the new class price,” Saputo Jr said in an interview on Friday, using another term for milk proteins. “We’re already shifting over to (using) Canadian solids.”

The Montreal-based dairy imports milk derivatives from the United States, Australia and Argentina.

Canada’s supply management system tightly controls dairy prices and production, and Ottawa levies steep tariffs to limit imports.

Gay Lea Foods is also preparing to boost milk protein output. It will soon announce construction of a milk drying plant in Ontario, said Chief Executive Michael Barrett.

The pricing agreement, similar to one already in place in Ontario, is critical to that investment, he said.

“Processors won’t make investments in $100-million plants without any sort of a guarantee of a return,” he said.

U.S. exports of milk proteins to Canada have dropped this year, due to the Ontario pricing system, said Jaime Castaneda, senior vice-president at the U.S. National Milk Producers Federation.

“We strongly oppose any new special class that will be detrimental to the USA,” he said. “We will challenge such a new program and believe (it) wouldn’t be in place for too many years.”

Agropur, another Canadian dairy co-operative, stopped importing U.S. proteins earlier this year.

“We need to find a way in Canada to produce dairy ingredients,” said senior vice-president Dominique Benoit, declining to comment on specific production plans. (Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Andrew Hay)

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