Grey market milk substitutes could see crackdown at Canada-U.S. border

U.S. processors are becoming adept at creating products that circumvent importation restrictions, critics say

The federal government is promising the dairy industry a crackdown on surging milk substitute imports.

NAFTA regulations exempt U.S. dairy producers from tariff rate quotas (TRQs) on milk protein products, giving them nearly unfettered access to the Canadian market for these products.

They’re used mainly to make cheese, and the dairy industry says the U.S. industry has become adept at finding and exploiting loopholes, creating a grey market that’s unfair to Canadian producers.

One of the most controversial issues is the use of “diafiltered” milk in cheese making.

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Diafiltered milk is produced when water is added to milk and then ultrafiltered, causing soluble materials such as milk sugars to be removed and non-soluble material such as milk fat to be retained, resulting in a product that’s more than 85 per cent protein, and thus exempt from any import restrictions when coming from the U.S.

What it is subject to are restrictions on its use in cheese making, something the Canadian dairy industry says is happening more and more, and something the federal agriculture minister conceded to the Commons agriculture committee is a growing issue.

“We’re looking at an approach that ensures that the cheese compositional standards are clear for everyone,” Minister Lawrence MacAulay said. “Under the standards, diafiltered milk was never meant to be allowed to be used as milk. We are working with the industry, and intend on having further discussions on this issue to ensure that standards are clear.”

Industry sources peg the value of the imports at $100 million annually, which cuts the demand for Canadian-produced milk. American studies have suggested half the dairy farmer income in the U.S. comes from government subsidies, giving them a significant and unfair advantage, the Canadian industry says.

With the dairy supplement management system facing increased cheese imports under the Canada-Europe free trade deal and significant increases in milk imports under the proposed Trans-Pacific Pact, the industry has been trying to firm up its domestic position with new pricing options, the minister noted. No agreements have been reached.

“There are discussions taking place with the processors and the industry in different provinces,” he said. “What I am trying to do… is make sure that all of the sectors understand the regulations and what standards are required.”

Quebec Conservative MP Jacques Gourde, a parliamentary secretary for agriculture in the Harper government, said U.S. companies “are quite imaginative in inventing products to ship milk into Canada that circumvent Canadian rules.”

He noted diafiltered milk isn’t used to make cheese in the U.S. and to his knowledge there’s no use of it at all south of the border.

“It was developed solely to get across our border,” he said. “Americans don’t eat cheese made with this stuff and no Canadian should either.”

NDP Agriculture Critic Ruth Ellen Brosseau said she’s been told that diafiltered milk imports cost individual dairy farmers about $1,000 a week in lower sales. She urged MacAulay to show more leadership in fixing the problem by enforcing the rules. Brosseau has raised the issue repeatedly in the Commons.

MacAulay said there are still different approaches among the provinces that have to be resolved.

Dairy Farmers of Canada says it’s disappointed the government didn’t announce in the budget that it would fix the diafiltered issue by clarifying the compositional standards. The group also said the government needed to address confusion and a lack of coherence between the Canadian Border Services Agency, that enforces the regulations at the border, and the Canadian Food Inspection Agency, that creates them.

They also noted some importers are also exploiting loopholes in a program that allows manufacturers to defer paying duties for up to four years when the material will be later re-exported. DFC said the program was never intended for food products, and there’s a supply management-specific program that these products should fall under. They also chided the government for failing to act quickly to resolve the issue.

“The government is fully aware of the impact of these issues, and of their solutions,” DFC said in a release. “There is political consensus on the issues – everyone agrees that they are an easy fix – and yet, the government continues to take no action.”

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