Economic Isolationism and America’s Biggest Rival: Canada

Cayuga Milk Ingredients from New York is fighting isolationist policies in Canada and hoping for dramatic changes for the dairy industry in the renegotiation of NAFTA.

America’s hard-working dairy farmers are being exploited by the gross abuse of global trade norms by the country’s greatest rival: Canada. Despite the presence of the North American Free Trade Agreement (NAFTA), the Canadian government bans the import of milk and many dairy products from the U.S. in a system referred to as “supply management.”  Intended to ensure the survival of Canadian smaller, family owned farms, supply management has the downside of causing higher prices for Canadian consumers and providing fodder for reactionary trade regulations [1].  This came to a head with the election of President Trump and the effort in 2017 to renegotiate NAFTA.  Caught in the middle are regional businesses like Cayuga Milk Ingredients which are having trouble navigating the increasingly heated debate and determining a viable strategic path for their future.

A co-op of 28 dairy farmers in upstate New York, Cayuga Milk Ingredients provides value to its members by providing controlled, scaled production while serving as a combined point to bargain with customers [2].  With an eye on the increasing global demand for several products, Cayuga completed a $100 million processing plant and began expanding sales in powdered milk to countries like China and ultra-filtered milk, a previously unregulated good, to Canada [2].   When Canada updated its supply management system in 2017 to include the prohibition of imports of ultra-filtered milk, Cayuga lost the $30 million in export sales that the company normally sends north [3].  The U.S. responded with a clear demand for Canada to reduce or eliminate its supply management system as part of the ongoing NAFTA renegotiations [4]. The Dairy Farmers of Canada, a strong lobbying organization, refutes the claim that removing the trade restrictions would help U.S. farmers and instead proposes on its website that the U.S. would be better off regulating American production as a way to help its farmers [5].  A more pointed argument is made by those who point out that eliminating the protectionist policies would allow Canada to begin selling its own milk on the larger markets, potentially increasing global supply by up to six billion additional liters according to the Canadian Advisory Council on Economic Growth [6].

In the short term, Cayuga has found a willing ally for its complaint in both President Trump and Democratic Senator Schumer from New York [3] and the pressure has been stepped up during the fourth round of NAFTA renegotations.  Cayuga hopes to be able to access the Canadian market again in the short term.  However, the company is itself a long-term move made by its co-op members in order to stay competitive.   The U.S. dairy industry is consistently plagued with supply surpluses and farmers have begun to be squeezed by retailers looking to consolidate production under their control.  As a part of the trend, Kroger, a national retail grocery store, recently brought 100% of their milk production under their control.  Cayuga and its members are addressing these pressures by reaching into the global market more extensively to make itself less dependent on the status of the U.S. and Canadian dairy markets.  The company is working to convert almost 80% of its intake into powdered milk that it can export to mainly Mexico and Saudi Arabia [2].  This transition to a product more easily exported allows for greater global distribution and resilience to regional demand fluctuations.

There are additional complications that come with expansion into the global market that Cayuga must take into account in order to successfully transition their product.  In the short term, the company must continue to expand its supplier base to allow for greater economies of scale and bargaining power when negotiating with distributors and retailers.  By expanding into additional states, it may set itself up as an ideal regional partner if and when the Canadian dairy market is opened.  In the longer term, Cayuga must be wary of the political messaging it pursues with the NAFTA renegotiation and be conscious of how that may be extended.  Although President Trump is championing their cause now, other isolationist and anti-trade policies may eliminate the very global relationships that the company looks to nurture for its survival.  Continuing the path into greater diversification into the international market is critical to Cayuga’s long-term success.

A relatively small co-op in upstate New York, Cayuga finds itself caught in some of the swiftest changing political tides in generations.  However, while it is holds great value to some firms like Cayuga, the Canadian dairy market is only of tertiary importance to most U.S. diary farmers.  Is Cayuga right to publicly pressure the Canadian government to remove supply management instead of focusing on less politically sensitive expansion?  When global milk supply can fluctuate at such a large scale, is Canada right to protect a small industry that they believe preserves cultural value?

 

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[1] Dan Charles, “How Canadian Dairy Farmers Escape the Global Milk Glut”, National Public Radio, May 3, 2017, https://www.npr.org/sections/thesalt/2017/05/03/526613411/how-canadian-dairy-farmers-escape-the-global-milk-glut, accessed November 2017.

[2] Ilan Brat, Kelsey Gee, “U.S. Dairies Get Crash Course in Exporting; Cooling Chinese Demand Points Up Unpredictability of Global Prices”, Wall Street Journal (Online), January 9, 2015, https://search-proquest-com.ezp-prod1.hul.harvard.edu/docview/1643257591?accountid=11311, accessed November 2017.

