Economy

Milk Wars Curdled U.S.-Canada Relationship Long Ago

Trump blames Canada, but both sides have been fighting dirty since the 1930s.

Turning up the heat.

Photographer: Elisabeth Schmitt via Getty Images

Donald Trump sent much of the presidential campaign vilifying Mexico. More recently, he has shifted his attention to the north, assailing Canada for unfair trade practices. In the past few days, he has slapped a retaliatory tariff on softwood lumber imports and threatened Canada’s dairy industry. "We will not stand for this," Trump tweeted. "Watch!"

Neither industry falls under Nafta, and with good reason: Both countries have propped up these industries for decades and aren’t eager to throw them on the mercies of free trade. The dairy business is an especially sheltered industry in Canada, known among the bovine cognoscenti as the “milk cartel.”

But the U.S. is equally guilty of treating its dairy industry as a sacred cow. Indeed, both countries have gone to extraordinary lengths to prop up their dairies since the 1930s. Canada has merely done so in a very different fashion than our cherished subsidies and price supports.

Why did Canada sour on a free market in milk? As with the U.S., the Great Depression played an important role. In the early 1930s, Canadian dairies desperate for revenue in the hard times inaugurated the so-called “milk wars,” where cash-strapped producers began slashing prices. Ontario witnessed some of the worst declines, and a number of farms went bankrupt. As a cherished industry continued to implode, the regional parliament passed the Milk Control Act in 1933.

This piece of legislation created the MCB, or Milk Control Board. This body didn’t set prices, nor did it hand out subsidies to encourage farmers to cut production, as the U.S. would soon do during the New Deal. Rather, it brought together producers, distributors and consumers to hammer out a “fair price" for milk. One historian of the MCB has characterized it as an attempt to “allow the milk industry to organize and control itself with minimal regulatory intervention.”

The MCB brokered numerous price agreements that stabilized the price of milk and then started to drive it higher. It also raised barriers to entry by imposing strict licensing and bonding requirements. As the number of producers and distributors stagnated and declined, the MCB refused to extend new licenses, insuring a greater profit for those remaining. In effect, the MCB propped up prices by limiting supply.

These tactics turned the Ontario dairy industry into a closed community dominated by a handful of big dairies. The policies also stabilized the price of milk, though at levels many consumers found onerous, prompting significant protests in the late 1930s. In a typical broadside, one newspaper labeled the MCB as “autocratic,” and compared its leaders to Mussolini’s regime.

Nonetheless, other provinces in Canada emulated Ontario’s MCB over the course of the decade. In Alberta, milk actually became a “public utility,” as the province put dairies under the control of the Public Utilities Board. For the most part, though, provinces followed Ontario’s lead. Some, like Saskatchewan, also imposed production quotas to keep milk prices high.

Other countries around the world at this time also wrestled with falling prices and a glut of milk. In the U.S. and Europe, the solution generally took the form of subsidies, where farmers hurt by falling prices would get direct payments from the government to keep them from going out of business. These programs, born during the New Deal, became ever more elaborate and essential in the postwar era.

In the 1950s, Canada also tried subsidies, but by the 1960s, the expense became increasingly prohibitive. In response, Canada passed the Milk Act of 1966, which created a national body known as the Canadian Dairy Commission. Though the CDC initially continued some of the subsidy programs, it soon embraced methods that sought to limit the supply of milk, much as the MCB had sought to do many years earlier.

These tactics took three forms. The first aimed at restricting imports. Initially, Canada prohibited all imports of milk; eventually, Canada relaxed this stricture, using high tariffs to accomplish the same end. At the same time, the CDC began setting prices, much the way the original MCB did. And finally, the CDC imposed a rigorous quota system that restricted the amount of milk produced. These quotas -- which confer rights to regular profits -- have a monetary value and can be transferred.

Canada’s dairy industry has changed little since the 1970s, despite token concessions in free-trade negotiations. John Manley, the president of the Canadian Council of Chief Executives, has called it “the last Soviet-style economic regime on the planet.” Critics claim that it is inefficient and imposes an unfair burden on Canadian consumers.

All of that may be true. None of it should bother the president of the United States. The more relevant question is this: Have these machinations lent Canada a competitive edge in international milk markets? In 2016, it exported $112.6 million in dairy products to the United States. During the same period, Canada imported more than four times that -- $631.6 million -- from American dairy producers.

The fury aimed at Canada might lead one to assume that the U.S. would never stoop to propping up its own dairy industry. This is laughable.

Instead of a government-sponsored cartel, the U.S. has created myriad price supports and subsidies aimed at keeping the milk flowing. These included the federal government’s “milk marketing orders,” which set minimum prices; the Dairy Price Support Program, which bought up surplus production at guaranteed prices; the Milk Income Loss Contracts (MILC), which paid farmers when prices dip below certain thresholds; and many others. 

In fact, only a few years ago, the U.S. came very close to imposing supply management on the nation’s dairy industry. In 2014, the National Milk Producers Federation pushed for the creation of a supply management regime in this country, but fell short, according to the Wilson Center. Instead, the final version of the bill abandoned direct subsidies, though it replaced them with an indirect subsidy program known as the Margin Protection Program. Direct and indirect subsidies offered by state governments have largely remained untouched.

Both countries are guilty of manipulating milk markets. Canada has followed a policy that insures that a cartel of producers limits supply (and imports) in order to keep prices high, with consumers footing the bill at the grocery store. The American policies effectively lead to unlimited supply, cheap milk (and a desire to find foreign markets to dump surplus milk). Consumers don’t pay the price; instead, taxpayers do. 

The president can milk this issue all he wants. But he should realize there are no innocents in a trade war like this -- unless you count the cows themselves.

(Corrects 15th paragraph to remove a potentially misleading figure on U.S. subsidies of the milk industry and adds a 16th paragraph with the history of the issue.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Stephen Mihm at smihm1@bloomberg.net

    To contact the editor responsible for this story:
    Mike Nizza at mnizza3@bloomberg.net

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