Agriculture Committee on May 11th, 2006

[Paul Steckle, Liberal, Huron—Bruce, ON]

When you said it's not helping the industry and this has to change; you've been 40 years with the same system and it has to change. I think there have been a lot of changes. But I think you will find that later, in this next two hours, somebody at the table will probably tell you why that industry is flourishing. Anywhere in the world where they don't have it, you show me where they're making a lot of money in the dairy industry.

[Don Jarvis]

I think I particularly emphasize that our concern is based on our desire to save the system to make sure it doesn't collapse in terms of the competitive marketplace pressures we're feeling. I think, in response to your observations about the competition, we are facing a much more competitive marketplace. I reference that with respect to different consumer demands, demand for health profile products.

In fact, in the Globe and Mail just yesterday, Mr. Steckle, there was a very good example of how quickly and rapidly the marketplace is evolving around the world. Yesterday it was reported in the Globe and Mail that Wal-Mart stores in Britain are introducing--and it's made by a British cheese company--something called Heartfelt Plus Natural Cheese. It's enhanced with an ingredient, an innovative product, made here in Canada by Forbes Medi-Tech, a phytosterol. It reduces cholesterol. In England now, in a market twice the size of the Canadian market, they are in fact putting in the marketplace a product called a cheese. It has a low fat content of 12%, and a typical cheddar cheese is usually between 30% and 40% fat. This cheese tastes like real cheese, unlike other low-fat offerings usually made with vegetable oil, and it certainly offers a great alternative to traditional low-fat cheeses, which have been poor tasting and poor in texture.

That's where the marketplace is going. The problem we have in this country is that we are not allowing our regulatory system to adjust; there is a continued demand at the producer level to produce only high-fat products. This product would not be allowed in the Canadian marketplace; it's a functional cheese, a functional food. We're constrained, as processors, in meeting those new demands in the marketplace. We're looking for more flexibility. The consumer is demanding these products. Our customers are demanding these products. That's Wal-Mart. Our customers are the major supermarkets or the food service companies.

Mr. Leroux referenced the fact that he's competing, at the food service level, with non-dairy ingredients to make “cheese toppings”. That's what we're competing with.

[The Chair, Conservative, Gerry Ritz]

Mr. Easter.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you.

There's no denying that the marketplace is changing, and we have to find ways whereby we can change to meet marketplace demands. But the key problem here is that the intent of the supply management system in the beginning was, and still is, to be able to manage your industry in a way of having a predictable market. The MPCs are taking that predictability out of it and leaving the industry with, as you indicated, a declining marketplace. There may be a number of reasons for that. As Paul said, other raw materials are cheaper because they're under different systems. It may be a heavily subsidized U.S. product that claims to operate in the free market, but the Treasury bails them out once in a while and as a result the raw material can be cheaper at times.

But what's the solution you would put forward to maintain at least predictability in the industry? What would you lay on the table? That's key. If there's not predictability there, in terms of that supply system, then we've got a severe problem. What would you do in that regard?

[Yves Leroux]

I think one of the solutions is for our dairy farmers, our dairy producers, to be more competitive. Let's not kid ourselves, in the last two years prices went up probably an average of 15% from the farm aspect, and then by the time the consumers were buying it at the retail level you were looking at possibly 20% and 25%. Consequently, that's what it's done. It's really played a hell of a number on our butter consumption and our cheese consumption. So we need to be more competitive. Our prices are going up and consumption is going down. We have to stabilize this. We need to grow this industry, not continue to shrink it. One way to do it is to understand our price structure and how we can be more competitive.

[The Chair, Conservative, Gerry Ritz]

Thanks, Mr. Easter.

Mr. Miller.

Oh, sorry, Mr. Bellavance.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

It was a pleasant surprise.

[The Chair, Conservative, Gerry Ritz]

I was just making sure you were awake. See, André was.

Mr. Bellavance.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

I am pleased that the committee agreed to hearing witnesses on this issue so quickly because it is a priority for the Bloc Québécois. There are 7,400 dairy farms in Quebec. I come from the region with the most dairy farmers in Quebec, the Arthabaska region. This is therefore a very important issue for me.

