Agriculture Committee on May 11th, 2006

[The Chair, Conservative, Gerry Ritz]

I call this meeting to order.

Good morning, ladies and gentlemen.

It's a pleasure to have you here at the first official non in camera meeting we're going to have this year. Of course, it's a very interesting topic, the protein concentrates issue that just keeps bubbling along--almost ten years now, I guess.

We're pleased today to have with us Don Jarvis, president and CEO, Dairy Processors Association of Canada; Kempton Matte, senior vice-president, industry and government relations; Yves Leroux, vice-president, government affairs—you guys really like government; and Pierre Nadeau, président-directeur général, Conseil des industriels laitiers du Québec.

Welcome, gentlemen. It's a pleasure to have you here.

We have ten minutes for opening comments. If you can stay within that timeframe it gives us more time for questioning. We have about an hour for this segment of the meeting, and then we'll move into questions.

Mr. Easter, I knew you'd do that.

[Wayne Easter, Liberal, Malpeque, PE]

A point of order first, Mr. Chair.

The committee the other day made a request to the minister to appear today and, obviously he's not here. When can we expect him to appear? If he's not going to appear for some time, will he at least make a ministerial statement to clear the air in terms of when and what money will be coming so farmers can predict, both for their creditors and themselves, this supposed spring money?

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Easter, for that point of order.

Mr. Anderson, could you give us an update on that? You were talking to the minister.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Actually I can, Mr. Chair.

As you know, the minister has been very available since he's become minister. He's met with over 250 farm groups and farm organizations across the country, and he continues to do that kind of consultation. He's happy to meet with the committee, and the intention right now is that he will be here before the end of the month, on May 30.

[The Chair, Conservative, Gerry Ritz]

Thank you.

Does that answer your question, Mr. Easter?

[Wayne Easter, Liberal, Malpeque, PE]

That does, but it's certainly not the direction the committee moved in. The fact is, he has not cleared the air relative to cash for spring for farmers. We have a statement by the chair of the committee indicating there won't be an ad hoc payment this spring, but we have nothing from the Prime Minister or the minister to establish for the farm community if there's money for spring or not. That's what we need. If he can't meet with us, the least he could do for the farm community is issue a ministerial statement.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Easter.

You've actually got a purged statement from the chair of the committee that you chose to clip and edit to your own means. That's fine, and you're certainly allowed to do that. That's what politics is all about.

The minister has made several statements. He actually made a speech in Calgary last Friday that outlined the billion dollars and how it would be available. You may want to go online and refresh your memory with that.

Mr. Miller.

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

I wanted the minister here today too, Mr. Chairman, but it didn't work out. He has given us a commitment to be here on May 30. I think we would all agree it would be nice if he were here sooner, but that's not the case.

The other side of it is he's made it very clear that some changes need to be made to CAIS, and I think every member in this room will agree to that. They're working on that very diligently, and I know his intention is to get that money as soon as possible. I think for him to try to announce something when it really isn't in place yet would be premature anyway. I think his intention is to do that, and I think we have to trust him on that.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Miller.

Does anyone else want to weigh in on this, or will we move to our witnesses?

Thank you, Mr. Easter, Mr. Anderson, and Mr. Miller.

Gentlemen, please, who will be presenting for you?

Mr. Jarvis.

[Don Jarvis, President - CEO, Dairy Processors Association of Canada]

Mr. Chairman, thank you very much. Thanks for the opportunity to appear before you today. Our chairman, Andy MacGillivray, is unavailable. He is actually out of the country, in Central America, working with some producer groups on behalf of his cooperative, so he extends his regrets that he couldn't be here. As well, one of our other major members, Agropur, is unavailable. They had a prior commitment, a three-day management retreat that began last night. If it hadn't been for the short notice, they would have been here as well. However, my colleagues will be adequately representing our industry and I will be calling upon them for some brief comments as well.

