(Bloomberg) -- David Wiens thought the 2,500-gallon (9,470-liter) stainless steel milk tank he purchased 20 years ago would provide more than enough storage for his dairy farm in Manitoba. These days he’s producing so much he’s had to order a new tank that can hold almost three times as much.
“We have to have everyday pickup now because we don’t have the capacity,” Wiens said from Skyline Dairy, a 240-head operation near the small town of Grunthal that he and his brother Charles have owned since 1989.
As the U.S. takes aim at Canada’s dairy sector as it attempts to renegotiate the North American Free Trade Agreement, the nation’s farmers and processors are forging ahead with some of their biggest expansions and investments in more than a decade.
That’s partly to do with rising demand for butter, which consumers increasingly view as a healthy part of their diet. Canada’s dairy sector receives tariff and quota protections from its government, and also benefits from a new policy, the so-called Class 7 pricing formula, which helps it deal with the leftover skim milk from butter-making.
Class 7 has made it cheaper for processors to buy domestic supplies, supporting the wave of new capacity that’s being built. It’s also attracted the ire of U.S. President Donald Trump, leading him last year to describe Canada’s dairy policies as a “ disgrace.”
For farmers like Wiens, Class 7 means an opportunity to produce more milk, albeit for less money: he’s now receiving about 73 Canadian cents (57 cents) per liter instead of about 80 Canadian cents previously.
The change has spurred some big investments. Gay Lea Foods Co-operatives and Vitalus Nutrition opened a new C$100 million processing joint venture in Winnipeg, Manitoba, last fall. This month, Nestle Canada said it will spend C$51.5 million to increase production at its ice cream factory in London, Ontario. China’s Feihe International is planning to spend C$225 million to build the nation’s first wet infant-formula facility in Kingston, Ontario, which is slated to be completed by 2020. More announcements are expected in 2018, according to industry lender Farm Credit Canada.
In ongoing Nafta talks, the U.S. has proposed effectively killing Canada’s supply-managed system as it and other producers worry the nation will start exporting more skim-milk proteins, exacerbating a global glut. Canada’s expansion comes at a time when the U.S. dairy industry is struggling amid weak milk sales, eroding earnings for companies like Dallas-based Dean Foods Co.
Still, Canada says it has a trade deficit with the U.S. on dairy and has pledged to defend the sector, which is concentrated in regions whose support Prime Minister Justin Trudeau’s Liberal Party relies on.
While the U.S. Department of Agriculture forecasts Canadian exports of skimmed-milk powder are poised to grow 13 percent in 2018, the nation’s shipments account for less than 4 percent of world trade. The European Union and the U.S. are the top exporters.
“Canada became an easy scapegoat for them to blame,” said Philip Vanderpol, president of MDI Holdings, the Gay Lea-Vitalus joint venture. “Are world prices on protein are down? Yes, because there’s a lot of supply.”
Back in Grunthal, Wiens said the thorny trade environment has always been “that cloud in the sky” that hangs over the industry, but it hasn’t hampered his plans: he’s increased production by 12 percent in the past 18 months and hopes to keep it up as there are 30 new calves poised to join his existing herd.
“Our exports won’t move the needle anywhere,” said Wiens, standing next to a pen of Holstein calves born a week earlier. “We’re not someone influencing the world price with the small amount we do.”
Copyright 2018, Bloomberg