Canadian Dairy Conundrum

OMAHA (DTN) -- A lot of people pointed fingers at the giant red maple leaf late last week when Trans-Pacific Partnership trade negotiations appeared to stall. While automobile exports to Japan remain an issue, Canada's long-standing supply management programs, particularly for dairy, also contribute to the gridlock delaying the 12-country trade deal.

High import tariffs and production controls regulating roughly 12,000 Canadian dairy farmers are now key to unlocking a trade deal that involves nearly 800 million people and more than 40% of global gross domestic product.

Agricultural exports among all 12 Trans-Pacific Partnership countries are expected to grow about $8.5 billion by 2025, according to a USDA analysis. U.S. agricultural exports would increase about $2.8 billion.

The TPP countries also account for more than half of all Canadian ag exports and analysis shows Canada's beef, pork, grain and oilseed sectors could all gain from a robust trade deal.

The pressure is on Canada to open the domestic market to imported milk products, but key players in that country's dairy industry are pushing back with studies and lobbying efforts to keep out competition from the likes of the U.S. and New Zealand, the world's largest dairy export country.

MOST PRESSURE SINCE THE 1960S

Sylvain Charlebois, an economist at the University of Guelph in Ontario, who follows international trade and Canada's ag economy, said the TPP talks last week in Hawaii energized a lot of people about the issue of supply management. Charlebois noted Canada's dairy industry is seeing the most pressure it has faced since the 1960s to end its supply management system which limits milk production.

"Canada's position on supply management is becoming increasingly more difficult to sell to the world," Charlebois said in an interview with DTN. "It's not defendable any longer."

A Canadian-EU trade deal allowed Europe to export 17,000 tons of cheese annually to Canada with lower tariffs; the tradeoff allowed increased exports of Canadian beef and pork to Europe. "This was historically the first time any trade agreement has compromised the integrity of our food supply management regime," Charlebois said. "When it was signed it really created a debate within our country and of course we knew TPP was coming along."

Canada is not offering significant market access for dairy in TPP, but neither is Japan. Thus, the U.S. could not agree to "unrealistic demands for access to the U.S. market in light of the limited market access offers from Japan and Canada," stated the National Milk Producers Federation. NMPF is demanding balance between further opening of the U.S. market and getting more export opportunities.

"It is not yet clear how the negotiators will push past this to bring talks to a successful conclusion," said Jim Mulhern, president and CEO of NMPF. "But we will continue to work constructively to achieve a dairy package that provides comparable results between new export market opportunities to TPP's two key markets and any new import access."

Dairy Farmers of Canada, a national policy and lobbying organization, aggressively stepped up its defense of supply management and domestic milk. The group put out a poll last week which showed more than 70% of people surveyed agreed it was important for the government to protect the dairy industry. As many as 89% of Canadians polled also said it was important or very important that their milk products come from Canadian farmers.

"This is a clear message to the Government of Canada," said Wally Smith, president of Dairy Farmers of Canada. "We've been saying all along that Canada's dairy system is worth keeping. And consumers in this country clearly feel the same way."

Dairy Farmers of Canada also is petitioning members of the Canadian parliament regarding supply management and the importance of supporting domestic farmers. "At a time when the demand from consumers around the country for fresh, locally produced products from family farms has never been greater, why would we think that shipping in dairy products from halfway across the world is something consumers would want?" states the form letter to parliament that people signed online.

"Every single country involved in the TPP has something that they want to keep," DFC said in a late July press release defending supply management, adding the U.S. "has a long history of restrictive import protection in the sugar and dairy industries; Japan has a long history of protecting the rice sector; and New Zealand has always vigorously defended its pharmaceutical program."

U.S. DAIRIES: BIG WINNERS

Clearly, U.S. dairies in some parts of the country would be big winners if Canada's high tariffs came down. Canada's largest dairy co-operative, Agropur, released a study on supply management and the shape of the dairy industries in Australia, New Zealand and the U.S. The study noted there are 960,000 U.S. dairy cattle within 155 miles (250 kilometers) of Canadian milk processors, effectively equivalent to the entire Canadian dairy herd. The bulk of those U.S. dairy cattle near Canadian milk facilities are concentrated in the Northeast, stretching from Vermont to northern Michigan.

Agropur's analysis shows as many as 6,000 farms across Canada, including 3,000 in Quebec, would be at risk because they wouldn't be able to compete if supply management went away. That would effectively put as much as 40% of Canadian domestic milk production at risk.

Canadian dairy producers in some provinces may be more supportive of restructuring the industry to boost their own exports. Still, Canadian producers fear a lack of competitiveness with U.S. dairy operations because of the safety net U.S. farmers have in the farm bill. "That is just something we can't compete with," Charlebois said.

The Agropur study, produced by the Boston Consulting Group, also showed U.S. producers would have an advantage selling into Canada because of the current exchange rates and the fact U.S. producers have lower costs of production. Moreover, there would be an incentive for U.S. dairies to export into Canada, given that Canadian milk prices are 28% to 36% higher than in the U.S. Much of that is meaningless because Canadian import tariffs are nearly 250%.

FEWER CANADIAN DAIRY FARMS

Charlebois questioned whether supply management has had its intended effect. A study countering Agropur's analysis suggests Canada could still lose half of its dairy farmers over the next 15 years even if supply management is left alone. Consolidation continues to shrink the number of dairy farms in the country, which has fallen from 42,000 in 1966 to slightly more than 12,000 now.

"So to suggest supply management actually is saving dairy farms, I would say, is based on pretty weak theory," Charlebois said.

Still, Charlebois thinks if the trade pact is well put together, the Canadian dairy sector could take advantage of export growth in those emerging Asian markets. "There's going to be tremendous growth in Asia when it comes to dairy products," he said.

A lot of these issues surrounding agriculture and TPP are expected to come up again later this month at an Asia-Pacific Economic meeting set in Malaysia. Despite Canada's federal elections set for Oct. 19, the country's government is continuing to negotiate, following the advice of the non-partisan Privy Council Office. "It's a complicated political place right now -- Canada is -- because of the election," Charlebois said. "Even though there is an election going on, all political parties have stated they are favorable, enthusiastically favorable, to TPP, but no one actually wants to speak about actual reform to supply management or change or an end. It's just politically unwise to do so."

Charlebois noted Canada's election isn't as significant to the talks as the U.S. push to get a deal that would help the U.S. keep its influence and economic footprint among Asian countries. The trade deal is needed to somewhat offset the influence of China in the region.

"I wouldn't expect Canada to retreat or defend supply management at all costs because the stakes are much higher than perhaps losing a few dairy farms across the country," Charlebois said.

Chris Clayton can be reached at Chris.Clayton@dtn.com.

Follow him on Twitter @ChrisClaytonDTN.

(ES/CZ)

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