[3] Robert Harding, “CEO: Cayuga Milk Ingredients lost $30M in sales overnight due to Canada’s trade rules”, Aubornpub.com, April 20, 2017, http://auburnpub.com/blogs/eye_on_ny/ceo-cayuga-milk-ingredients-lost-m-in-sales-overnight-due/article_f85b4c52-2563-11e7-907c-0724c5c124aa.html, accessed November 2017.

[4] Paul Lalonde, “A Closer Look at Round Four of the NAFTA Negotiations”, Mondaq Business Briefing, November 3, 2017, https://global-factiva-com.prd2.ezproxy-prod.hbs.edu/redir/default.aspx?P=sa&NS=16&AID=9HAR000400&an=BBPUB00020171103edb30002x&cat=a&ep=ASI, accessed November 2017.

[5] Pierre Lampron, “NAFTA Round 4 – What does the U.S. really want?”, Dairy Farmers of Canada, October 17, 2017, https://www.dairyfarmers.ca/farmers-voice/farm-policy/nafta-round-4-what-does-the-u.s-really-want, accessed November 2017.

[6] Advisory Council On Economic Growth, “Unleashing the Growth Potential of Key Sectors”, Advisory Council On Economic Growth, February 6, 2017, https://www.budget.gc.ca/aceg-ccce/pdf/key-sectors-secteurs-cles-eng.pdf, accessed November 2017.

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13 thoughts on “Economic Isolationism and America’s Biggest Rival: Canada

  1. Super interesting topic about our great rival, Canada. I wonder if, given that Canada has a strong dairy farming union and is of tertiary importance to most U.S. dairy farmers, Cayuga is better off focusing its sales on China, Saudi Arabia, and other countries that may not have dairy farming infrastructures. As Cayuga, I don’t want to be involved in political drama with Canada; I want to sell milk. Additionally, because Cayuga’s main product is powdered milk (thus easier to ship and has a long shelf life) it seems like a more global expansion is a logical next step and poses less risks in the short term. However, this strategy would come with its own geopolitical concern given that relationships with both China and the middle east can be fraught and unpredictable.

  2. Very interesting write-up. I wasn’t aware of Cayuga or this issue and am surprised by Trump’s position, as I would have expected more of a “take our ball and go home” approach given his own strong isolationist tendencies. I think it would be interesting to learn what the margin difference between powdered milk and ultra-filtered milk are. I know very little about both, but if ultra-filtered is a high-ish margin product while powered milk is more of a low margin commodity, that $30mm revenue hit may be even tougher to make up through exporting to the Mexican/Saudi Arabian/etc. markets.

    As a believer in comparative advantage, I’m against Canada’s supply management policy, particularly given that the country is a signatory of the North American FREE TRADE Agreement. Will be interesting to see how the situation progresses.

  3. Very interesting essay, this reminds me of the spat between Canadian and American paper mills. To that end, however, I do think it’s important for you to recognize the amount of protectionism is rampant across the U.S. economy. The United States protects manifold industries, including paper, iron ore, steel, cotton, and military defense, to name a few, suppressing prices at times when advantageous or allowing outright ban of foreign imports when better suited for the United States. In the larger scheme of things, if you think about the scale of the U.S. military industry protected by tariffs and compare it to an industry such as dairy, you’ll clearly see which country is committing the greater injustice. Moreover, the United States has an obligation as the world’s largest economy to set a foot forward in free trade negotiations, instead of retracting from them as it has done in every convention of the Doha Round talks.

    Instead of making it easier for American companies to complain about foreign trade stealing their lunch, the United States needs to prioritize industrial innovation. For the paper mill example, the U.S. paper industry had been losing jobs for years not only because of foreign competition but also because of automation and an exogenous decline in paper consumption due to technology. Of course companies will reel because of globalization and global competition, but maybe that’s a symptom of changing times? Shouldn’t we think a couple of steps in advance about how to create new livelihoods for our children, than castigate our North American brethren for worrying about the same concerns?

    https://www.wsj.com/articles/u-s-canada-paper-dispute-shows-unintended-results-of-import-tariffs-1483987734

  4. Mark, thanks a lot for your essay – I have never heard about this type of USA-Canada tensions and for me it is very interesting case.

