June 12, 2018 / 7:50 PM / a year ago

Sheltered Canadian dairy sector skimming global exports, U.S. complains

WINNIPEG, Manitoba/CHICAGO, June 12 (Reuters) - Canada’s surging exports of protein-rich skim milk powder have angered farmers in the United States, as the sheltered dairy sector in Canada draws the ire of U.S. President Donald Trump for its high tariffs.

Canada cannot expect to have both a protected system and compete globally, U.S. Dairy Export Council Chief Executive Tom Vilsack said in an interview.

“They have decided to go significantly into the export market by undercutting the world price for milk powder,” said Vilsack, who was U.S. agriculture secretary under former President Barack Obama.

Canadian exports of skim milk powder more than tripled to 71,880 tonnes in 2017 from a year earlier, worth C$173 million ($133 million), according to Statistics Canada data. Still, Canada accounts for less than 3 percent of global trade, according to Agri-Food Economic Systems.

Canada controls dairy supplies and prices and limits imports through high tariffs and has been long criticised by dairy-producing countries such as the United States and New Zealand. It recently become the main target of Trump’s verbal attacks on Canada amid talks toward a new trade agreement.

Dairy farmers have an outsized influence in Canadian politics, as they are concentrated in the vote-rich provinces of Ontario and Quebec.

Faced with fast-rising volumes of U.S. milk proteins not subject to high tariffs into Canada, Canadian processors and farmers implemented a new pricing system, called Class 7, for milk ingredients starting in 2016.

The new class allowed processors to produce skim milk powder at a low enough price to compete globally.

“They are essentially transferring the problems that are created by their system,” Vilsack said.

The underlying reason for Canada’s new price class is that demand for butterfat, used to make butter and cream, is outpacing that of dairy proteins - leaving processors with surpluses of the latter.

Mathieu Frigon, chief executive of the Dairy Processors Association of Canada, whose members include Saputo Inc and Parmalat Canada Inc, said he was surprised by the U.S. complaints.

“If we talk about contradiction, the U.S. faces the same issue,” Frigon said, adding the United States also limited dairy imports with high tariffs, albeit much lower than Canada’s. “It’s not like their market is wide open.”

The United States ships five times more dairy to Canada than vice-versa, Frigon said.

U.S. concerns about Class 7 are overblown, said Al Mussell, research lead at Canadian think tank Agri-Food Economic Systems

Canadian sales are “a drop in the bucket,” and while skim milk exports grew fast, that growth cannot continue because Canada’s system restricts production, Mussell said.

$1 = 1.3012 Canadian dollars Reporting by Rod Nickel in Winnipeg, Manitoba and Julie Ingwersen in Chicago; Editing by Peter Cooney

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