DPAC and dairy processors are very concerned about farmers in the dairy industry as a whole. We want to make it clear that DPAC members understand why DFC members, Dairy Farmers of Canada members, are concerned with the state of the dairy industry in Canada and why the milk protein concentrate, milk protein isolate, issue has taken on the importance it has.

Dairy farmers have taken four quota cuts in the last year, with more perhaps looming, as prices for milk continue to increase. DPAC understands that the price increases do not offset the financial impact of the quota cuts that directly attack the producers' equity. Also, BSE issues have caused considerable financial hardship for many farmers.

Consumption of traditional dairy products is dropping as the consumer market changes. The aging population and the new ethnic mix in the Canadian population means that different products are now coming on the market. The best example of that is that Health Canada is fundamentally changing the food guide. There used to be a milk products, or a milk category, that is now being changed to milk and alternatives. I think this is the best example of how formulations and foods are changing in the marketplace. Of course, this is not only occurring in this country, it's occurring around the world.

DPAC will not deny that MPCs or MPIs do have some substitution effect on domestic skim milk powders. This impact is considerably less than the DFC purports. Indeed, it's only a symptom of a much larger problem in the Canadian dairy industry.

We would point out that the level of MPCs/MPIs imports over the past three years has remained steady and has therefore not accounted for the production side challenges in the last couple of years. In other words, Mr. Chairman, stopping imports or the use of MPCs/MPIs would not solve the dairy industry's problems but would likely enhance them even further.

Before we get into that specific subject, I want to describe to the committee members the state of Canada's dairy industry as we see it as dairy processors.

First, all of you have been provided in the blue folder some information on our organization and on the industry. Our members purchase, process, market, and distribute more than 90% of all the milk produced in this country. The dairy industry represents a very significant segment of the Canadian economy. Last year dairy processors shipped $12 billion worth of products, making up more than 15% of all food products shipped by the food and beverage industry. About 27,000 people are employed in the processing of dairy products. In Canada, fluid milk and cream production represents just under 40% of total milk production, while the remaining 60% is dedicated to other manufactured dairy products.

We have a real concern. The following facts were relayed by our chair, Mr. MacGillivray, here in Ottawa only a few months ago, and I think it's worth repeating some of those facts. It's a concern centred on growth, or the lack of it, and the long-term implications for this industry. The facts best demonstrate that concern.

Over the past nine months we've witnessed these four cuts in MSQ quota, reflecting the state of demand for dairy products in Canada.

Over the past 12 months, as reported by ACNielsen, consumer purchases or demand in key categories is seriously down. All fluid milk, including specialty milk, shows a 1% drop in volume. Butter shows more than a 4% decline. Cheese shows zero growth, with a 4% decline most recently. Even yoghurt, the star category for the past decade in our industry, has very modest tonnage increases nationally, compared to the almost double-digit annual growth. And ice cream continues a very serious downward slide.

At the same time, by sharp contrast, consumer demand for competing categories is showing increases. The best example is the case of soya and rice drinks, showing a 5% per annum increase in volume, with an 8% increase. Refrigerated juices show more than a 10% annual increase in volume. This ACNielsen data provides a very accurate measurement of sales in the major supermarkets right across Canada, in all cities, towns, and regions.

A closer look at our two largest regional markets reinforces this very disturbing picture. For example, butter sales in Quebec are down 6%. Yoghurt sales in that province are not showing any growth whatsoever. Cheese is down 16% in Ontario. By contrast, in Quebec, soya and rice drinks are up 21%, and over 25% in the last year. We see in other data that there is a similar story unfolding in the food service restaurant industry, where growth in dairy product use is reported as slightly negative or zero over the past 12 months.

If we dwell a bit longer on the fluid milk category, we see that over the past 10 years, per capita consumption has declined by 14%. This is the largest category in the grocery stores, with probably the fastest turning and highest consumer involvement of anything occurring in the grocery business, yet usage continues to shift to competing beverages: soy, soft drinks, and fruit juices. All those categories that we compete with in today's marketplace are driven by innovation, strong consumer focus, and independent strategies for growth.

