Mr. Speaker, I am pleased to take part in this debate, which is of paramount importance to a number of dairy farmers in my constituency and other parts of Canada.
I will speak to the House today about the improper use of certain milk protein substances, such as diafiltered milk, in the context of Canada’s cheese compositional standards and the negative impact that such improper use has on Canadian dairy farmers.
A flourishing dairy industry means more jobs and better access to infrastructure. It also means economic spin-offs for other industries, such as the banks, businesses that sell food, livestock, parts, machinery and hardware, construction companies, veterinarians, and many others. It is important to point out that the Canadian dairy industry makes a huge contribution to the country’s economy.
It contributes $18.9 billion to our gross domestic product and $3.6 billion in tax revenues every year. It provides the equivalent of 215,000 full-time jobs for Canada as a whole.
As we know, the dairy farming sector in Canada operates under a Canadian agricultural policy known as supply management. The policy’s objectives are to ensure that 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.
Canadian dairy was the first industry to operate under supply management—a system that egg and poultry farmers would later adopt.
As for the dairy sector, the supply management system is administered by the Canadian Dairy Commission. The basic idea behind supply management is simple: manage production so that supply is in balance with demand.
Supply management is much like a stool that rests on three equally important legs, or pillars.
The first pillar is farmgate prices, which ensure that the milk price received by dairy farmers takes into account the cost of production, including capital and labour costs, and the overall conditions of the Canadian economy.
It is important to note that the retail price is not set by the Canadian Dairy Commission, the provincial milk marketing boards, or the producers. The price paid by the consumer at the grocery store and in a restaurant has always been set by the retailers or restaurant owners.
The second pillar is production discipline, which ensures that the supply of Canadian milk corresponds to the demand from consumers. Each dairy producer in Canada holds a quota, that is, a market share establishing the quantity of milk that it can produce, depending on the demand from consumers. The quantity that the quota allows to be produced is adjusted upward or downward according to demand.
The third pillar is import control. For supply-managed sectors, imports are controlled by means of tariff rate quotas. Tariff rate quotas allow a predetermined quantity of dairy products to be imported at preferential tariffs, generally duty-free, while maintaining control over the quantity imported.
When the three pillars of supply management play their allotted roles, they enable the dairy industry to weather all economic storms, attain a high degree of self-sufficiency, and ensure its sustainability. Conversely, if one of the three pillars becomes unstable, it can jeopardize the whole system.
This brings me to the reason why we are here today: milk proteins. It used to be that Canadian milk was a primary source and basic component in the making of dairy products.
Even though certain makers of cheeses and yogurts still use 100% milk, for which I congratulate them, a growing number of them are adding ingredients such as milk protein isolates, milk protein concentrates, and diafiltered milk to replace milk.
These ingredients may be produced in Canada or imported. When they are imported, they are not classed under chapter 4 of the customs tariff schedule, which includes milk products.
Instead they are classed under chapter 35, which includes ingredients such as milk protein substances. Originally, these milk protein substances were imported in dry form. Over the last five or six years, however, we have seen a change in the import model. The quantities of milk proteins imported in liquid form under the same tariff line have increased significantly.
Once they have entered the country, these milk protein substances are used as ingredients in making cheese and yogurt. However, the situation becomes complex when the same product is treated differently by two government agencies. When one agency considers a product to be an ingredient and the other treats it as milk, then we have a serious problem.
Under the Canadian cheese composition standards, a minimum percentage of the protein used to make cheese must be sourced from milk. The percentage required varies from one cheese to another. For example, at least 83% of the casein contained in cheddar must derive from milk, and a maximum of 17% of the total protein content can derive from ingredients, including milk protein substances.
The Canadian Food Inspection Agency is responsible for applying the cheese compositional standards. That means that it has to verify that the milk-to-ingredients ratio defined in those standards is adhered to for every cheese. Since milk protein substances are ingredients that are sometimes less expensive, some processors use them to make up their required minimum quantity of milk in cheese making, instead of using them for their permitted percentage of added ingredients.
This situation is also inconsistent with the classification of these ingredients at the border, where they are not treated under the chapter on milk and dairy products and enter the country duty-free.
One of the most serious issues today is the growth in the uncontrolled importing of milk protein isolates. Imported in ever-larger quantities, they are competing with the skim milk solids and milk proteins produced here, thereby altering the competitive context and undermining the revenue of dairy producers.
The importing of milk protein isolates is growing exponentially. Canada adopted tariff rate quotas on milk protein concentrates around the mid-1990s. About 10 years ago, a few companies began to import milk protein concentrates, isolates, to obtain larger protein concentrations. Milk protein concentrates are a skim milk product from which lactose and permeate, which is mostly water, have been removed to varying degrees.
These highly concentrated proteins are imported into Canada duty-free, which allows companies to get around the tariff rate quotas. The Dairy Farmers of Canada tried to resolve this situation by bringing the matter before the Canadian International Trade Tribunal.
The concentration of protein in normal farm gate skim milk is about 35% in dry matter. Any product whose protein concentration is above that percentage is considered a concentrate. Therefore skim milk containing 40%, commonly called 52% to 72%, or even up to 84% protein is still considered a concentrate.
The Canadian International Trade Tribunal determined that a product with a concentration of over 85% is an isolate, not a concentrate, even if it is used for the same purposes. This product was designed for the sole purpose of circumventing the tariff rate quota on milk protein concentrates. This decision defies common sense and is not in line with government policy.
In any case, the Government of Canada attempted to rectify the situation.
