Key Takeaways
- The United States is pressing Canada to alter its dairy supply‑management system under the USMCA so that retailers can obtain import licences and increase U.S. dairy sales in Canada.
- U.S. milk production rose 2.8 % in 2025, driven by higher cow productivity and a growing herd, while domestic dairy consumption has stagnated since its 2021 peak.
- To absorb excess supply, the U.S. dairy industry relies on exports, which have grown 15 % over the past decade to $9.4 billion, with Mexico and fast‑growing Asian markets as primary destinations.
- Global dairy trade is highly competitive, dominated by the “Big 5” (U.S., New Zealand, EU, Argentina, Australia), all of which are expanding output, keeping world prices under pressure.
- U.S. dairy farmers face a “hidden squeeze” from rising input costs (feed, energy, labor, insurance) and have only covered total costs twice between 2014‑2024, making export growth essential for profitability.
- Despite its modest size, Canada offers a geographically advantageous outlet for U.S. dairy, and the industry views expanded access there as a high‑priority component of the USMCA review.
Overview of the USMCA Dairy Dispute
The United States has consistently urged Canada to modify its supply‑management framework for dairy, arguing that the current allocation of import licences—restricted to processors and distributors—limits retailer access and therefore underutilizes the agreed‑upon quota. Washington wants Ottawa to allow retailers such as Loblaws, Walmart, and Costco to import U.S. dairy products directly, which would increase the volume of American milk entering the Canadian market. Although Canada agreed to raise the dairy import quota when the USMCA took effect in 2020, officials have not yet indicated whether they will change the licencing rules, despite discussions in the office of Minister Dominic LeBlanc about the potential costs of doing so.
U.S. Milk Production Trends
U.S. milk output climbed 2.8 % in liquid terms during 2025, marking the largest annual increase in two decades. This growth stems from two main factors: each cow now produces roughly 5,000 lb more milk per year than it did 20 years ago, and the national herd has expanded to 9.6 million cows—its highest level in 30 years, with an addition of 190,000 head since April 2026. Concurrently, processing capacity is expanding, with over $12 billion earmarked for more than 50 projects across 19 states slated to come online by 2028.
Stagnant Domestic Demand
While production surges, per‑capita dairy consumption in the United States has flattened. Total demand peaked in 2021 and by 2025 had receded to levels near those seen in 2018, according to the USDA Economic Research Service. Agricultural economist George Frisvold notes that the market is “topping out,” prompting producers to look abroad for outlets for their expanding supply.
Export Dependency and Growth Markets
Faced with rising output and tepid home consumption, the U.S. dairy sector has turned to export markets as a vital outlet. Over the past ten years, dairy exports have risen 15 % to $9.4 billion, aided by a growing global middle class that favors high‑fat, high‑protein products. Mexico remains the fastest‑growing destination, accounting for 61 % of export growth over the decade and 28 % of total U.S. dairy exports in 2025. Additional priority markets identified by the U.S. Dairy Export Council for 2025 include Taiwan, Vietnam, the United Kingdom, Indonesia, Malaysia, Thailand, and the Philippines.
Global Competitive Landscape
Securing share in these markets is challenging because the international dairy arena is dominated by a handful of major exporters—the “Big 5”: the United States, New Zealand, the European Union, Argentina, and Australia. All of these competitors are also boosting production, especially Argentina (+4 % per year) and New Zealand (+1.8 % per year). Rabobank reported that global milk production rose 5.2 % year‑on‑year at the end of 2025, one of the steepest increases on record, and while the rate of growth is expected to ease, abundant supplies will continue to depress prices.
Financial Pressures on U.S. Dairy Farms
U.S. dairy farmers are already operating under tight margins. Leonard Polzin of the University of Wisconsin‑Madison describes a “hidden squeeze” driven by rising costs for insurance, borrowing, energy, repairs, veterinary care, and labor since 2016. USDA data show that the average dairy farm covered its total business costs only twice between 2014 and 2024. A University of Illinois forecast projects milk prices averaging $20.15 per hundredweight over the next year; if production costs remain at the 2024 average of $23.65, farmers would lose $3.21 per hundredweight sold. Some farms offset losses by leveraging high beef prices and low grain prices—cross‑breeding low‑yield cows with Angus to produce calves that fetch up to $1,000 each—though Polzin warns this strategy is unsustainable because both feed and beef prices are cyclical.
Structural Consolidation and the “Agricultural Treadmill”
The dairy sector’s ongoing consolidation reflects what Frisvold terms an “agricultural treadmill”: a relentless push for efficiency that lowers prices, which then forces further efficiency gains, economies of scale, and increased political clout among fewer producers. As the number of farms shrinks, lobbying becomes easier, amplifying industry influence over trade policy. This dynamic reinforces the urgency for export growth, including access to the Canadian market, to sustain farm viability.
Why Canada Matters Despite Its Size
Although Canada represents a relatively small dairy market, it offers distinct advantages for U.S. exporters. Its proximity reduces transportation costs, and the United States already enjoys a competitive geographical edge there. U.S. dairy exports to Canada have risen 11 % over the past decade, a trend attributed to the USMCA’s quota increases. Polzin emphasizes that any additional market access—especially one where transport costs remain favorable—provides a meaningful boost to producers contending with global oversupply, intense competition, and looming price declines. Consequently, securing greater retailer access to Canada’s dairy market remains a high priority for both the White House and Congress as they review the USMCA.