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

By Rod Nickel and Julie Ingwersen

WINNIPEG, Manitoba/CHICAGO (Reuters) - Canada's sheltered dairy sector has drawn the ire of U.S. President Donald Trump for its high tariffs, but U.S. farmers say it is just as galling that exports have spiked from a country largely closed to importing dairy from other nations.

Canada controls dairy supplies, prices and imports, and the system has recently become the main target of Trump's verbal attacks amid talks toward a new trade agreement.

Even as Canadian politicians have defended the need to protect the industry from outside supplies, 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 research firm Agri-Food Economic Systems.

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.

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

Their main lobby group, Dairy Farmers of Canada (DFC), met privately with Prime Minister Justin Trudeau on Tuesday and left feeling comforted.

"He clearly understands our concerns. He stated that not only does he support supply management, he is also committed to our dairy farmers, and a robust dairy sector," said DFC President Pierre Lampron.

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

U.S. shipments of the proteins have now tapered off, and the new price class also allowed Canadian processors to produce skim milk powder at a low enough price to compete globally. The extra supplies have depressed global prices, Vilsack said.

"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 [PLTPRC.UL], said he was surprised by the U.S. complaints.

"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.

(Reporting by Rod Nickel in Winnipeg, Manitoba and Julie Ingwersen in Chicago; editing by Peter Cooney and Diane Craft)