LOST IN A DAIRY MAZE
Little appetite in Ottawa for change despite calls to reform supply management system
Joe Makowecki may buy cheese by the truckload, but that doesn’t mean it’s easy to find.
Cheese is so scarce that the chief executive of Edmonton-based perogy maker Heritage Frozen Foods Ltd. has to secure cheese supplies through third-party brokers — often called “cheese ninjas” by Heritage employees for their ability to search through the back channels of certified sellers.
“We have guys that we know and we trust,” said Makowecki, whose company produces some three million perogies every day.
Scrounging for cheese is part of doing in business in Canada’s supply-managed dairy system for food manufacturers such as Heritage.
That system means cheese is forever locked in a short market, while other commodities such as flour and potatoes are openly traded on public exchanges and can be bought at a discount in times of oversupply.
“We’re continually looking for it, we’re constantly looking for opportunities to buy,” Makowecki said.
The tight control over the dairy market has been in place for decades, which satisfies local producers, but aggravates homegrown manufacturers, foreign producers and consumers. Discontent over Canadian dairy protections most recently surfaced in October during North American Free Trade Agreement renegotiations, as the U.S. demanded Canada remove its protections for dairy, chicken, eggs and turkey over the next 10 years.
Some see the U.S.’s demands as an opportunity. The Montreal Economic Institute said scrapping supply management would “allow Canada to promote its interests in the automotive and softwood lumber sectors.”
Other organizations, as well as economists, manufacturers and would-be dairy exporters, have made similar calls, arguing that Canada’s higher dairy costs (cheese, milk and butter often cost more than double that of U.S. products) are no longer defensible. And in a global economy that is increasingly free trade, many say it’s time to scrap supply management altogether.
The first protections for the dairy industry were introduced around 1970. Additional protections for chicken, eggs, turkey and other products were phased in over the following decade. Today, dairy markets are controlled through production quotas, fixed pricing and heavy tariffs on imports ranging between 246 and 300 per cent.
Supply management for dairy was largely viewed as a workable system until 1995, when a World Trade Organization agreement forced Canada to remove several of its export subsidies. That decision effectively led to a major consolidation among dairy producers, and spurred the Canadian Dairy Commission, along with the federal government, to craft a new, much tighter pricing system, which remains largely in place.
This pricing system protects producers, but doesn’t adequately account for food manufacturers further down the supply chain, according to the Food Processors of Canada. It estimates that dairy input costs for Canadian manufacturers, which produce everything from frozen pizza to ready-made lasagna, are between five and 30 per cent higher than what U.S. companies pay.
That difference is partly because there is no mechanism in place to ensure manufacturers receive similarly competitive prices to what the producers get — a provision that exists in other protected industries, such as poultry.
“It’s creating a real disadvantage,” said Denise Allen, chief executive of the Food Processors of Canada. “There’s no safety valve to ensure that higher costs aren’t passed on to the processors.”
One result of those higher costs is that Canada’s food processing industry continues to bleed market share to U.S. competitors, with several major companies such as Campbell Soup Co, Kraft Heinz Co. and Kellogg Co. closing Canadian plants in recent years.
Canadian dairy processors such as Agropur Cooperative and Saputo Inc., meanwhile, have expanded into the U.S. or even Brazil to boost revenues.
Saputo chief executive Lino Saputo Jr. went so far as to say in June 2016 that Canada would have been “better off with an open market system.”
But opposition to Canada’s supply management is not confined to manufacturers. Foreign producers in the U.S., Australia, New Zealand, Europe and elsewhere have long argued Canadian producers are oversubsidized, and have repeatedly challenged this country’s export subsidies for dairy products under various free-trade agreements.
Canadian dairy producers, for their part, argue that the criticism is unwarranted. They say countries such as the U.S. and New Zealand may not have the same strict quotas and price targets, but their dairy industries are still subsidized through less-obvious price controls and other barriers that ultimately support domestic companies.
“It’s not like anybody lives with free trade in their agriculture sector anywhere around the world — everyone has their sacred cows,” said Donald Buckingham, chief executive of the Canadian Agri-Food Policy Institute, an Ottawa-based research group.
Martha Hall Findlay, head of the Canada West Foundation, said that argument is true to an extent, though other countries have dramatically pared back their dairy protections in recent years while Canada has not.
For example, the U.S. in 2014 introduced the Agriculture Act, which eliminated its dairy support program, the Milk Income Loss Contract program, and export subsidies.
Findlay has been among Canada’s fiercest critics of supply management. In particular, the Canada West Foundation has pushed back against the common claim by dairy producers that the system is integral to preserving the family farm.
A report by the organization found that there were approximately 145,000 dairy producers when supply management was introduced, compared to just 9,000 today. The average net worth of a dairy farm was nearly $4 million in 2015.
Findlay said there are dairy producers today that support the idea of eliminating supply management, but are afraid to say so publicly due to fears of retribution from the dairy lobby. Currently, would-be dairy farmers need to buy a certain minimum quota before they can enter the market — a prohibitively steep upfront cost.
“Here are people that want to grow their business, they want to expand, they want to compete internationally, and they can’t because domestically the intimidation is too great,” Findlay said.
Despite some calls for supply management’s elimination, it won’t be removed any time soon. Conservative leader Andrew Scheer supports supply management, despite being vocally in favour of free markets. Maxime Bernier, who was a front-runner for the PC leadership, is widely believed to have lost the race largely due to his resolute opposition to dairy protections.
The absence of Conservative opposition leaves little appetite in Ottawa to dismantle supply management. Moreover, the prospect of doing so hardly seems worth spending the necessary political capital.
Foreign Affairs Minister Chrystia Freeland has said Canada’s supply management system is not on the table in NAFTA negotiations.
In any case, the dairy supply chain is highly complex and determining a policy that would satisfy all parties, as well as one that fits into existing trade agreements, requires an immense effort.
“It can be a very difficult and time-consuming effort to get everyone onside,” said Ted Bilyea, former executive vice-president of Maple Leaf Foods Inc.
Even so, observers say Canada is now at a crossroads. The global economy is becoming increasingly open to trade and Canada is bleeding manufacturing market share to the U.S., so it may eventually be forced to look to new markets abroad. “The pathway to increased export for Canada is not clear and as it stands today, the costs of its subsidized export limits within current arrangements could become onerous,” analysts at Agri-Food Economic Systems, an Ontario-based research group, said in a 2015 research paper. “But this is an unacceptable situation as Canada’s import barriers and domestic market share shrink.”
Meanwhile, food manufacturers such as Joe Makowecki will continue to face restricted export markets while paying higher input costs for dairy.
Heritage Foods was established in 1972, right around the time supply management was first introduced in Canada, and Makowecki has little reason to believe it will end any time soon.
“I can only deal with what I know,” he said. “The three political parties clearly back it. Where will the change come from?”
Here are people that want to grow their business, they want to expand, they want to compete internationally, and they can’t because domestically the intimidation is too great.