As the 2026 review of the Canada-U.S.-Mexico Agreement (CUSMA) begins, some U.S. dairy groups are urging Washington to put Canada’s dairy import quotas on the table. They allege that Canada continues to manipulate dairy tariff-rate quotas (TRQs) and unfairly prices dairy products to the benefit of Canadian producers. The industry and U.S. administration have long expressed special frustration over the alleged underfilling of Canadian dairy import quotas for skim milk powder.
The federal government was reportedly talking to dairy industry representatives late last year about how U.S. demands might be addressed in CUSMA-related negotiations. While Canada recently passed (widely supported) legislation stopping federal trade negotiators from granting any more dairy market access to foreign producers in new trade deals, it may be difficult to avoid the conversation with U.S. trade officials over the coming year.
The United States has already initiated two separate but related CUSMA disputes against Canada concerning the allocation and administration of dairy quota. Among the U.S. claims in those disputes was that Canada’s allocation rules favour Canadian dairy producers and processors by restricting access to import quotas for retailers and food-service operators (e.g., restaurant chains, catering firms), limiting access for U.S. producers to the Canadian market.
The Retail Council of Canada (RCC), which represents large Canadian and many U.S. grocery and fast-food chains, supported the U.S. position in these disputes. They argue that giving their business members more power to source U.S. dairy products directly would widen consumer choices and lower prices.
The Dairy Farmers of Canada (DFC), on the other hand, argues that CUSMA granted U.S. producers “substantial tariff-free access to the Canadian dairy market,” resulting in “a significant [U.S.] dairy trade surplus with Canada [that] came at a direct cost to Canadian dairy farmers, reducing their market share and weakening the stability of Canada’s domestic dairy sector.”
Importantly, the industry association also contends that the current approach to dairy quota allocation is consistent with, and necessary to preserve, the functioning of Canada’s supply management system.
Canada’s supply management system and trade agreements
Under Canada’s supply management system, domestic dairy production is controlled and prices administered to maintain stable supply and good incomes for dairy farmers. Prior to the 1995 Agreement on Agriculture at the World Trade Organization (WTO), dairy imports to Canada were tightly limited through quantitative restrictions, including import quotas and licensing, to protect the domestic market. Upon acceding to the WTO and its many agreements, Canada was obligated to convert its dairy quotas into tariff-rate quotas, which were set very high (up to 300 per cent on some products) to ensure imports remain tightly capped.
In the intervening years, Canada gradually expanded market access in its dairy sector through large regional free trade agreements including the Comprehensive Economic and Trade Agreement (CETA) with the European Union and the 12-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and in the renegotiation of the North American Free Trade Agreement (now CUSMA). Dairy Farmers of Canada estimates that the combined market access granted under CETA, CPTPP and CUSMA represents an annual loss to domestic producers equivalent to 8.4 per cent of milk production. This translates to an estimated average annual loss of $450 million to farmers’ revenues.
Under CUSMA, Canada’s dairy concessions went well beyond the market access commitments made under CETA and CPTPP. First, CUSMA increased U.S. dairy access via new tariff-rate quotas. Second, Canada cancelled its Class 6/7 pricing policy, which was established in 2016 to stop a “virtual tsunami” of imported milk protein used to make cheese, yogurt and other products. Third, CUSMA introduced limits on Canadian dairy exports of certain products, such as infant formula and skim milk powder, to prevent Canada from undercutting U.S. and New Zealand exports of the same abundant goods.
| Agreement | Approximate Market Share Impact |
| CETA | ~2 per cent of Canada’s cheese market (~1.3 per cent of Canada’s total dairy market by milk solids) |
| CPTPP | ~3.25 per cent of Canada’s domestic dairy market (across products) |
| CUSMA | ~3.5 per cent of Canada’s domestic dairy market (14 dairy categories, U.S.-exclusive) |
Source: Dairy Farmers of Canada
Because opening the dairy market in these ways could harm Canadian dairy farmers and processors, the Canadian government put compensation measures in place. Dairy farmers received $1.75 billion in payments over eight years to make up for income losses linked to CETA and CPTPP. The government also created a Dairy Processing Investment Fund of about $100–150 million to help processors modernize and stay competitive. Later compensation announced to accommodate CUSMA was separate from, and in addition to, the CETA/CPTPP package.
Although new TRQs were granted under CUSMA, U.S. dairy producers soon became frustrated with how Canada administered those quotas. In several product categories, Canada allocated between 85 and 100 per cent of quota to domestic dairy processors, In practice, this limited opportunities for U.S. exporters to sell directly to Canadian retailers. The United States initiated dispute settlement proceedings against Canada under Chapter 31 of CUSMA.
