The Canadian government will appeal a World Trade Organisation ruling that found changes to the dairy pricing regime unsatisfactory.
This is the latest setback for the Canadian industry, which re-jigged the quota system as it applied to exports in response to a previous WTO ruling.
But the WTO ruled that the changes do not go far enough, which leaves the Canadian industry with no choice but to curb exports or face sanctions if it loses this latest appeal.
Currently, the Canadian dairy industry operates as a monopoly, with provincial marketing boards assigning quotas to individual producers and controlling prices.
Excess production is sold on the world market at low prices to avoid domestic oversupply and downward price pressure.
The WTO found the system amounted to an export subsidy, and the Canadian response was to remove the monopoly marketers' role in exports.
According to Richard Doyle, the executive director of Dairy Farmers of Canada, the ruling on the appeal, expected by November, will have no effect on domestic prices; however, the impact will be on exports, which account for about 5 per cent of the US$4bn milk production market, he said.
"This is a case of jurisprudence.
It very much addresses the issue of how much governments can do in their domestic policies without causing problems for their exports at the WTO."
"It will affect absolutely everyone, including the United States and New Zealand," the two countries that took Canada to the WTO, he added.
The two countries said they had been hurt by a combined US$70m by Canada's system.
Lyle Vanclief, Canadian Minister of Agriculture, affirmed there would be no radical overhaul of the system even if Canada loses.
"We are committed to defending Canada's interests throughout this process," he said.
"Decisions about production and marketing of dairy products will continue to be made in Canada."
If Canada loses the appeal, the sides will proceed to a compensation panel, which will decide how much the complainants are owed.
The government would also have to say what it intends to do to further change the system to make it more compliant.
"At the end of December or beginning of January we would have a clear view of what the impact is," said Doyle.
He said he is confident the appeal will go in the industry's favour, since Canada's appeal of the previous ruling was successful in overturning some findings of that panel.