WASHINGTON—In 2016, U.S. dairy farmers saw the value of milk fall to its lowest level since the recession. Now they’re facing the additional challenge of Canada’s national ingredients strategy.

Designed to make Canadian milk more competitive and U.S. milk less so within Canada, the move has displaced many U.S. dairy farmers and businesses accustomed to supplying the Canadian market with ultrafiltered milk.

As a direct result, some U.S. dairy manufacturers recently communicated to their dairy farmer suppliers that they had lost business in the Canadian market, an American Farm Bureau Federation market analysis noted. “These farmers need to find a new marketing arrangement or processor for their farm milk,” the analysis explained. “Finding a home for this displaced milk is proving to be a tall order as the U.S. milk supply continues to outpace processing capacity in some regions.”

Ultrafiltration retains the proteins in milk while separating out lactose, water and minerals. It creates a concentrated dairy ingredient that can be used when making cheese.

Canada maintains strict tariffs and import quotas on dairy products and a milk supply management system that prices raw milk based on end use. The price of milk used for further processing is based on international dairy commodity prices.

Under that system, the price of Canadian milk typically has been higher than the price of milk in the U.S. That price difference, along with the U.S. proximity to Canada, made U.S.-produced milk proteins a competitively priced input for Canadian cheese processors.

About a year ago, Ontario implemented a new milk pricing program that “will include skim milk solids in all forms that can be used as ingredients, including but not limited to skim milk, skim milk powder, ultrafiltered and diafiltered milk, whole milk powder and condensed or evaporated milk (not for retail).” The price for that milk is based on international prices of milk products, effectively dropping the price of milk to Canadian processors, and cutting into the well-established market for U.S. milk protein. Other Canadian provincial governments adopted the program earlier this year.

In 2016, U.S. milk production increased 1.8 percent to more than 212 billion pounds, and hundreds of millions of pounds of milk were sold at steep discounts, dumped or used as animal feed. 

Last year the U.S. lost 1,725 dairy farms due to surging milk supplies and lower dairy commodity prices. Industry stakeholders are working to find processors for the displaced milk and have requested that the USDA purchase dairy products and absorb them into nutritional aid programs.

“Longer term, until new processing facilities come online the U.S. will struggle to balance the increasing milk supply with demand,” the AFBF analysis noted. “New market opportunities … and improvements in existing trade agreements are necessary to grow demand for U.S. dairy products as well as provide for stronger trade dispute settlement mechanisms.”

Tony Banks, a commodity marketing specialist for Virginia Farm Bureau Federation, said the Canadian pricing strategy will have an impact in Virginia despite the commonwealth’s distance from the northern border. “The loss of the Canadian market for U.S. milk products will definitely have a ripple effect on farm milk prices here. Virginia dairymen will face continued pressure on milk prices as a result.”

Media: Contact Banks at 804-290-1114 or Dr. John Newton, AFBF market intelligence director, at 202-406-3729.