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Dairy Supply Management and the Trans Pacific Partnership

Posted: 01/27/2014 3:56 pm

Barrie McKenna is at it again, declaiming on the benefits of getting rid of supply management in dairy. His rationale? Because that mechanism must mean that Canada has to sacrifice other possible trade gains in the Trans Pacific Partnership (TPP) negotiations. He maintains this without any evidence.

Moreover, every country in the world supports dairy and other agricultural commodities in some way. Supply management matches domestic demand with domestic supply and is a most sensible and rational way to organize milk production, where 40 per cent of it is consumed locally. Each dairy farmer must have quota to produce in this system, and beyond about five percent of the Canadian dairy market, it is closed to imports. And given that supply management matches supply and demand, Canadian farmers to not participate, generally, in the export trade.

Our dairy farmers are also not subsidized by the Canadian taxpayer in the way that European and American dairy farmers are subsidized, nor do they belong to a massive cooperative, Fonterra, as 92 per cent of New Zealand farmers do. Fonterra is the darling of supply management critics like McKenna, because it is mistakenly perceived to be untouched by regulation. It is, in fact, very heavily regulated.

The NZ system bears more than a passing resemblance to Canada's own. In order to produce milk for Fonterra, the farmer must own shares in Fonterra -- sort of like quota. Incidentally, it also costs consumers much more to buy milk in NZ than it does in Canada; the commodity has been labeled a luxury product in New Zealand by some.

Three litres of Anchor brand milk on the grocery store shelf costs the equivalent of C$5.59. I buy my four litres at my local supermarket for C$4.19. And strikingly, the US dairy organizations, the National Milk Producers Federation (NMPF) and the U.S. Dairy Export Council, have demanded that the US government not negotiate with NZ over dairy liberalization within the confines of the Trans Pacific Partnership. In their view, New Zealand does not operate "on a level playing field." And the likes of Barrie McKenna maintain that Canada should? What is it that US dairy knows about Fonterra and NZ that Mr. McKenna does not?

He also notes that "Canadian negotiators could find themselves fighting a rearguard action to protect supply management in the face of complaints from other major agricultural exporters at the TPP table, including the United States, Australia and New Zealand." I have noted above how NZ protects its dairy farmers most successfully. What of Australia? It really doesn't have much of a dairy industry left following complete deregulation and the removal of subsidies in 2000.

Dairy farms are grown over with weeds, and many can't be sold. Bankruptcy has visited more than one dairy farmer as they are unable to make ends meet. An Australian Broadcasting Corporation story in early 2013 made that point forcibly. As one dairy farmer, Nigel Hicks, noted in an interview: "At the moment ... we've been getting around 25 or 26 cents a litre. Cost of production does vary from farm to farm, but for us it's around 43 cents a litre."

He goes on to point out that the number of dairy farmers in Australia has about halved over the past decade, from 12,000 to 6,700: "Just in this little block where I live there has been approximately 12 or 13 farms there. We're down to three now. It's been like a slow cancer eating away. Before long there just won't be any." If this is the case, why was the Canadian food processor, Saputo, so keen to buy the Warrnambool Dairy, Australia's oldest? As it turns out, it wants it largely as a platform from which to sell into Asian markets. Australians be damned!

Finally, what of the US? It subsidizes dairy production with taxpayer dollars, and keeps about 97 per cent of its dairy market off limits to all but US dairy producers. Remember, Canada only reserves 95 per cent of its market for its producers. When Canadian consumers "outshop" and pick up American milk in Niagara Falls, NY, they are not nearly paying the cost of its production.

Canada tried the subsidization route before supply management system was introduced, but found it too expensive and dislocating. As the then-minister of finance, Donald Fleming, told cabinet on 6 April 1960, "Payments [to dairy farmers] as high as $47 or $48 million would seriously upset the balance of the budget." And in these days of budget balancing in Canada, how would subsidies to dairy farmers of $2-3 billion be perceived? Not well, I imagine.

Further, a study out of Texas A & M University, "The Economic Impacts of Immigration on US Dairy Farms," partially supported by the US Department of Agriculture, suggested that "Eliminating immigrant labor in dairy farms would reduce the US dairy herd by 1.34 million head, milk production by 29.5 billion pounds and the number of farms by 4,532. Retail milk prices would increase by an estimated 61%." In short, the paper pointed out that immigrant, read Hispanic, labour gets paid less, with fewer benefits than native-born workers. In Canada, by and large, we don't employ the same sort of immigrant labour on our dairy farms. A 61 percent increase in milk prices would be formidable -- dairy farmers hope that the Obama administration does not make it more difficult to employ illegal immigrants.

What this brief discussion makes clear is that in no country does dairy operate without some sort of government and/or special arrangement assistance. And this should guide Canada's activities in this space -- as Jonathan Swift said in Gulliver's Travels, "nothing is greater or lesser but by comparison." And the only country that has seen fit to cast dairy farmers on the mercy of "the market," Australia, is in danger of losing that industry in its race to the bottom.

Moreover, every critic of supply management huffs and puffs of the international opportunities we are missing because of our made-in-Canada system. They don't seem to realize that only seven percent of total global dairy production is traded internationally. And NZ already controls about 33 per cent of that seven per cent -- it doesn't leave much for everyone else! Clearly, 93 per cent of dairy production in all countries stays at home. Given this, will the international market eventually implode as more and more countries attempt to send more and more product into it? China can only take so much milk and its by-products, and India already has the world's largest dairy industry.

Finally, is a successful negotiation of the Trans Pacific Partnership, the starting point for Barrie McKenna and his cohort, a good thing? The objective experience of most Canadians would probably say no. Its investor rights provisions and almost-totally corporate agenda should be a warning bell to citizens in the 12 countries presently in negotiations.

In NZ, the latest public opinion poll puts the nays to TPP at 65 per cent. In Canada, widespread ignorance of its very existence, (which the government hopes will continue), means that most Canadians don't understand how it will impact them. Secrecy and opacity have been this country's organizing principles governing TPP participation.

Canada only joined the discussions for round 15 (!), and a condition of our membership in the talks was that we had to accept everything in the previous 14 rounds - we could not change a comma. Does everything that was agreed to in those 14 previous rounds reflect Canadian preferences? I very much doubt it. The only good thing to emerge recently from these talks is that the Obama administration does not yet have what is referred to as fast-track authority to complete the negotiation. If Congress does not provide it, the TPP talks are dead.

Lastly, the TPP is not really about trade. Of its 26 chapters, only two address trade issues, while the other 24, as the Council of Canadians points out, "deal with issues as diverse as how a government regulates corporate activity, what Crown corporations can and cannot do, how long pharmaceutical patents or copyright terms should be, how the Internet is governed, the sharing of personal information across borders, banking and taxation rules, and when a company or investor should be compensated when environmental or public health policies interfere with profits." Happily, areas of disagreement among participants are growing as the US asserts a hegemonic influence. It is not interested in the give and take of negotiations -- only the take.

Supply management is being unfairly pilloried again by ideologues who do not understand the world of dairy. Those who put all their faith in the perfectibility of the market as a sentient, rational and understanding being. The 2008 collapse doesn't seem to have made an impact on them at all. Certain regulation and organization is a Good Thing. Supply management in dairy works very efficiently and is cost-effective. As we contemplate perhaps agreeing to a TPP, let's not throw the baby out with the bathwater.

 
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