Thank you, Mr. Chair.
I will begin my presentation in French, and then I will continue in English.
On behalf of Dairy Farmers of Canada, or DFC, I'd like to thank you for the invitation to appear before the Standing Committee on Agriculture and Agri-Food in view of its study on milk proteins. Today, I will speak about the improper use of certain milk protein substances, such as diafiltered milk, under the cheese compositional standards for Canada—and the negative impact this has on Canadian dairy farmers.
DFC is the voice of all farmers on each of the 11,350 dairy farms from coast to coast. Our organization strives to create stable conditions for the Canadian dairy industry today—and in the future. We work to maintain policies that foster the viability of Canadian dairy farms, and promote Canadian dairy products and their health benefits.
We care deeply about our country, and we are active participants in our local communities. A vibrant dairy industry means more jobs and improved access to infrastructure. It also means economic benefits for other industries ranging from banking, to feeds, to parts and machinery sales, to veterinarians, and much more. It is important to emphasize that the Canadian dairy sector makes a huge contribution to the Canadian economy. It contributes $18.9 billion to the GDP and $3.6 billion in tax revenues every year. It sustains 215,000 full-time equivalent jobs across the country.
Dairy is either the top or second agricultural sector in seven out of ten provinces. Furthermore, unlike other jurisdictions where farmers' incomes are heavily subsidized, Canadian dairy farmers derive their income from the marketplace. However, that marketplace will be further diminished by the access granted in the comprehensive economic and trade agreement, CETA, and the Trans-Pacific Partnership, TPP.
As you probably know, the dairy farming sector in Canada operates under a Canadian agricultural policy known as supply management, the objectives of which are to: ensure farmers receive a fair return, derived from the marketplace, for their work and investments; provide processors with a stable supply of milk, so that they can properly plan their production year after year; and provide consumers with a consistent supply of milk and milk products of the highest and safest quality, at a fair price.
The system achieves these objectives by enabling Canadian dairy farmers to act collectively to negotiate prices and adjust milk production to meet consumer demand. In so doing, supply management ensures that Canadian prices for both farmers and consumers remain relatively stable and less subject to the volatility of the global market. The fact is, in countries where milk production has been deregulated, such as in New Zealand, the United Kingdom and Australia, farmers have at times received less for their milk, while consumer prices have gone up.
For example, in New Zealand throughout 2014, although the farm gate price for milk decreased by 42%, the retail price for milk increased by 2.2%. The Government of Canada put in place a supply management system in the early 1970s in an effort to reduce the surpluses in production that had become common in the 1950s and 1960s, and ensure a fair return for farmers.
Canadian dairy was the first industry to operate under supply management—a system that egg and poultry farmers would later adopt. For the dairy sector, the supply management system is administered by the Canadian Dairy Commission. The basic idea behind supply management is simple; the goal is to manage production so that supply would be in balance with demand.
The farm gate price enables farmers to cover the costs of milk production, including a fair return on labour and capital. In other words, we only produce as much milk as is required by the Canadian marketplace, while limiting surpluses that would otherwise end up on the world market at dumping prices.
Supply management is a stool that rests on three equally important pillars.
The first pillar is producer pricing, which ensures that the milk price received by dairy farmers takes into account both the cost of production, including capital and labour costs, and the overall conditions of the Canadian economy. It is important to note that the Canadian Dairy Commission and provincial milk marketing boards do not set the retail price, and neither do the farmers. The price that consumers pay at the grocery store or in a restaurant has always been set by the retailers or the restaurant owners themselves.
The second pillar is production discipline, which ensures that the supply of Canadian milk equals the demand from consumers. Each dairy farmer in Canada owns a quota—a share of the market—that allows him to produce a certain amount of milk. Depending on consumer demand, the amount that a quota allows a farmer to produce can increase or decrease; upward and downward quota adjustments are made on an as-required basis.
The third pillar is import control. For supply managed commodities, imports are controlled using tariff rate quotas. They allow a predetermined quantity of dairy products to be imported at preferential tariff rates, generally duty free, while maintaining control over how much is imported.