Around 2008, the government set a new tariff rate quota and tariffs for milk protein isolates. The only problem is that these tariffs do not apply to NAFTA countries, namely the United States and Mexico. Consequently, the border with the United States remains open. Milk protein isolates cross the border as ingredients but can be used in Canada as milk. This conundrum leaves an ambiguous situation.
Although supply management was protected in international agreements, it is now up to us to protect it from within. The Conservative government took significant action in 2007-08 by establishing cheese production standards to limit the quantity of ingredients that could be used.
However, recent imports of diafiltered milk from the United States are once again threatening supply management. This product was designed solely for the purpose of circumventing border controls and Canadian cheese standards.
These proteins replace skim milk in cheese and yogurt production. In fact, there is no technical limit to the use of these proteins in production. This scheme is unacceptable. At the border, this product is considered an ingredient by the Canada Border Services Agency, which allows it to enter tariff-free.
However, for yogurt and cheese production, it is considered milk by the Canadian Food Inspection Agency. This means that its use is not limited by cheese and yogurt production standards. The federal Liberal government therefore has an important role to play. Diafiltered milk needs to be considered an ingredient under the compositional standards for cheese and yogurt. This will ensure that the standards and the spirit behind them are honoured.
Also, the verification rules for these standards need to be strengthened to ensure compliance. We all need to work together to come up with a solution to the problem of diafiltered milk. We are all aware of that. I believe that many members of Parliament are keenly affected by and aware of this problem. We ran into the problem of solid proteins and then pizza kits, which the previous Conservative government was able to fully resolve.
The dairy industry says it has no choice but to use diafiltered milk in making dairy products. As I said earlier, diafiltered milk was created to get around the rules at the border and production rules. I was able to confirm that thanks to the answer I got to one of the questions I asked in the Standing Committee on Agriculture and Agri-Food. No one in the United States makes cheese with liquid protein concentrates with 85% protein. Processors in the United States do not do that. It does not happen.
In Canada, processors are now using this product to remain competitive. They are using it for one reason only, and that is to save money. That does not make sense because this cost savings cannot benefit the producers and, at the end of the day, the processors are not benefiting either. Things start to get profitable only after the processing stage.
Honestly, this has to stop because the entire industry is engaging in this at the expense of supply management. As long as the issue of imported diafiltered milk is not resolved, there is no doubt that processors will keep looking for ways to reduce costs. We want there to be a level playing field, and we urge the Liberal government to do something about this.
The processing industry in the United States produces cheese without using diafiltered milk. Americans therefore eat cheese that was made without diafiltered milk. Canadians should not be eating cheese made with American diafiltered milk.
There is absolutely no justification for this because there is no economic incentive for it. There is no reason to do this. The only reason Canadian processors are importing diafiltered milk is that it is cheaper because it is tariff-free and there are no restrictions on using it in manufacturing. That is the only reason.
With respect to imports coming into the country, how much do we need to satisfy market demand? We do not need any. Why? Because Canada has an abundance of skim milk that can be used to produce these ingredients. If the government decided to regulate the use of these ingredients, we would produce them domestically at a competitive price, and we would use them. We do not need these imports because we have an abundant quantity of skim milk available.
Whether it is imported or produced domestically, the product used by many processors contains 85% or more milk protein. That is the definition of ultra-diafiltered milk. According to the regulation, there are no restrictions on the use of diafiltered or ultra-diafiltered milk in regular cheese and other dairy products.
If imports are not controlled, it is impossible to manage the supply to ensure that it meets demand. A lack of import controls will inevitably lead to overproduction and make our system unstable. It is not enough to have good regulations in place. The validation and auditing processes and the enforcement of the regulations are also important.
Right now, those who may want to circumvent the rules are fully aware that, when it comes to dairy products, existing border controls are not being applied in a consistent and uniform way in Canada. Proper law enforcement and audits are therefore essential in order to discourage anyone seeking to exploit these loopholes. People can be very creative when it comes to getting around tariffs and quotas. The problem with pizza toppings is a prime example of that.
The Canadian dairy system is unique and has proven its worth. It provides dairy producers with an income that allows them to cover their costs and gives processors a stable environment. It helps maintain the social fabric and contributes to the economic development of our communities, while providing consumers with high-quality products at competitive prices. We therefore believe that it is necessary and more important than ever for all stakeholders to work to support supply management. That is obvious.
The Conservative government managed to maintain high tariffs at our borders in recent trade agreements. This is essential to maintaining our dairy system. We hope that the Liberal government will not undo the Conservative government's work to protect the supply management system.
With respect to border controls, at least four departments are affected by the issue of effectiveness. The Department of Finance ties into the payment of tariffs, and the Department of Public Safety is responsible for border controls, through the Canada Border Services Agency. There is also the Department of Agriculture and Agri-food, because this has to do with agricultural policy, and then there is the Department of Foreign Affairs, since we have trade agreements and we have made commitments to our partners. Our trade partners also have specific requirements and agricultural policies as well.
In conclusion, if we work hard to fix the problem with diafiltered milk and other dairy substitutes that are crossing our borders, we can restore the balance in our supply management system, which will benefit the entire Canadian dairy industry. We will restore harmony in the entire industry, from producers to processors, to distributors, and all the way to our esteemed consumers.
For more than 45 years, we have managed to keep Canadians happy with high-quality dairy products at a fair price, in accordance with the wishes of this House.
To succeed, the industry needs to be supported by a regulatory and policy framework that maintains supply management and the three pillars.