In January 2022, a CUSMA panel ruled that Canada’s tariff-rate quota allocation practices were inconsistent with its obligations under the agreement. The panel ordered Canada to change its policy. In response, Canada revised the way it allocates dairy TRQs by ending exclusive processor pools and adopting a market share–based approach to allocations. At the same time, it introduced new conditions, such as requiring importers to be “active” in the dairy industry.
The United States was not satisfied with these changes and launched a second CUSMA dispute settlement proceeding in 2023. This time, the panel ruled in Canada’s favour, finding that Canada’s revised administration of dairy TRQs complied with agreement. In effect, Canada was able to meet the letter of its CUSMA commitments while continuing to channel a significant share of the quotas to domestic firms, upholding the intention of the supply management system.
Also in 2022, New Zealand alleged that Canada’s practice of reserving a certain percentage of dairy quota allocations for processors did not comply with its obligations under the CPTPP. Similar to the U.S. dispute, the CPTPP dispute panel ruled in New Zealand’s favour.
In July 2025, Canada agreed to make commercially meaningful changes to the administration of its dairy quotas under the CPTPP, including earlier return dates, the introduction of a chronic return penalty, the introduction of an underfill mechanism for TRQs with low fill rates, and increased data transparency.
Dairy and the CUSMA review
The United States consistently says it does not want to eliminate Canada’s supply management system, but rather to obtain greater access to dairy import quota for retailers, food-service operators and other non-processor importers. However, this is easier said than done, as supply management and the government’s approach to TRQ allocation are closely intertwined.
The purpose of the supply management system is to satisfy domestic demand with domestic production, thereby protecting dairy farmers’ livelihoods, stabilizing prices and fostering a healthy downstream Canadian processing industry. New TRQs granted under each international trade agreement structurally and permanently reduce the share of the domestic market reserved for Canadian producers.
Although each individual TRQ appears quantitatively modest, their cumulative effect is significant. For dairy farmers, these concessions are not trivial, as they affect income stability and require ongoing adjustments to production planning, expansion decisions and long-term business strategies.
While recent regional trade agreements grant foreign producers increased access to Canada through import permits, they have largely failed to create meaningful export opportunities for Canadian dairy products. In fact, CUSMA imposes explicit limitations on Canada’s ability to export certain dairy products, thereby reinforcing the asymmetry between increased import access and constrained export capacity.
There are voices in Canada that debate whether the country should move away from supply management for commercial reasons (particularly among retailers, food chains, and some processors), as well as for ideological ones.
While the system aims to ensure stable farm income, critics argue that it shifts the burden onto consumers by artificially increasing food prices.
However, supporters of the supply management system argue that retail prices are influenced by a range of factors beyond the farm-gate price, including processing costs, transportation, distribution and retail markups. As a result, even if supply management were dismantled, retail prices might not decline significantly. Farm incomes, however, would almost certainly become more volatile.
Critics of the system acknowledge that the greater the level of protection the government provide to domestic producers by shielding them from foreign competition, the more difficult it becomes for domestic producers to compete in a liberalized global market. They propose that prolonged protection may reduce incentives to innovate, improve efficiency or adapt to international competition.
According to a 2023 paper from Dan Ciuriak, exposure to international markets does not automatically generate efficiency gains in sectors with structural limits on scale economies and New Zealand’s export success was counter-intuitive from a standard trade theory perspective. That success was enabled by an administered farm-gate pricing system that allowed the country’s dairy industry to compete at globally competitive prices regardless of the marginal cost, he writes.
Elsewhere in Canada, agricultural sectors not covered by supply management regimes complain that maintaining protections for dairy, poultry and egg farmers increases Canada’s negotiation burden under international trade agreements. This argument does not hold up to evidence, as Canada regularly negotiates lower tariffs for export-oriented Canadian agricultural sectors in free trade agreements with non-dairy-exporting countries (i.e., everyone other than Europe, the United States and New Zealand).
The Bloc Québécois bill protecting supply management in future trade negotiations, which passed with unanimous support, prevents the federal government from making commitments in new trade deals to either increase tariff-rate quotas or reduce tariffs on imports beyond a specified threshold. On its face, this rule would prevent Canadian trade negotiators from offering to lower the import barriers that shield Canada’s dairy and egg producers from price shocks.
While the legislation appears to rule out the use of supply management as a bargaining chip in trade negotiations with the United States, it does not entirely constrain the federal government. The federal government has consistently stated it will continue to stand up for supply management and the dairy sector. However, with pressure in the other direction from the U.S. and within Canada, this may be a difficult promise to keep.
Still, as demonstrated by the CPTPP dairy deal with New Zealand, it may be possible to appease the Americans through technical or administrative adjustments to dairy TRQ allocation policies without fundamentally compromising supply management itself. It’s also possible U.S. negotiators will downplay the dairy issue in the current CUSMA review and focus on more economically consequential matters related to manufacturing and critical minerals supply chains.
