Time for Dairy to Go on the Offensive

By Michael Grant, Director, Research, Centre for Food in Canada

This post first appeared here, and is re-posted here with permission.

An upcoming report for The Conference Board of Canada’s Centre for Food in Canada argues that it is time for the Canadian dairy sector to transition from playing defence to playing offense. The notion of a growing dairy sector is rarely part of the policy discussion because supply management has focused on divvying up the domestic market as opposed to capturing growing world demand.

The agreement in principle on a Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union is the latest in a series of challenges to Canada’s dairy supply management. Canada’s dairy farmers are upset that the agreement hands over more of the slow-growing dairy market to foreign dairy farmers. Canada’s system of supply management puts our dairy farmers on the defensive.

The CETA agreement calls for the European cheese import quota to rise from 13,000 tonnes to 29,000 tonnes. To put this in perspective, Statistics Canada estimates that Canadians consume roughly 500,000 tonnes of cheese every year. So the additional allowance for European cheese amounts to only about 3 per cent of the Canadian market. This modest move does not seriously threaten dairy supply management. (For an in depth description of how dairy supply management works, see our report Making Milk: The Practices, Players, and Pressures Behind Dairy Supply Management.

However, a pattern is clear. In trade negotiations, dairy interests are gradually being traded off against export-orientated agricultural sectors. In the case of CETA, some European dairy access to Canada was traded off for Canadian beef and pork access. More generally, agricultural interests are being traded off against other interests, such as manufacturing and trade in services. This explains why Quebec and Ontario, traditionally the strongest supporters of supply management, have come out in favour of CETA despite the impact on their dairy sectors. Market and political realities have put the supply-managed dairy sector on the defensive. Expect more of the same as Canada now sets its sights on a Trans-Pacific Partnership (TPP) deal—which would force the dairy sector to take another, perhaps larger, hit.

This creeping trade liberalization will not bring an end to dairy supply management. Far more important are technological and market forces that are reshaping dairy markets. For 20 years now, Canadian producers have been gradually consolidating in fewer and fewer farms while simultaneously losing market share to dairy substitutes. If the dairy industry continues to wed itself to supply management, it will simply become smaller over time because it will fail to respond to market realities, both domestic and global.

Supply management binds Canadian dairy farmers to the slow-growing domestic market. Decades of supply management have placed the industry in a strategically weak position. And yet there is no inherent reason why the industry can’t prosper as it has done in New Zealand. In fact, Canada has some of the best dairy farms in the world that could compete with great success in open markets. And those markets are growing elsewhere; world dairy product demand is rising, especially for high-end, quality producers like Canada.

In an upcoming Centre for Food in Canada (CFIC) report, we show how comprehensive reform of dairy policy could position Canada’s dairy sector for international growth. Even under conservative assumptions about potential global market share, Canada would see rising output, higher employment, and more dairy farms.

Relying on trade agreements to spur incremental reform is not the way to position the dairy industry for growth. This approach inevitably leads to a smaller dairy sector because Canadian producers are not in a position to realize gains from trade. The result—dairy imports enter Canada with no compensating increase in dairy exports. The industry remains internationally uncompetitive because too few dairy assets are in the hands of the best producers. Although the federal government has indicated that it will compensate the dairy industry for losses under CETA, this is a stop-gap measure. There are better ways to compensate dairy farmers for adjustment while positioning the sector for growth.

As our upcoming report shows, Canada really needs to adopt a new strategy for the dairy sector that co-ordinates market, price, and quantity reforms as it moves forward with trade liberalization via the TPP and bilateral trade agreements

 

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