    I would like to share my opinion on your open questions:
    1) Is Cayuga right to publicly pressure the Canadian government to remove supply management instead of focusing on less politically sensitive expansion?
    I think it is important to keep both lines of their business on this step. “Canadian question” is good direction to develop while they can get support on USA level but the same time it is important to prepare back up as, of course, for USA government milk industry will be lower priority than general relationships with Canada. Other options might be direct partnerships with local Canadian farms (e.g. supply of sub-products at lower prices). Selling to other countries is also very good idea especially because of current i. weather ii. politic conditions which significantly affects on milk volume in some regions (e.g Finland – Russia case for Valio). The main risk here might be low scale and following it high cost of entrance. Cooperation with non-profit USA based funds can be a good opportunity to enter some of emerging markets.

    2) When global milk supply can fluctuate at such a large scale, is Canada right to protect a small industry that they believe preserves cultural value?
    I think the main factor should be taken into account to answer on this question is an equilibrium between local milk producers revenue and Canadians milk costs. My opinion here that different rules should be applied for “mass market” and “small producers” but to be protected by Canada “supply management” only if they show high level of sustainability (example is renewable energy at the beginning of cost curve despite its relatively higher price). In this case all customers will have alternatives of different milk options at good “money for value” levels.

  5. First of all, let’s keep all of this “biggest rival” talk where it belongs – Olympic hockey rinks, atop rankings of most livable countries in the world or in debates over who is really responsible for Justin Bieber. The fact of the matter is that these countries are not rivals, but teammates. In fact, despite this issue, Canada is the US’ number one export market for agricultural products, worth $23bn in 2016.

    The reality is, this policy is unlikely to change. Supply management is highly popular in Canada (~80% support in a survey conducted by the Globe and Mail), despite consensus among economists that this policy results in higher end prices to consumers. This comes from a combination of nostalgic empathy for the agricultural producers on which the country was founded, and the idea of maintaining national food security in the event of instability of imports resulting from volatile trade relations (though this shouldn’t be an issue…right?).

    You raise an excellent question about whether or not Canada should be that big of a priority for Cayuga. As you note, there are many less protected market opportunities available to the company. However, if Canada is in fact that attractive of a market, Cayuga would be able to set up its own production in Canada, accessing the higher price market. If Cayuga felt it had a sustainable competitive advantage in its product, cost structure, marketing, etc this would surely present an opportunity to cash in until the cows come home.

  6. Thanks for this write-up about a topic that I didn’t know much about before. It’s so interesting that this commodity is one of the many things causing tension between our government and other countries’ leaders.

    In response to your questions:
    1 – Cayuga has the right to publicly pressure the Canadian government, but it may not be the smartest move, as there are likely many other countries that they could expand to without as much pushback. However, the concern with pursuing other countries is that shipping costs will be much higher and may not be worth it. That being said, it would be interesting for them to look into emerging markets for opportunities there.

    2) Canada is right to protect this industry if it is that important to their country. We can’t assign a dollar value to another country’s cultural value on a product, so even if it may not make perfect sense to from our economic standpoint, we should respect their beliefs and help influence them to make a change rather than completely disregard their cultural attachment to their own milk.

  7. This was a really interesting read, especially given that most of the rhetoric from Trump is about closing borders and bringing everything in-country – which seems to be exactly the position Canada has taken in this case. For Cayuga’s part, are they right to be fighting this battle? That can be seen from two lenses: 1) Do they have the right/privilege to complain and try to affect policy? and 2) Is this the best use of the CO-OP’s time and resources?

    Examining #1, I would argue that yes. Just like Canadian milk producers have a right to lobby for their interests, so do American producers. However, examining #2, I would argue that Cayuga has much better ways to employ their time and resources, especially since they are a very small COOP and lack the backing of larger milk producers who don’t consider the Canadian market of particular importance.

    Per a commenter above, I also am not very familiar with the margins for powder milk or ultra-filtered milk. However, as someone who grew up with powder milk, there are advantages to this segment. For one, the product has a much longer shelf-life, which means Cayuga runs lest risk of inventory losses due to expiration. And secondly, there is a very vast market for powdered milk all around the developing world, including those with relative proximity in Mexico and central America. Based on this, Cayuga should consider focusing their efforts in this segment.

  8. This issue exemplifies why isolationist policies are counterproductive. US isolationism aims to protect domestic industries by keeping out foreign competitors. However, Cayuga is suffering as a result of such policies from Canada. That being said, Cayuga’s value add to local dairy farmers in upstate New York is to act as a voice for its members. Therefore, Cayuga taking an active stance with regard to trade policies in dairy farming is necessary. If Cayuga fails to act given current events in the industry, members could begin to exit the co-op, undermining the organization and fueling further exits from the group, as dairy farmers seek elsewhere support and bargaining power of a larger entity.