Now, DPAC spent considerable time over the past couple of years working and explaining and worrying about the situation with the dairy farmers of Canada, trying to understand the problem, trying to find ways to address it. DPAC likes the process outlined to us by the minister a month ago. We want to work on a working group to get at the real root issues that are causing this problem. All the old processes and discussions won't work.

A month ago, Minister Strahl invited our chair, Mr. MacGillivray, to begin working on these problems in a dairy working group, with representation from DFC. The minister advised us that he wanted to do a number of things. He said there are a number of serious pressures currently facing the Canadian dairy industry: processors are concerned about flat or shrinking markets for dairy products, and about the ability to develop new products and associated technology to grow the market; producers are concerned about issues such as recent quota cutbacks, the size and cost of the skim milk surplus, the undermining of domestic markets through imports of certain dairy products, and of course the uncertainty of upcoming or current WTO negotiations. Both producers and processors are concerned about the declining consumption of dairy products and about pricing and profitability issues.

A month ago, the minister laid out for us a reasonable process and a timetable for this working group. In fact, he hoped that we would be able to agree on key principles and a strategic framework by early next week, with detailed work and agreements between producers and processors under way by late June, and a complete report and a way forward with recommendations by the fall.

Now, Mr. MacGillivray and DPAC and our members have readily agreed to this process, but to date the DFC has not.

Before turning to my colleagues to discuss MPCs and MPIs, I think it's important to state up front what the real issues facing our industry are.

The market for dairy products is not growing. The market for traditional standardized products is stagnant. Consumption is dropping. There have been significant price increases in the past three years, with very serious consequences in the marketplace. Dairy is losing ground to its competitors in the marketplace, especially non-dairy substitutes, and there is no incentive any more for new investment. There's no incentive to develop new products. The regulatory system discourages innovation.

We need to be ready for the future, whether there's a Doha Round, a WTO agreement, a new agreement, or not.

We know technological change will not stop. We know Canadian demographics do not mitigate in favour of increased consumption of full-fat dairy products or traditional dairy products. We know Canada will have to provide increased market access for dairy products by 2013. Already agreed to market access means, according to the chairman of the Canadian Dairy Commission, a 5% to 6% further cut in MSQ, and we're not ready for that.

We need to retain the good. DPAC and its members want to save supply management for dairy. The stability of the system is and has been an advantage. The stability of the system has allowed Canadian dairy farmers to provide high-quality product on a continuous basis for many decades, but we need to look at it and perhaps reform it.

The dairy system is the first supply-managed system implemented in Canada, and it's now over 40 years old. Today's pricing and allocation systems are no longer working well within Canada and within the world realities. The regulatory system for dairy products at both the provincial and the federal level is archaic and counterproductive in today's marketplace. And, finally, the system is not keeping up to dairy developments in the rest of the world and economic realities right here in Canada.

With those opening remarks, I'm going to turn for several minutes to my colleagues to get into the MPCs.

I'll turn to Mr. Nadeau to provide the members with a good description of MPCs and MPIs.

Mr. Nadeau.

[The Chair, Conservative, Gerry Ritz]

Mr. Nadeau, I'll ask you to keep those remarks fairly short. We're stretching our time already. Thank you.

[Pierre Nadeau, Chairman and Chief Executive Officer, Conseil des industriels laitiers du Québec, Dairy Processors Association of Canada]

Thank you, Mr. Chairman.

I will take a couple of minutes to draw your attention to the document, a table, in your blue folder. The table is in English on one side and French on the other and describes milk and its constituents. As you can see from the table, milk is made up of several ingredients, the first one being water, followed by lactose, butter fats, and finally proteins, the constituents we are interested in.

