Agriculture Committee on May 11th, 2006

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Could we see the numbers that show that doing so would not be economically viable?

[Kempton Matte]

I imagine those numbers are available. I mentioned earlier that we had one foot in a supply management quota system and the other in the free market. Regarding the sharing of this information, we have strict obligations as a business for competitiveness reasons. That said, there is no doubt that economic studies can bear this out. In our sector, competitiveness is dictated by the international market. There is no getting around that . If we are not able to produce these products here at prices equivalent to the international market, we obviously will not produce them.

[The Chair, Conservative, Gerry Ritz]

Mr. Jarvis, for a short redirect.

[Don Jarvis]

I'll just add to Mr. Matte's comments that the numbers, if they were crunched out.... First off, if you were going to make the necessary major investment in ultrafiltration to create these MPIs in Canada, you'd have to compete with sophisticated companies in New Zealand and in Europe that do it for the world market. We would not be able, of course, to compete in the world market. We are limited to the domestic market.

Second, these MPIs are used around the world--they are in fact regulated to be used in cheeses in France, for example, and they're used in the United States now--so we would be competing with very sophisticated companies who have huge investments. That's the other side of the competitive picture, the other foot we have in that camp.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Jarvis.

Now we go to Mr. Atamanenko for the final segment of this first hour.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

I don't have a lot of questions.

The ultimate goal is how to ensure our producers keep making money. That's the key within the system--to determine how we can ensure that your industry is able to survive and make some profit. I guess that's the overall goal.

Here is my first question: do you feel the government has a role here to do something, whether it's to limit the MPIs coming in or to somehow redirect our industry? Obviously, unless there's some kind of direction, it appears there won't be any kind of regulation here. That's my first question.

The other question is just a technical one. I don't quite understand; apparently there are no tariffs if MPIs of 85% or more are coming in, but if there's less, there are tariffs. That's something I'm not quite sure about. I'd like you to explain that. Thank you.

[Don Jarvis]

The first question is the question we're all asking ourselves--everyone around this table. The minister put forward a very good recommendation a month ago that we, the processors and the producers, should sit together and examine all these issues that we've put on the table and try to come up with some broad understanding and agreement on the principles involved, the underlying issues, and a way forward. We're certainly wanting and willing to do that, and I know the minister and the government support that effort.

Those are important questions. We do want to answer those questions and move forward.

On the technical question, simply put, in the classification system for tariffs used around the world, these particular MPIs--milk protein isolates--with a protein content of 85% or above are defined as protein products. They're not defined or recognized as dairy milk products.

[The Chair, Conservative, Gerry Ritz]

Are you done? Okay, then we'll give the final word to Mr. Boshcoff.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Thank you very much, Mr. Chair.

When the processors came to see me, as did the dairy farmers...it seems there's some convergence of questions, so I'll ask both this round and next round. Philosophically, is it within your mandate to assume Canadians should expect milk in their milkshakes and cheese in their Cheezies and butter in their butter tarts?

[Don Jarvis]

Yes, of course. That's why we're in business.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Okay, so when we talk about the imported proteins--the use of butter fat and those kinds of things--these quantities are now becoming unmanageable. The Canadian dairy...the surplus milk protein and all these kinds of problems are more than the system can bear. With this collapse of the price structure, it's pretty plain that the $2 million a month the dairy farmers are claiming to be losing and the 2.6% cutback....

I guess the concern is that these combinations of factors, which you understand very well, seem to be leading to an end to supply management as we know it in dairy production.

[Don Jarvis]

No. I disagree with that last comment. I believe the MPI issue is manageable. I've already addressed the numbers with respect to the....

The macro number is being referenced for a wide range of imported dairy ingredients, but the MPI, I think, is very manageable. Mr. Matte and Mr. Leroux referenced the functionality and the use in a very specific way in cheese; as an industry, we believe that particular usage has a ceiling, we believe there is a manageable level, we believe that's where we're at, and we believe it can be addressed without threatening supply management in any way.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Is your concern for performance characteristics displacing nutrition, quality, taste, and those types of things? When you talk about pizza browning, is that not an artificiality, as opposed to reality?

[Don Jarvis]

No, absolutely not. It has nothing to do with the nutritional value; in fact, as Mr. Matte said earlier, these are superior products that are imported and used. They are used around the world in making cheese, in most other jurisdictions, including France and the U.S.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

When we talk about international rules, there doesn't seem to be as much fear for our Canadian farmers from the products you're importing from New Zealand as for those from the American tidal wave. New Zealand was one of the countries that essentially played by the rules 10 years ago and did the same things that Canadian farmers and producers did.