  9. The issue is a great example of how selective nations and electors, can be regarding protectionism. Many companies and politicians are liberals until that hurts them, and others are protectionists until this is not as convenient for them. I fully agree with the article’s position that Cayuga is basically caught in the middle of a bigger discussion and are seriously suffering the consequences of that. Answering to Mark questions, I do think that Cayuga is right to public speak its mind and attack the isolationist practices employed by Canada government. As a group co-op of small producers, they have to do that to be heard and from a PR perspective I believe the public tends to side with the small man, and I think that Cayuga can be perceived as such. I also agree with their initiative to create capabilities to dry milk and have access to the international market – this will help Cayuga to diversify a risk that might be too great for the group of small farmers.

  10. Thank you for this! By highlighting one small (but mighty) co-op, you make it easy to imagine the thousands of small suppliers that are harmed in a similar manner by global isolationism. In our prior economics classes, we learn about the system of a free market and the role of government intervention. In a free market, scarce resources are allocated by supply and demand to set prices. Government is meant to step in in when the rights of their citizens are forgone causing the market to be inequitable. In the case of Cayuga, we see government intervention hindering the free market forces. Cayuga has every right to publicly pressure the Canadian government to remove supply management. But I think an even more compelling tactic would be to engage in dialogue with potential Canadian consumers and potential Canadian competitors. Cayuga has compelling arguments to convince both of the merit of open borders. If they can get buy-in from the end consumer, and the potential competitor, they can collectively tackle the issue together.

  11. Thank you for an interesting read, Mark. I also have concerns with Canada’s protectionist policy towards dairy. Not only has Canada kept foreign suppliers out of the market, it has also orchestrated government-set pricing for some time (http://www.cdc-ccl.gc.ca/CDC/index-eng.php?link=123). Canada has even gone as far as to set a fixed price-premium for the country’s organic dairy dairy above regular dairy, rather than relying on consumers’ demand and willingness to pay to help set prices. While this can be an effective tool for growing the organic dairy supply and promoting the organic health trend, fixed prices likely lead to a “snowball” effect of government oversight needed to maintain a sustainable market.

    My other concern with Canadian dairy protectionism is that this may limit other cross-border food trades, given the logistics cost implications. Food processors and distributors tend to “mix” refrigerated shipments over the border with heavy and light products, so as to maximize product in each truckload. Without a full suite of refrigerated products to choose from (of which dairy is a large component), companies may decide to stay in-country and miss out on potential value-creation.

    If pressed, I can think creatively of a few benefits to the policy. Spreading dairy production over the US and Canada might help prevent illness-outbreaks, such as the avian flu that destroyed much of the egg supply a few years ago. Canada may also be a “winner” in global climate change as the planet warms, making it a more hospitable home to dairy cows. It will be interesting to see how the NAFTA discussions progress.

  12. Mark, thanks for the write up and for highlighting the acute impacts of trade agreements (or violation thereof). Most of the time, people talk in broad terms about how issues are good, or bad, and it is refreshing to have a specific circumstance to evaluate true merits.

    Though I’m not sure to what extent, there is clearly foul play here. A trade agreement is designed to allow the free flow of goods across borders. The “supply management” is simply a loophole that prevents free trade. While Canada has a right to protect its dairy farmers, it should not outwardly discriminate against Cayuga.

    The issue here, as you point out, is one of scale and importance. Cayuga is a blip on the radar and doesn’t carry enough weight to force change on a broader scale. Furthermore, I’d argue that for every Cayuga, there is a Canadian Cayuga who is subject to the same “supply management” discrimination.

    A sticky situation indeed, but as with many companies facing isolationism, it seems like Cayuga will be forced to adapt (turn more attention to the U.S. market) until legislation goes its way. Problem is, we are moving away from free trade at the federal level which will further complicate Cayuga’s situation.

  13. The food and beverage space is a very delicate topic from a governmental perspective because in many ways it is so visible to consumers and touches hot button issues such as health and wellness. I can see the Canadian government viewing a locally owned (and more importantly, Canadian regulated) milk producer as a sort of strategic tool since having some level of domestic food and drink production may one day be critical to survival if international peace breaks down. Canada and others may feel protectionism is thus warranted for select survival-oriented industries and have a tough time giving up such policies even in the face of sound arguments. Moreover, Cayuga’s position as a sub-scale player means they are unlikely to have the lobbying resources or political clout to negotiate against the protectionism in other countries. If Trump does re-cut NAFTA, it would likely prompt protectionist measures in response from other countries, which could even worsen the situation for Cayuga.

    Given this, Cayuga may be better served looking to enter other markets such as Latin America and Europe. Their communication strategy could be less tainted by the brewing conflicts that Trump’s negotiations are triggering. Cayuga’s limited resources are best spent looking elsewhere, and perhaps they may uncover even better growth markets that they previously hadn’t appreciated.

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