July 26, 2017

Canada Quickly Moving from Customer to Competitor

 |  By: Fran Howard

U.S. dairy exporters have been losing markets this year due in part to new classes of milk in Canada and strained relations with Mexico. However, beginning in mid-August, U.S. trade representatives will have a chance to renegotiate the North American Free Trade Agreement (NAFTA).

“If recent trade data from Canada and Europe are any indication, competition in global milk powder trade will be intense the rest of this year,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle.

According to USDA’s Foreign Agricultural Service (FAS), Canada will be able to export more milk powder going forward by aggressively pricing milk proteins produced in Canada under the country’s new Class 7 milk price.

“The Class 7 milk price allows Canada to sidestep the World Trade Organization ruling that prevents the country from exporting government subsidized skim milk powder,” notes Dorland. “FAS believes Canada prices its Class 7 milk off the lower of either the skim milk powder or whole milk powder (WMP) prices in New Zealand, Europe, and the United States, effectively guaranteeing that Canadian skim milk powder will always be competitive on the world market.”

Canada’s new Class 7 milk price accomplishes two things. First, it makes U.S. ultrafiltered milk less attractive to Canadian buyers, and second it ensures that Canadian milk powders are competitive with U.S. nonfat dry milk in the global market. While the loss of the ultrafiltered milk market in Canada had an almost instantaneous negative impact on U.S. dairy producers, the impact of higher Canadian exports is just now starting to become evident, Dorland says.

Through May 2017, Canada exported 19,924 metric tons (MT) of skim milk powder, which is 237% more than in January through May 2016. For the first five months of this year alone, Canada exported more skim milk powder than it did annually each year between 2010 and 2015. Perhaps even more worrisome for the U.S. dairy industry than losing Canada as a market for ultrafiltered milk is that in the first five months of this year Canada also increased exports to three of the top four destinations for U.S. nonfat dry milk—Mexico, the Philippines, and Indonesia, Dorland notes.

At the same time, Canada is facing increased demand for butterfat and is thus putting more milk into butter, which means its milk protein surplus is also growing. According to FAS, the country’s surplus milk proteins could grow to 105,000 metric tons by 2021-22, up from 79,200 metric tons in 2014-15.

“More milk powder from Canada along with unchanged domestic demand will mean more exports and likely more competition for U.S. exporters in key markets,” Dorland says. “And Canada is not the only exporter with surplus skim milk powder.”

Europe’s total skim milk powder exports rose to 80,043 metric tons in May, the highest monthly volume over the past decade. Europe’s year-to-date skim milk powder exports to Mexico hit 18,733 metric tons—an increase of 332% from the same period last year—while May exports to Mexico of 6,819 metric tons were the highest since January 2002.

“The value of the euro to the Mexican peso provided some incentive to buyers in Mexico to source EU milk powders,” notes Dorland. “But Mexico also could be looking for alternatives to U.S. suppliers, which could give Mexico some leverage in the upcoming NAFTA discussions”

Not all the news is bad news for the United States, though. “Currency exchange rates are working in favor of U.S. exporters,” says Dorland. “And the upcoming NAFTA discussions will focus partly on reinforcing the dairy trade relationship between the United States and Mexico while seeking to level the playing field with Canada.”