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May 13, 2013

13 May 2013

System that keeps dairy prices high needs adjustment

The Gazette, p. B07

Pizza may soon become less expensive in Canada. Or at least, pizza will become less expensive for pizzerias to make. The Canadian Dairy Commission has recently changed its method for classifying the milk that is used in mozzarella-cheese production. The change exempts Canadian-made mozzarella from the pricing arrangement that is used for other dairy products under Canada’s long-standing supply-management system for those products. The change, which takes effect June 1, is expected to reduce the cost of Canadian-made mozzarella purchased by pizza restaurants.

Whether pizza will actually become more affordable for Canadian consumers remains to be seen. But the change in the dairy commission’s policy is a sign of the mounting macroeconomic forces that are compelling dairy farmers to rethink their traditional supply-management strategy.

Supply management, Canada’s production-quota system for dairy and other commodities, was established more than 50 years ago to balance supply and domestic demand for dairy products. Under this system there are prohibitive tariffs, coupled with quotas, on dairy products imported from other countries. But with the food-price hikes seen in recent years, many food processors in Canada have been looking for ways to reduce production costs. One large national pizza chain found an efficient way to escape the duties — which turned out to be the catalyst for the recent change of policy by the dairy commission.

Pizza Pizza Ltd.’s way around the high import cost was to purchase mozzarella that came as part of packaged cheese-and-pepperoni-pizza topping sets in the United States, and import them. It is estimated that this resulted in as much as 4,000 tonnes of U.S.-made mozzarella coming into Canada annually in the duty-free packages. While it was convenient for the company, this import volume became so significant that Canadian dairy farmers felt the need to fight Pizza Pizza’s practice, and they challenged it before the courts. The resultant lengthy, obscure battle before the Canadian International Trade Tribunal, which is still going on, has led to the creation of a new pricing class for milk used in mozzarella, which is to come into effect June 1.

The federal government has made access to foreign markets for Canadian goods a top priority. Canada is trying to close deals with the European Union while reaching out to the ever-growing Asia-Pacific market by engaging with the trans-Pacific Partnership. But Canada’s continuing attempt to have it both ways — demanding greater access to other markets while essentially prohibiting access to our market for some commodities, like dairy — has undermined our moral authority abroad when it comes to negotiating trade deals.

Essentially, dairy farmers do not have a choice but to change. Supply management in its current unbending, non-adaptable form needs to improve.

For years, dairy farmers believed that any alteration, however insignificant, in supply management would mean the end of supply management as a whole. But the creation of the new milk category for mozzarella signals that they are now willing to recognize that some situations warrant adjustments.

Our demographic situation has made growth of domestic dairy sales impossible. Milk consumption per capita in Canada is at an all-time low, and dairy farms are disappearing despite our protectionist policies. In 1971, when supply management in dairy went into effect, there were 122,000 dairy farms in Canada. Today there are fewer than 13,000. A demand-focused approach to dairy products is needed. Supply management has played an important role for our agricultural economy, but those days are long gone.

A new supply-management model should increase the competitive advantage of our food-processing and food-service sectors, not destroy it. The Canadian Dairy Commission is finally recognizing that it needs to change, which is welcome news. We may be witnessing the emergence of a new approach — Supply Management 2.0, if you will. But if this tactic fails to provide continuing evidence that the system can adapt as needed, it too will need to go.

Sylvain Charlebois is associate dean of the College of Management and Economics at the University of Guelph in Guelph, Ont., and an associate researcher with the Montreal Economic Institute. The views reflected in this column are his own.

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