As for the high-quality end, is there not a world market for Canada to become known as the quality country, where you would actually have real quantities of true butter, cheese, and milk?

[Kempton Matte]

Well, there's always a market at a price. Canada can probably develop niche markets at very high prices, but it would never, ever, be a volume exporter of Canadian dairy products; we're simply priced out of the world market.

Our company intended to build a Canadian export-based business. After we lost at the panel in 2002, we actually went to every provincial government in this country to see if there was interest in setting up a WTO-compliant, exportable supply of milk within each province. We were rebuffed in every province. The result of that is that we have remained in the “export business”; we now export capital and jobs.

Since that time, we've invested in Argentina, where we now employ 1,000 people and are the third largest dairy processor. The reason we went to Argentina is that Argentina, like New Zealand, produces milk at an internationally competitive price, which allows us to serve export markets. We recently invested in Europe, where the price of milk is less than it is here, which gives us access to the European market for product. So while there are possibilities for specialty or niche products from Canada, in terms of volume it's not even thinkable.

The other problem that arises is that prior to December 2002, Canada and the supply management system were able to ship offshore the surplus production here—the structural surplus and any other surplus that was produced. That door was slammed shut, and, frankly, that is one of the greatest challenges facing the Canadian dairy industry. If we continue to create or form or manage a supply management system on the basis of the domestic requirement for butter fat, we will always have a structural surplus, which will always cost producers, or the industry, or the taxpayer, funds to clear the market, if we're going to maintain the price levels we have. And we're not opposed to the price levels domestically; a bankrupt farmer is of absolutely no use to a dairy processor.

It's not a question of trying to beggar-your-neighbour here; it's a question of how do you develop growth that would allow everyone to grow while maintaining those prices? We have just experienced a significant or major price escalation, which is having a market impact 12 months later, which is compounding the issue. It is all tied into this confusion that is focused on MPCs, which I believe are a scapegoat for a real or fundamental issue here.

This is a good system; it's been good to everyone. But it has to change to meet current realities in the marketplace. While changes have been made, in my opinion, for what it's worth, they have not been sufficient to maintain the industry's momentum, to maintain the ability of processors to reinvest, or indeed.... I am constantly amazed that dairy farmers themselves risk their money in buying additional quota; I can't understand it under the circumstances.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Matte.

Gentlemen, thank you so much for your presentation here today. We're sorry for the short notice; it was just one of those meetings we wanted to get on with as quickly as we could.

This committee will stand suspended for about a minute as we change our witnesses at the end of the table.

Thanks again.

[The Chair, Conservative, Gerry Ritz]

Could we have everybody back to the table; time is burning here. If everybody would take their chairs, we'll start again. Ladies and gentlemen, you're losing questioning time here. I'm going to get a whistle or one of those registered guns.

This committee is back in session.

Thank you, gentlemen and mesdames, for your appearance here this morning. We realize it's short notice, but it is one of those issues that we want to start off the session with and work towards.

We have, of course, Jacques Laforge, who is no stranger to the committee; Mr. Richard Doyle, the same; Bruce Saunders, who has also been here before; and Madame Gosselin.

Welcome, ladies and gentlemen.

We have a short presentation time for you as well.

I imagine, Mr. Laforge, you will lead off.

[Jacques Laforge, President, Dairy Farmers of Canada]

Thank you, Mr. Chairman.

My first part will be done in French and English. I'll do the introduction, and then Richard will give us a lot of facts and figures about what's going on.

I would like to thank you for having us here today. We need to have a debate on this very important issue, and decisions must be taken quickly. We cannot afford to wait six or nine months.

It is a bit strange to be here today. I feel like we are saying the same things that we said a year ago. I hope that you will be patient. We will go through the same exercise.

I will begin by describing the reality of dairy farmers right now. We are very concerned about the impact of future WTO negotiations. We are at the point today where we are wondering about import controls. After nine years of imports of butter oil and sugar mixtures and, since 1999, protein concentrates or isolates—use whichever name you like—milk protein is coming into the country without any controls. We have known that since January. The door is open to imports because of tariff line 35.04.

We are also convinced that all this is a question of price. It has nothing to do with functionality. We could have been making protein concentrates in Canada for a long time, but someone found a very cheap protein source, subsidized or not, depending on whether it comes from New Zealand or elsewhere, and they are trying to find justification in order to import it, because it is functional, etc.

