Our wily neighbours to the south have figured out a clever way of not paying tariffs on a certain — let's say "controversial" — commodity, and Canadian dairy farmers say it's costing them hundreds of millions every year.

The product in question is called diafiltered milk.

Essentially, it's milk that's filtered, flushed with water, and then filtered a second time, with a few other steps along the way. The end product has a high concentration of protein, about 85 per cent, and very little of the fat and lactose that make up natural milk.

It's a classic case of the right hand of the government doing one thing, and the left hand doing another. - Maurice Doyon, Laval University professor

The Canadian government allows it to cross the border without a tariff, because if it were dried into a powder, it would have the same amount of protein as the kinds of protein powders allowed to pass through tariff-free under trade agreements.

Diafiltered milk hasn't been around for long, but it's a very attractive alternative to food processors in Canada, who can buy it much more cheaply than milk produced by Canadian farmers.

'Addicted' to cheap U.S. milk

According to Sylvain Charlebois, dean of management and a professor in food distribution and policy at Dalhousie University in Nova Scotia, it's unclear just how big the market is and how much diafiltered milk is entering Canada. Global trade, he says, is likely negligible, though again those figures are difficult to nail down despite his efforts to calculate them.

Nonetheless, Canadian food processors seem keen to use it when they can.

"It's a fairly new thing, it doesn't cost a fortune to transport from the U.S. to Canada, and, frankly, some food processors here have started to become addicted to it because it's so economical," he says.

Diafiltered milk was one of the primary issues raised by dairy farmers from Ontario and Quebec who demonstrated on Parliament Hill this week.

One of the key demands of the dairy farmers who protested on Parliament Hill earlier this week was for the government to end the import of diafiltered milk. (Chris Wattie/Reuters)

Maurice Doyon, a professor of rural and agricultural economics at Laval University, estimates that Canadian dairy farmers lose about $200 million per year from food processors buying diafiltrated milk rather than Canadian product.

"You have to remember, for food processors, milk is just the raw material they use to extract the ingredients they want to make their products," he says. "And if that product happens to have a high protein component, then why spend the money on Canadian milk?"

Doyon says, however, that dairy farmers have a legitimate complaint when it comes to diafiltered milk, because, at the border, the protein content is calculated as if the product were dry, like a powder. But at the processing plant, it's still a liquid that is essentially milk.

"It's a classic case of the right hand of the government doing one thing, and the left hand doing another. It's two different government agencies making decisions about the same product. So the farmers are saying, 'make it one or the other,'" he says.

"If it ended up being classified as milk, then no Canadian producers would continue to import and use it, it just wouldn't make sense."

Milk is more than 'just milk'

Some companies in the U.S. have already pounced on the marketing potential of the current protein craze. Coca-Cola began selling a product called Fairlife in 2015. It's advertised as milk with 50 per cent more protein, 50 per cent less sugar and lactose free. In reality, it's diafiltered milk, Doyon says.

Efforts are being made to stop the use of diafiltered milk in Canada, however. Earlier this month, the Agropur Dairy Co-operative, whose 39 member companies process more than 5.7 billion litres of milk each year, announced it would temporarily stop using diafiltered milk in its products. The trial is set to last for three months, until the end of July.

Agropur argues that should be enough time for the government to begin enforcing Canada's cheese standards, established in 2008, which require processors to use higher quality domestic dairy products.

Charlebois says the government should also begin prioritizing upgrading Canada's food processing sector to be more competitive on a global scale. The battle over supply management has shifted the focus in the dairy sector away from innovation, he says, leaving it highly underdeveloped.

"In Canada, we've always seen milk just as milk, rather than a series of ingredients that can be used to make other products. It's a pretty unsophisticated system, and now it's coming back to haunt our dairy farmers.