Mr. Jarvis, you mentioned that the industry is experiencing difficulties. Yet, at its annual general assembly, Agropur announced profits of over $2 billion for the first time. I do not think things are going too badly and I am pleased. In fact, this co-op was part of a group of 63 milk processors who joined with the dairy farmers in asking Ottawa to slow down its imports. It is important to point out that the idea was to limit imports.

You mentioned prohibiting imports in your introduction but I do not think that was ever the intent of the producers. Even the use of article 28 of the GATT would involve a 10 per cent increase in imports. There is no question of prohibiting milk protein across the board. However, we need to be aware that if one of the pillars is weakened, in this case import limits, we will undermine all of the supply management system. The Federal Court's recent ruling has opened the doors to milk protein imports and threatened supply management.

Yet there is unanimous agreement on this. I mentioned 63 dairy processors, in other words, members of your industry, who joined with dairy producers. Even the Quebec Minister for Agriculture, Fisheries and Food, Mr. Yvon Vallières, stated that there is no reason for the federal government not to act decisively on this issue.

On April 6 last, the federal Minister of Agriculture and Agrifood, Mr. Strahl, took part in the take note debate requested by the Bloc Québécois, on the issue of the agricultural income crisis. In his speech, in reference to dairy protein, he said that

he was just as interested as dairy producers in finding ways of making sure that Canada would not be flooded with imported products. He added, that if they used article 28, and they were considering that possibility...

He was referring to some difficulties, but he did say that he could consider using that article.

I think many people agree that there is a problem. I would like to know if you are not somewhat alone in your position, given that you have indicated that there could be a general prohibition on milk protein imports, which I think is inaccurate. You would have to agree that something needs to be done in order to protect supply management, as you mentioned earlier. Otherwise the system, which has served Quebec and Canada well, could fall apart.

[Don Jarvis]

Let me start by indicating that we don't think there are a few difficulties in the industry; we think there are many. There are very difficult and profound issues that really need to be addressed.

The MPC/MPI issue is a symptom and one issue out of many.

Mr. Bellavance, you mentioned article 28, which we've examined as an industry. Of course, the Dairy Farmers of Canada initiated a request for an article 28 over a year ago. At that time, it was an instrument they envisaged being used for a whole host of imported dairy ingredients far beyond MPCs and MPIs. I think it included butter, all sugar blends, and a host of other ingredients.

When we examined it independently as an instrument, after serious examination, we concluded it would not work—now it has been reintroduced as a potential instrument to directly limit imports of MPCs or MPIs, which was confirmed by the minister and Mr. Verheul, our chief agriculture negotiator—because potentially it would only be used against our trading partners outside NAFTA, and MPCs and MPIs would still be imported via the United States. So using that instrument opens up a whole range of problems for the industry.

Our concern is that if an article 28 was proceeded with, there would have to be a negotiation with the Americans. We would be opening up a negotiation on supply management, and we do not want to see that happen. So that's one of our major concerns.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Several countries, including the United States, have used GATT article 28. How can supply management work if we don't limit milk protein imports? How can the industry continue to operate if supply management no longer exists in Canada?

You may respond, Mr. Leroux, that's fine.

[Yves Leroux]

Mr. Bellavance, the system we have today is good for dairy producers, for processors and consumers.

However, prices have gone up to such and extent that the diary consumption in Canada has decreased. We think that if dairy producers became more efficient and were able to provide us with a less expensive product, then we wouldn't need to rely on imports; we'll have our own non fat solids necessary to ensure the growth of our industry. Our industry has to become more competitive.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Do you really think that Canadian and Quebec dairy producers can be competitive, given the existence of European subsidies, even though Mr. Jarvis said earlier that there weren't any?

That's not what we hear nor what we see. European agricultural industry is massively subsidized. How can our producers be competitive? Something has to happen at the WTO level, but what can we do right now?

[Yves Leroux]

That is a tricky question but don't worry, I will answer it.

Our industry currently uses between 15 000 and 20 000 tons of quality non fat solids which are sold to the animal feed industry at $0.80 to $0.90 per kilogram. The products that we'll talking about, that come from abroad, are competing with our industry. Canada already has these products, as they are sold for animal feed at $0.80 to $0.90 per kilogram.