The dairy industry receives no subsidies. Our income comes from the market, from consumers. Right now, the main focus of dairy farmers is the image of the dairy industry. Everything that is at risk is on the producers' shoulders. We buy back surpluses of non-fat solids at the CDC. We buy them back from the same processors who import protein concentrates. That makes no sense. We are taking protein that used to bring in $12 a kilo for cheese production and selling it at $1 a kilo to the animal production industry.

I have to say that this process cannot last if we're going to have a supply management system that is viable. We definitely know the processors are viable. You have to look at their numbers since 1999. They are viable. We're not jealous of that; it's just that if they're viable we don't want it to be done at our expense. There is a form of supply management for processors.

Import control for finished dairy products protects dairy processors in this country. They have high tariffs and they're in a closed environment. They compete with each other, and if they buy the raw material at the same price, they're not treated poorly. The over-quota tariff for them protects them as much as we do.

Coming back to the actual milk protein concentrate scenario, I don't want to play politics too much here. If I look at the scenario over the last two years, the previous minister who started a working group--and we were involved--definitely had the luxury of appealing the CITT decision. That bought time and kind of partly froze the issue. But since January 31, this new minister has had a hell of learning curve to get his mind around this in taking the proper decision. In between that and the confusion of all the technology and everything you can put with that, it's quite an amazing learning curve to take the right decision.

He does not have the luxury of waiting. A short-term decision has to be made here and action taken really fast. I know that Richard will get into some of this, but this matter has to be resolved and solutions found in the next month to month and a half, not 12 months from now.

We've heard from the processors. I think we could get into all kinds of technical debate here on what's right or what's wrong. The question is, do we still have milk supply management in Canada? We have a House motion basically saying that all the parties support supply management, and I think that motion is fairly strong. Now we're waiting for action on import control.

The WTO will be another process, but if we cannot take action on import control, with all the issues facing us.... Our farmers are wondering what the hell is going on and what we are doing.

I'll now pass it to Richard for all the technical aspects that need to be covered here.

[Richard Doyle, Executive Director, Dairy Farmers of Canada]

Thank you, Mr. Chairman.

Thank you.

Before I begin, I would like to call your attention to the kit that has been distributed. I would particularly like to draw your attention to the appendices to our presentation. These appendices include a chronology of significant development since the 1990s and the Uruguay Round. The appendices also comprise an explanation of the chain impact, the economic impact, resulting from uncontrolled imports of MPCs. There is also an explanation of the two relevant tariff lines and levels of import, in more technical terms.

In my presentation, I talk about the legal rationale vis-à-vis GATT and NAFTA. Unfortunately, we could not provide everything in the two official languages, but we will be able to give you the missing appendix a little later today.

In the interest of time, I am going to highlight only the salient developments that led to DFC, Dairy Farmers of Canada — requesting the Government to take action to re-establish controls on imports of milk protein concentrates.

During the Uruguay Round and the WTO negotiations, the government of Canada negotiated ceilings on imports of dairy products, including milk protein concentrates or MPCs. MPCs were clearly covered by tariff line 04.04 as products consisting of natural milk constituents. A tariff rate quota was negotiated limiting the imports of these products to 4,345 tonnes.

The United States challenged the application of these tariff rate quotas to the U.S. through a NAFTA dispute settlement process in 1996. Canada won the panel, and TRQs — including the one on tariff line 04.04 — have always been applied to all countries, including the U.S.

A notice issued to importers on October 19, 1999 by the Department of Foreign Affairs and International Trade (DFAIT) clearly stated that milk protein concentrates in blends of natural milk constituents were the major products covered by tariff line 04.04.

At almost the same time, despite this notice by the department responsible for the WTO negotiations, the Canada Border Services Agency decided to classify a milk protein concentrate, PROMILK 872, which comes from Switzerland, in tariff item 35.02, which covers other protein substances and their derivatives, not elsewhere specified, and which are tariff free. If I remember correctly, tariff item 35.02 covers albumin proteins.

In 2002, Dairy Farmers of Canada noticed a rapid rise in protein imports classified under Chapter 35 and asked the Canada Border Services Agency to explain this increase. In April 2003, the CBSA reviewed its classification and re-classified PROMILK 872 B, a milk protein concentrate with 87.5 per cent protein content, into tariff 04.04.

Advidia, the company that imports the product, challenged the re-classification before the Canadian International Trade Tribunal. On March 8, 2005, the CITT ruled that PROMILK was properly classified, not under tariff item 35.02 but under tariff item 35.04, which covers protein substances not elsewhere specified that are better described as milk protein concentrates than natural milk constituents.

