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Pressures Growing on Canada’s Dairy Policy

June 29, 2015
Glen Hodgson
Senior Vice-President and Chief Economist
Forecasting and Analysis
Michael Bloom Michael Bloom
Vice-President, Industry and Business Strategy

Canada has been a closed market for dairy products for decades, but we are now approaching a turning point. Whether Canada opens up its dairy market—and who determines the future production of the cheese and milk that Canadians consume—may be the central factor for the immediate future of Canada’s global trade opportunities.

Last week, the U.S. Congress took steps that will only add to that pressure. Congress has given President Barack Obama the authority to negotiate trade agreements without members of Congress amending them (they can only vote yes or no). This clears the way for the U.S. to conclude the Trans-Pacific Partnership (TPP) trade deal. The TPP negotiations include 12 countries, with the U.S., Japan, Australia, New Zealand, and Canada among them. The deal aims to be precedent-setting, extending to areas far beyond tariff removal.

Canada has a strong stake in the TPP. With a relatively small, export-driven economy, Canada has a deep interest in being at the table to determine wider trade rules that affect our economy. In particular, given the importance of the U.S. market for Canadian trade, Canada ought to be inside any U.S. trade deal, lest the U.S. give others better access to its markets.

Participants in the TPP talks have long been pushing for more access to Canada’s dairy market. Canada’s existing supply management system for dairy relies on the ability to limit supply in order to maintain price levels. Canada limits dairy supply through domestic quotas (the control and allocation of individual dairy production quotas are central to the current system) and tariffs of 200 per cent or more that severely restrict imports.

The supply management system has been costly to Canadians as a whole for a long time. The poorest in our society—for which dairy products form a larger share of their budget—are the hardest-hit. Each Canadian family spends an extra $276 per year supporting dairy supply management. The cost to farmers of acquiring dairy quota—the right to produce—has created barriers to enter the dairy business.

The system has also led to dysfunctional behaviour in a number of ways. Cheese from the U.S. has been smuggled into Canada. Companies have started importing cheaper milk protein isolates, undercutting production quotas and the ability to maintain controlled prices. And, as recently reported, excess skim milk is now being dumped and wasted.

One of the consequences of dairy supply management is that Canada is prohibited from exporting its dairy products. This limits the opportunity to export to Asia in particular, where “brand Canada” often provides a marketing advantage.

As TPP negotiations head into their final, more sensitive stages, it is becoming clear that Canada will be asked to open its markets to dairy imports—possibly as the price of being included in the deal. Thanks to TPP, Canada now has an opportunity to reform its dairy policy for the benefit of Canadian consumers, businesses, and dairy producers. Policy reform will create additional economic opportunity for Canadian dairy farmers and producers by allowing them to sell in growing global food markets.

To do so, the dairy industry will need to embrace a growth vision, instead of settling for a share of a stagnant domestic market. As The Conference Board of Canada outlines in Reforming Dairy Supply Management: The Case for Growth, successful reform will require coordinated phased action to eliminate price setting, incremental winding down of milk production quotas, and the removal of international trade barriers.

Quotas could be bought out on the basis of their book value (the cost of the quota at time of purchase). This overall cost is estimated at between $3.6 billion and $4.7 billion. This approach would compensate farmers fairly for their quota purchases. The buyout could be funded by a temporary levy on dairy products. In the longer term, Canadian prices would move toward world prices, saving consumers an estimated $2.4 billion annually.

Canada will need to continue to aggressively negotiate access to international markets so that Canada’s dairy producers can seize the opportunities presented by growing global demand. The TPP offers one such opportunity to the dairy industry and many other sectors. In our view, it is imperative for Canada to be part of a TPP deal from the outset.

 


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