Trans-Pacific Partnership offers dairy sector good news, bad news and a question mark
The deal marks a nudge toward competitive change, but more uncertainty than the dairy sector is used to
It certainly could have been worse for Canada's dairy sector. But in the final deal, it was possible to maintain Canada's supply management system and still join the Trans-Pacific Partnership.
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That doesn't mean, however, that important things won't change.
Providing Canada's TPP partners — including the U.S., New Zealand and Australia — with 3.25 per cent of Canada's annual dairy production will disturb the previously still waters of the Canadian milk business.
Here's more about the upside, the downside, and a pledge that's not certain to be fulfilled.
Upside: Supply management stays
At one point, the cost of admission for Canada to join the TPP was thought to be dismantling the supply management system and its three pillars: price setting, production control and import control.
Now Canada has joined and those pillars still stand, even if their footing has shifted a little: the provincial marketing boards will still be calling the ultimate shots on pricing and production levels, adjusting for the new imports required under the deal.
Upside: It's not 10 per cent
Reports out of earlier stages of the negotiations had TPP partners like the U.S. asking for larger chunks of the Canadian industry to be opened up: perhaps as much as 10 per cent.
Seen in that light, the deal's 3.25 per cent isn't as much of a game changer.
"We obviously would have preferred that no additional market access be conceded in the dairy sector," said Wally Smith, the president of the Dairy Farmers of Canada in a press release reacting to the deal. "However, we recognize that our government fought hard against other countries' demands."
If Canada had conceded much more than this, another wrinkle could have emerged: the cheese access offered to the European Union in its 2013 free trade deal with Canada amounted to about two per cent. If a much bigger concession was put on the table at TPP, would the Europeans have wanted to reopen their deal and ask for more?
Upside: Most milk processed domestically
Opening the border to any amount of fluid milk is something new for the dairy industry: previous changes under the Uruguay Round and the EU deal had introduced small levels of cheese, butter and other imports, but jugs of foreign milk were not heading to Canadian grocery store shelves.
Raw milk will not move across the border in this deal. The fluid milk import agreement under TPP requires 85 per cent of imports to be processed at facilities in Canada. That shields domestic dairies from more significant drops in their processing volumes, which could have compromised the economies of scale they need to compete.
And a new $450-million processor modernization fund is intended to encourage capital investments and other capacity improvements in not just the dairy but the poultry industries as well.
Upside: Export potential
After the EU deal was signed, the Harper government tried to encourage the dairy industry to see export opportunities now available to them, like selling their calves as veal exports or developing specialty cheese that might find new markets across the Atlantic.
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The TPP deal also nudges the dairy industry to look beyond its borders to balance potential losses from new imports. Specifically, Canadian artisanal cheese makers interested in developing American markets will see their tariffs eased.
Upside: Canadian milk still hormone-free
Some consumers fear American milk imports because U.S. dairy producers are governed by different regulatory rules when it comes to raising their livestock. In particular, a controversial bovine growth hormone (referred to as rBST or rBGH) is approved for use in American cattle, but not Canadian herds. (Health Canada has a fact sheet on this.)
The U.S. takes the position that these hormones are safe, including for consumers who drink the milk.
At the Oct. 5 briefing, officials suggested Canadian drug and phytosanitary regulations would apply to dairy imports under the TPP.
But the following week, the trade department clarified that there has never been a restriction in Canada on the import or sale of milk, or products containing milk ingredients, that come from cows treated with the rBST growth hormone.
"Health Canada found no evidence of adverse health effects in humans from the consumption of these products," a spokesman wrote.
Consumers who wish to avoid hormone exposure can continue to consume only Canadian dairy products. But there is no labelling requirement for the original of milk ingredients in processed food sold in Canada.
It's unclear whether Canada's different drug rules could be challenged down the road as a non-tariff barrier.
Downside: Uncertain quota values?
While some Canadian producers inherited their quota at low or no cost, others have financed their quota at considerable expense through financial institutions.
Until now, producers could count on relatively stable quota values. But it's unclear what happens now.
Unless domestic consumption significantly increases, Canada's marketing boards may have to scale back domestic production to maintain prices. Over time, some quota may need to be retired.
If the value of dairy quota, currently set at around $25,000 per milking cow, declines and producers incur losses from selling quota after the implementation of TPP, $1.5 billion over 10 years has been set aside to compensate producers.
Downside: Farming the mailbox
Although frequently criticized, supply-managed agricultural sectors did have a big point of pride on their side.
Unlike other export-driven commodities — which need emergency bailouts and other income support programs to deal with roller-coaster world commodity markets — dairy producers did not cost taxpayers in the form of subsidies. The prices the milk marketing boards set paid them what they needed to make a living.
Monday's announcement ends that talking point, introducing a $2.4-billion, 15-year (initially) income support program to cover losses incurred after the TPP comes into force. (It also covers losses resulting from the new European imports.)
Taxpayers subsidize dairy farmers in other competitor countries. Now Canadian taxpayers will subsidize their dairy farmers too.
Unknown: Will grocery prices go down?
For consumers of dairy products, Stephen Harper's Conservatives have suggested prices will fall. Really?
To get an apples-to-apples comparison of drinking milk prices, you have to compare the average cost of a four-litre bag in Canada to a gallon jug in the U.S. (the ways most people buy milk — four litres is roughly 1.05 gallons.) In this kind of comparison, the cost differential is about 10 per cent between Canada and the U.S.
This relative price difference has to be seen in the greater context of Canada's retail price competitiveness, where goods in Canada are sometimes far more than 10 per cent more expensive than in the U.S. Transportation logistics, economies of scale, labour costs and other policy differences all play a role in the Canada-U.S. price gap.
Will new imports help ease Canadian prices closer to parity?
To some extent, that's out of the hands of government and the farmers.
When Canadian beef farmers took a bath after the BSE-related border closures since 2003, retail prices didn't always drop to the same extent. Margins expanded elsewhere.
Time will tell whether any lower costs now will be passed on fully to consumers.
- An earlier version of this story suggested milk and dairy products imported into Canada would have to meet Canadian regulations, including a ban on the use of bovine growth hormones in dairy herds. In fact, officials have clarified that while these regulations will still apply to Canadian milk production, imports from other countries that do not conform to these regulations would still be allowed. Health Canada found no evidence of adverse health effects in humans who consumed dairy products from cattle who received the hormone.Oct 15, 2015 1:48 PM ET