Our dairy producers can be more competitive. They can benefit from the non fat solids that are already sold l to the animal feed industry, and make them available to the processors. That is one possible solution, Mr. Bellavance.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Leroux.

Mr. Miller.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

Thank you.

I'm going to take the first five minutes and Mr. Gourde will take the last two. I thank everyone for coming on short notice as well. It saved us wasting a day of meetings, which we certainly don't want to do.

One comment, Mr. Leroux, that I guess in my background as an agriculture producer I take a little offence to--and I'm sure most will--is your statement that farmers need to be more competitive, or what have you. I think all of our farmers in all commodities are very competitive and very efficient. I wanted to point that out.

Dairy Farmers of Canada have claimed that they're losing about $175 million a year--that was a figure for 2004--and it's growing, on the imports of dairy ingredients. It's basically growing, I understand, by $2 million a month. Is that a figure that the food processors agree with?

[The Chair, Conservative, Gerry Ritz]

Mr. Jarvis.

[Don Jarvis]

I believe the chairman read the mandate of this discussion. I think it's related specifically to the use of MPCs and the imports of MPCs/MPIs. It would not be a correct figure if what we're here to discuss is MPCs/MPIs. There's a host of dairy ingredients that go way beyond MPCs/MPIs. As Mr. Matte has indicated, the volume of those is 3,000 to 5,000 tonnes, and the value of those is about $9 per kilo. So you can calculate the value, and that does not in any way indicate or reference the numbers you're referencing, Mr. Miller. Indeed, as I stated in my opening remarks, the imports of MPIs have been steady for the last three years.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

Okay. You went through some things about what motivates food processors to use imported dairy ingredients, and you mentioned changes in consumer demands, but there have to be other reasons. Is it price? Is it quality? I would like to hear a few more comments on that.

[The Chair, Conservative, Gerry Ritz]

Mr. Matte.

[Kempton Matte]

Thank you.

I think you're right. There's a raft of reasons, and I would say it's all of those. There's price, quality, availability--those are basically the three--and technology. The dairy industry in Canada wouldn't be where it is today (a) without supply management and (b) without the use of technology.

I explained the evolution that allowed us to use whey protein concentrate in cheese-making, for example. That same technology is applied throughout the industry for all product categories, so it's not surprising to me and to industry people that every effort is made to produce the highest-quality product at the lowest possible price.

The irony of this is that the industry gets no credit for it. The fact is that by DFC's own publications, dairy product prices to consumers in Canada are a better bargain than dairy product prices to consumers in the U.S.A.

Now, bear in mind that up to 90% of a finished product's total cost is the price of raw milk. So the difference between that 85% to 90% and 100% is divided among the rest of that food distribution chain--the dairy processor, the wholesaler, the retail distributor, and so on. Considering that the raw milk price in Canada is about the third-highest in the world--depending on the year, anywhere between 25% and 40% higher than in the U.S., and it's currently higher than the price in Europe generally--the consumer's obviously getting a bargain. That effort, which has to be made somewhere in the chain, is being made in the processing sector.

I'm not crying poor-mouth here; I'm just saying that we're applying the best manufacturing technology possible to deliver the most competitively priced product into the grocery basket, and that's what's happening.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Matte.

We'll now move to Mr. Gourde for the final segment.

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

There is a detail with regard to processing that bothered me. We all agree that Canadian producers produce a very high quality milk. A quality issue relating to isolates and concentrates was raised. You therefore prefer to import those products. You mentioned that this was a technology problem. So why don't the processors choose to import the technology rather than the concentrates?

[Kempton Matte]

I would like to point out that we did not in any way question the quality of Canadian products. We said that imported products, contrary to what some people might think, were not inferior in quality. Their quality is at least as good as that of Canadian products.

Moreover, if we have not imported the technology, it is because it is not viable economically, given Canadian milk prices. We could import the technology and set up one or more plants to produce these isolates, but their price would not be competitive. It would be impossible to justify such an investment to the shareholders of a cooperative or a private company. It is not economically justifiable.

That is why we have suggested in the past that a special category of milk be established. This already exists and does not break any WTO rules. That way, the necessary investment could be provided and production could take place here. But it will not happen until it is economically justifiable.

[The Chair, Conservative, Gerry Ritz]

To Mr. Gourde, for a short question.