July 25, 2019

Canada Continues to Undercut World Powder Prices

 |  By: Fran Howard

As trade relations between the United States and Canada and Mexico fester, Canada continues to undercut world competitors with its lower export price for skim milk powder. As of yet, only Mexico has ratified the U.S.-Mexico-Canada Agreement (USMCA), and while USMCA remains in limbo, Canada continues to export large volumes of skim milk solids under its Class 7 pricing scheme.

As part of USMCA, Canada has agreed to end its Class 7 pricing system, an export class for milk that covers skim milk components, including milk protein concentrates, skim and whole milk powders, edible casein, and rennet casein.
Sarina Sharp, analyst for the Daily Dairy Report, note that Canada’s “Class 7 will be phased out slowly and only after USMCA passes in all three nations. In the meantime, Canada is likely to continue exporting SMP with impunity.”

Despite having  a rigid supply management system, Sharp says Canada increased milk production quotas several years ago to meet soaring demand for butterfat. “The decision allowed Canada to displace imported cream and butter—mostly from the United States—with homegrown butterfat,” she says. 

Canada’s increased milk quotas also led to a surplus of skim milk solids, according to Sharp. Canada’s solution to the surplus was to institute its Class 7 milk price. Sharp notes that the success of Canada’s Class 7 scheme led to record-breaking Canadian SMP exports in 2017 and large export volumes in 2018, which helped trim Canada’s SMP stocks by late 2018. “But stocks are starting to creep up again, and so are exports,” she says. In May, according to Statistics Canada, the country shipped 9.8 million pounds of SMP to other countries, the highest monthly volume since November 2018. 

“Following decades of mandated stagnation, Canadian milk output has surged in recent years,” Sharp notes. Compared to the year earlier, milk production in Canada climbed 4.5% in 2015, 3.2% in 2016, 6.5% in 2017, and 2.8% in 2018, according to Statistics Canada. “Through April 2019, milk production has lagged 2018’s record-shattering volumes in Canada, but output remains higher than in any other year excluding last year,” she adds.

Until USMCA is ratified and implemented, Canada’s movement of SMP under its Class 7 pricing scheme is unlikely to change. “To the ire of its more market-based competitors Canada has been selling skim milk powder (SMP) aggressively since mid-2016 while remaining largely closed to U.S. dairy product imports,” Sharp says.