Will NAFTA 2.0 Kill Canada’s Class 7?

While discussions press on regarding the renegotiation of the North American Free Trade Agreement without mention of dairy issues, industry leaders are confident Class 7 will be addressed before the deal is done.

“I believe dairy will be probably one of the last things addressed, but I remain optimistic we’ll get something done on Class 7,” says Michael Dykes, CEO of the International Dairy Foods Association.

According to Dykes, Class 7 is top of mind for the Trump Administration and they understand the short and long-term impacts Class 7 is having on American dairy farms.

“President Donald Trump has made it known that he wants some progress made and announced relative to U.S./Canada dairy trade issues when NAFTA 2.0 negotiations conclude their talks in the coming weeks,” says Pro Farmer’s policy analyst Jim Wiesemeyer. “Trump early in his administration pledged to defend the interests of Wisconsin dairy farmers against Canada’s ‘unfair’ dairy industry.”

Recent analysis from the American Farm Bureau Federation claims Canada is “having their cake and eating it too” when it comes to dairy markets. It notes that Canadian dairy farmers are expected to increase milk production this year by 4%, to 21.6 billion pounds. This follows three consecutive years of growth in Canadian milk production. In fact, since 2014, Canada’s milk production has grown by more than 16%, more than any other major dairy-exporting region.

Dykes says without consideration of any trade laws, the fact that Canada is undercutting the prices of other countries should be a red flag.

“They have gone from [exporting] about 20,000 MT to last year they did 70,000 MT of skim milk powder,” Dykes explains. “It defies logic when the highest cost milk producer in the world can land skim milk powder in Mexico three cents cheaper than we can in the U.S. Skim milk powder is a thinly traded product, even a one cent difference can mean the loss of a sale.”

While the short-term impact is the loss of markets, the long-term impact of the Class 7 pricing system is capital investments being made in Canada because of access to cheaper products. One example Dykes shares is a new infant formula plant being built in Canada under partnership with China.

According to Wiesemeyer, A bipartisan group of House members recently pressed U.S. Trade Representative Robert Lighthizer over NAFTA dairy issues. The group of 68 lawmakers said a good outcome on dairy will “remain an essential element of a positive result.”

“These results are critical to securing a modernized NAFTA worth of congressional support that addresses today’s top trade concerns with our NAFTA partners and fills the gaps in the existing agreement,” said the letter, spearheaded by Reps. Ron Kind (D-Wis.) and Lloyd Smucker (R-Pa.).

“The lawmakers urged Lighthizer to press for elimination of Canada’s Class 7 pricing program ‘and to extend to our dairy companies the same open market access opportunities to Canada that the vast majority of other industries in the U.S. already enjoy,’” Wiesemeyer says.