The over-quota tariffs are set at levels that meet the objective of ensuring that only the quota agreed to in trade agreements is imported. Other than exceptional cases, tariff rate quotas for dairy products are fully filled every year.
In 2015, the total value of dairy products imported into Canada, including both tariff rate quotas and non-tariff rate quotas, reached more than $824 million. As you can see, Canada imports a significant amount of dairy every year.
I will now continue my presentation in English.
Without any control on what is imported, it is impossible to manage supply management to match demand. A lack of import controls will inevitably lead to overproduction and instability within the system. Furthermore, it is more than just having the right rules in place. The auditing and validation process, and the enforcement of the rules, are equally important. Currently those who would exploit the rules are well aware that when it comes to dairy, Canada's enforcement and application of our existing border measures are inconsistent. Adequate audit and enforcement are essential in discouraging those who would exploit those loopholes.
People can be very creative in order to circumvent tariff and quotas. The pizza food topping preparation issue is a great example. Between 2009 and 2013, farmers lost an estimated $62.6 million due to the importation of these preparations. We also have the butteroil-sugar blend issue and more recently the case of salt being added to cream, all of which is in order to avoid tariff and quotas. The list goes on and on.
The government is responsible for the enforcement of Canada's border measures and must act quickly to limit damages caused to Canadian industry. This role will be even more important when service imports enter into Canada as a result of CETA and TPP.
The role of CBSA is to ensure the products crossing the borders are well classified and the products that are coming in are verified to ensure they fit the definition of the tariff line. Let's be clear. All we're asking is that the government enforce existing rules and allow only the amount that has been agreed to in trade agreements to enter the country.
We also need more transparency, especially as it pertains to the process CBSA uses to issue advance rulings. Decisions that impact our industry may or may not be consistent with our understanding and the interpretation of the rules. CBSA issues advance rulings at the request of importers. Currently there is no formal process to know whether a ruling has been issued, or even to find out whether the CBSA is investigating a complaint about a ruling. There is no industry consultation. When CBSA issues an advance ruling, it should be done through a transparent process so that stakeholders are aware and can offer input and respond when appropriate.
When the three pillars of supply management are functioning as intended, it enables the dairy industry to weather any economic storm, remain stable, and achieve a high level of self-sufficiency. If any of those three pillars becomes unstable then it risks putting the entire system in jeopardy.
This brings me to the reason we're here today: milk protein. Canadian milk used to be used as the main source and base component in making dairy products. However, while some cheese and yogourt makers still use 100% milk, more and more are adding ingredients such as milk protein isolates, milk protein concentrates, and diafiltered milk in substitution of milk. These ingredients can either be produced in Canada or imported. When imported, those ingredients are not classified under chapter 4 of the customs tariff schedule, which includes dairy products. They are classified under chapter 35, which includes ingredients such as milk protein substances. Originally these milk protein substances were imported in a dry form. Over the past five or six years we've seen a change of pattern. The amount of milk protein imported in liquid form under the same tariff line has increased significantly. This milk protein substance is then used as an ingredient in the making of cheese and yogourt.
Where the situation becomes more complex is when the same product is not treated the same way by two different government agencies. For example, when one agency treats a product as an ingredient and another treats it as milk, then you have a problem. Under the cheese compositional standards for Canada, when making cheese it is required that a minimum percentage of the protein used in the cheese-making be sourced from milk. The percentage required varies from cheese to cheese. For example, cheddar is required to derive a minimum of 83% of its casein from milk and a limit of 17% of the total in protein can be derived from ingredients. The Canadian Food Inspection Agency is responsible for enforcing the cheese compositional standards, which means verifying that the required milk-to-ingredient ratio defined under the cheese compositional standard for each cheese is met.
Because milk proteins are an ingredient that can be less costly, some processors are taking to using milk protein substances as part of their required minimum percentage of milk when making cheese instead of using it in part of the allowable percentage of ingredients. This is also inconsistent with its classification at the border when the ingredients are not even being considered under the dairy chapter, but enter the country tariff-free.
As previously mentioned, the CFIA is responsible for enforcing the cheese standards. From 2011 to 2016 DFC had 60 meetings with government officials on this issue and have sent 19 letters to various ministers.