Milk is 3.2 per cent protein.There are two kinds of protein: 80 per cent of the protein is milk protein, the kind that can be turned into cheese, and the other 20 per cent is lactoserum, the cheese byproduct, whey.

At the bottom of the page, you will note that skim milk powder is solid milk, with no fat, no water and 35 per cent protein. That is in its natural state. The term protein concentrates applies when there is more than 35 per cent protein present. Substances that are 85 per cent protein are called protein isolates, the subject of today's discussion.

Protein isolates, and other forms of protein, are used outside the dairy industry. They are used in hospitals for increasing muscle mass, in health drinks and energy bars, for example. They are also used in other foods for very specific purposes, for example, as extenders in some types of meat.

That concludes my remarks.

[The Chair, Conservative, Gerry Ritz]

Thank you.

Mr. Jarvis.

[Don Jarvis]

Mr. Chairman, I'm going to turn for a few minutes to Mr. Matte to explain further the issue around MPCs and MPIs.

[Kempton Matte, Senior Vice-President, Industry, Government, Producers Relations, Saputo; Dairy Processors Association of Canada]

Thank you, Mr. Chairman.

I'll assume I've been asked the question, “How come we use MPCs and MPIs?” I think it's a very important question. The dairy processing industry functions with one foot in the supply management system, from the standpoint of milk supply. We buy our milk in each province from a monopoly supplier, which is a producer-run dairy board. Everything else we do is in the free market, so from an operating perspective, we of course have all of the market-driven initiatives to seek efficiencies in our plants and to apply the latest modern technology.

Traditionally, when we made cheese, for example, the whey Pierre just referred to, the lactosérum, was simply pumped back out of the plants, spread on fields, dumped in ditches, put in lagoons, sent into rivers, and so on, which was acceptable at the time, but as environmental concerns arose, it emerged as a very major environmental issue, which the industry had to address. It did so by applying technology to this product, knowing that within the product were dairy proteins, some fat, as well as other material. It developed technology to recover these fats and the protein and the ability to use them in cheese-making.

You have to remember that this is a product that is simply the by-product of taking milk and making cheese with it. It's a domestic product. By far most of the whey protein concentrate used in the dairy industry is this type of product; it's domestically produced, and probably 95% or more of it is this product. So we've been able, through the use of technology, to reintroduce the whey protein concentrate into cheese-making to the benefit of the industry. It reduces costs, and there are more efficiencies, and so on.

The other aspect of the proteins, which seems to have drawn the attention—but in my mind this file gets totally confused. It involves the imported isolates that come into the market. By the best measure available to Ag Canada and Stats Canada, there are 3,000 to 5,000 tonnes of these products used in the dairy industry. The reason they are used is that they bring to processors performance characteristics that are not available in the domestically produced whey proteins. The technology is not in place in Canada to produce these products, so they are bought on the world market at world market prices.

They are used in a variety of uses in the dairy industry, but also outside of the dairy industry in further processing of foods, in the chemical industry, in the nutraceutical industry, in the pharmaceutical industry, and so on.

The comment that is often made is, you buy these cheap subsidized imports and use them domestically. I think the first misconception is that they're subsidized. The vast majority of them, according to my understanding, come from New Zealand, and there are no subsidies attached to those products. I think if you inquired at the EU, you would learn that today there is virtually nothing or very little—I believe nothing, but maybe it's very little—in the way of subsidies attached to the exports of those products from Europe as well.

The other interesting thing about those products is that contrary to what is often implied, they are very high-quality products. A large part of the business of the company I work for, Saputo, is food service, where we manufacture a cheese that meets all Canadian standards and all Canadian regulations but that we develop really to the customers' specifications. This means it has to brown at a certain temperature in a pizza oven within a certain period of time, it has to stretch a certain distance, and so on and so forth. Some of these characteristics you can only achieve by blending some of these imported isolates with our domestic source raw material. It's not only a question of buying cheap and selling high; it's a question of applying the best available technology to produce the best quality product, which you can then market at a competitive price. I think it's something that is often overlooked in this discussion.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Matte.

