OTTAWA—Tim Keenan is making plans to pass along his fifth-generation Quebec dairy business to his children, more than two decades after buying it from his father. There is one complicating factor: Trade talks between the U.S. and Canada threaten to upend the industry.
Canadian dairy farmers depend on a nearly 50-year-old system for protecting domestic production. The protections are viewed as sacrosanct by the main political parties, which have historically feared losing rural votes in Quebec and Ontario, the two biggest provinces and home to nearly all of Canada’s 10,500 dairy farms.
There are signs that is starting to change.
President Trump has called Canada’s dairy protections a “disgrace,” and his top aides warn they are now an obstacle in reaching a deal on a revised North American Free Trade Agreement before a late September deadline. The president has taken aim at Canada’s high tariffs on some foreign dairy products, ranging from 200% to 300%, which kick in if import volumes surpass quota thresholds.
Canadian Prime Minister Justin Trudeau has vowed to defend the dairy protections, known here as supply management. He has also hinted at concessions, a potentially high-stakes move for a leader facing a tight election race in just over a year.
“Is there room for flexibility? I mean, we will see and that depends on the kinds of negotiations that we have,” Mr. Trudeau said earlier this month.
Canadians appear amenable to this approach, with certain caveats. An Angus Reid Institute poll last year showed most Canadians are open to discussing changes to dairy policy, and an August poll indicated Canadians are split on terminating the regime altogether, but would lean toward this option if farmers are fairly compensated.
Canada has made concessions before. It agreed to give other Pacific Rim nations access equal to 3.25% of its annual milk production in this year’s Trans-Pacific Partnership deal. President Trump pulled the U.S. out of the trade pact in 2017. Separately, Canada’s trade deal with the European Union in 2016 allows for a doubling of European cheese exports, equal to more than 4% of the Canadian market, but left intact the supply-management system.
Canada’s dairy industry is worth six billion Canadian dollars ($4.62 billion) in farm sales and another C$15 billion at the food-processing level, according to the Canadian government. Overall, that is a fraction of Canada’s C$1.8 trillion economy.
An employee prepares cows for milking. Quebec and Ontario, Canada’s two biggest provinces, are home to nearly all of the country’s 10,500 dairy farms. Photo: Cole Burston/Getty Images
And the number of dairy farms in Canada has declined sharply over the past decade, to more than 10,000 from nearly 20,000 at the turn of the century. For context, the state of Wisconsin has almost as many dairy farms as all of Canada.
Yet dairy tends to get a disproportionate focus from politicians. The protections tend to pit a well-organized dairy lobby in Ottawa and provincial capitals versus think tanks and maverick politicians who believe the system has outlived its usefulness.
“There are very few dairy farmers left, but the image, for politicians, is one of big numbers still,” said Martha Hall Findlay, a former Canadian Liberal lawmaker and now head of the Canada West Foundation think tank. She has become an outspoken critic of the dairy system, arguing it stifles competition and forces consumers to pay higher prices for staples like milk and butter.
Under the regime, the country limits the production of dairy products by distributing quotas, which dictate how much farmers are allowed to sell domestically and sets fixed prices for farm sales. The goal, proponents say, is to avoid overproduction and the wild price fluctuations that often hit other commodities. The system also imposes tariffs on dairy imports above specific thresholds to limit foreign competition.
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Bruce Muirhead, an expert on Canada’s supply-management system and a history professor at the University of Waterloo, said the limits have helped stabilize the market and kept farmers here from contributing to a global dairy glut.
“We are not part of the problem, in fact we are part of the solution to the whole issue of oversupply,” Mr. Muirhead said. U.S. farmers are struggling, he said, because they produce too much dairy, not because their access to Canada’s market is limited.
A price difference can be seen at retailers on either side of the Niagara River. Big Baspa Mini Mart in Buffalo, New York, sells milk at $1.99 a quart. Stanley Variety in Niagara Falls, Ontario, sells a liter of milk—which is slightly larger than a quart—for C$2.99, or $2.30.
A spokeswoman for the Dairy Farmers of Canada, a lobby group, said it is unclear what concessions Canada is considering in the Nafta talks. The group contends concessions made in recent trade deals threaten to cost the industry up to C$350 million in lost sales.
Mr. Keenan, the dairy farmer, said he is watching Nafta talks closely, with an eye toward what they might mean for the family farm. Canada’s dairy system, he said, has allowed his family to plan for the future because they know what their incomes will be each year.
“It depends how much borders are opened up” in the talks, he said. “Certainly it will impact our bottom line, and the future of the dairy industry.”
Corrections & Amplifications
A liter is slightly larger than a quart. An earlier version of the story incorrectly said a liter is slightly smaller. (Sept. 14, 2018)