Despite the fact that this clearly does not reflect the intent of the Government of Canada, the Federal Court of Appeal found the CITT ruling on January 31, 2006 to be “not unreasonable.”

This decision takes away a right that the Government of Canada obtained and negotiated under the WTO in 1994. It is the Government of Canada's responsibility to correct the situation.

As of now, milk protein concentrates with less than 85% concentration remain under tariff line 0404, while those over 85% are classified under tariff line 3504 and enter the country tariff-free. It should be understood that this 85% threshold is not a solution. It is only a question of time before the industry adopts a purer form of milk protein concentrate in their manufacturing.

From a producer perspective, each kilogram of imported protein concentrate displaces a little bit more than two and a half kilograms of Canadian non-fat solids. With the existing technology, up to 25% of the milk protein found in Canadian industrial milk could be displaced by imports.

Unrestricted protein imports could increase non-fat solids surpluses beyond 100 million kilograms. This is more than the system can bear and will lead to the collapse of the domestic price structure for non-fat solids, putting a very quick end to supply management in Canadian dairy production.

In a relatively short timeframe we have estimated the loss of income to producers to be in the magnitude of $500 million. This is why Dairy Farmers of Canada has been requesting the government take immediate action. It is not that the government does not have the tools to address this issue. The government has a number of legislative and regulatory options to address the issue.

I would like to go back to a point made by Jacques earlier. Neither the producers nor the processors are responsible for ensuring adequate import controls. That responsibility rests with the government, which possesses the tools and the right to restore predictability in the import of all milk protein concentrates. If this right is not restored, then the import control pillar will be lost and the entire system of supply management will collapse.

I recognize that any solutions to be implemented by the federal government will have consequences, either with our trade partners, who will complain, or with our own processors, who will do the same. But as parliamentarians, we ask that you weigh these consequences with those that will be incurred by the production sector of our industry if nothing is done.

DFC has recourse through GATT article 28 as the most expeditious way for the government to cap milk protein imports under heading 35.04. The government would immediately enter into consultation with its trading partners and domestically modify its tariff schedule by way of legislation passed by Parliament. This approach provides for compensation to our trade partners, limiting the risk of an international challenge.

The federal government has expressed concerns that such action under article 28 may not be applicable to the U.S. under NAFTA, even though we provided a legal opinion to the contrary. We have yet to understand this line of argument.

DFC has also suggested that if the government is not prepared to undertake an article 28 action, the government could harmonize Canada's classification with that of the United States. The U.S. considers all MPCs with a concentration between 40% and 90% to be properly classified under tariff line 0404. We find it unacceptable that under the current circumstances a product would be classified differently entering Canada than the same product would be if it were to enter the United States.

Earlier this week DFC's board of directors met in Ottawa to discuss the current proposal of Minister Strahl to form a working group to address industry challenges. Now for dairy farmers it is very clear, yes, we need to deal with compositional standards. There is total confusion with competing interpretation and lax compliance, which is in turn further complicated by two conflicting sets of regulations with different definitions of what constitutes a milk product.

So yes, we need to deal with compositional standards. However, that will not replace the need to ensure imports are limited to what was negotiated in international trade agreements. Effective import controls are still required.

On Tuesday this week, Dairy Farmers of Canada sent a letter to Minister Strahl agreeing to participate in the working group, provided the timeframe be accelerated and that the key objective of the discussion is to address how producer, processors, and the federal government will work together to ensure that imports of dairy products and dairy ingredients, now and in the future, do not undermine the maintenance of a strong and effective supply management system. It is our hope that this key objective is shared by all participants.

On that note, Mr. Chairman, I'll conclude our presentation. We all look forward to answering your questions. Thank you.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Doyle.

Mr. Saunders, anything at all?

Madam Gosselin?

Just before we move into the questioning round, there are two documents in the package you handed out that actually have “confidential” up in the corner. Do you want them back at the end of the meeting, or are they no longer...?

[Richard Doyle]

We're pleased to share those with the committee, Mr. Chair.

[The Chair, Conservative, Gerry Ritz]

That's great.

Then also, on that very first one you have a summary that talks about the TRQs and the negotiations and so on. I think a timeline for that would be very helpful as well. I don't see that on there. If you could get that for me, I personally would find that very helpful.

[Richard Doyle]

I'd be glad to do so.

[The Chair, Conservative, Gerry Ritz]

That, and also in there you don't talk about the appeal period, the timeframe that was available for that.