[Don Jarvis]

I'll ask Mr. Leroux to finalize our opening remarks.

[The Chair, Conservative, Gerry Ritz]

You have 10 seconds.

[Yves Leroux, Vice-President, Regulatory and Government Affairs, Parmalat; Dairy Processors Association of Canada]

Okay. I'll be brief.

On my background, going back 45 years ago, I'm a cheese-maker. To tell you a little about the utilization of the MPI that Mr. Matte mentioned, when we use MPIs that we import—and there are possibly between 4,000 to 5,000 tonnes of MPI being imported—for us as processors it is an advantage. I will tell you the reasons why.

I would say that the bulk of the MPIs that are being used in the dairy business are used, as an example, in mozzarella. Possibly 70% to 75% is used to produce mozzarella that they use on pizzas, for example, for the food service. By using the MPI, which is more than 85% protein, that product comes in with a denatured protein and it also comes in without lactose. The denatured protein allows you to maintain a certain amount of moisture in your cheese. Because the protein has been denatured, it certainly allows for elasticity and makes a beautiful cheese that will spread on a pizza.

It's contrary to what it used to be five or ten years ago; you used to have a lot of bubbling on a pizza and some burning on a pizza. That doesn't happen today because the product we are using to supplement the milk is free of lactose. The lactose is a sugar, the ingredient that gives you the problem on top of a pizza, because it burns.

There are definitely some functional reasons for why we use the product. It is true that it is imported. As far as we know, it is unsubsidized, or the bulk of it is unsubsidized. It also allows us to maintain our prices and be competitive with the food service.

If we don't do that, if we don't give them the product they want, then we will be forced to produce cheese analogs. We will produce a product that will replace the dairy products on the pizza. That's coming. Canada has shied away from it so far, but for whatever reason, if we were not allowed to do that, I'm afraid we would lose a good segment of the food service on the mozzarella we have today.

Mr. Chairman, thank you.

[Don Jarvis]

Thank you for your patience, Mr. Chair.

We wanted to make sure those key points were made.

[The Chair, Conservative, Gerry Ritz]

Well, I'm stretching the time a little. It is a very important issue, and we want to make sure we get all the information.

We'll start the round of questions with Mr. Steckle, for seven minutes, please.

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

I may defer to my colleague, because we're running out of time here.

[The Chair, Conservative, Gerry Ritz]

That's fine.

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

Mr. Jarvis, we want to thank you for coming, because this is an important issue.

The dairy industry is hurting today, and they obviously look to the processors because they use these products. It's probably one of the reasons the ice cream industry is suffering and is dramatically down. But you're saying the whole market is not growing.

This morning you were pretty scathing and condescending when you made that statement in terms of our supply management. I think the farming community and the dairy community are certainly going to be saying this. Mind you, we know now where the processors stand. If that is the position of the processing industry, then I think it's pretty clear that there is a wall of divide between you people and the primary producers. I think that is some reason for concern, and I have a real problem with that.

I realized this morning that we've come here to talk about a matter that is perhaps not understood as well as it should be by many people.

The fact is that you said the industry is not growing yet, but the soya industry is growing in terms of soya drinks and those kinds of products. What is happening? Have we lost the ability to convince Canadians? Are we losing the market because our product is not as healthy as another product in the marketplace? I think there are a lot of things, but who has failed in this issue?

Obviously, the soya growers are going to tell you that they're not making any money producing soybeans. But is the processing industry making more money selling soya drinks, rather than the others, because of the way they can buy the product, and it's a controlled product in the supply management sector?

Let's get some things cleared up here, because if money is the issue that's driving it and it's not a health issue, then I think we need to have that on the table.

[Don Jarvis]

Thank you, Mr. Steckle.

First off, what remarks did I make that were scathing and critical of supply management?