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The False Promise of International Dairy Markets

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Exports are the panacea for all problems, or so it would seem from an even casual glance at news media, television commentary on the subject, or what your "common sense" tells you. Export more and up goes a country's GDP. Export industries then need to hire more workers to satisfy market demand in that far away country and employment in Canada benefits. This boost in trade, it is assumed, comes with free trade agreements that tear down barriers and make producers that are efficient and effective even more so, as well as winners.

We have seen that over the past 60 years as free trade has become the guiding principle of governments all over the world, beginning with the first tariff reduction round of the General Agreement on Tariffs and Trade, held in 1947-48. That round focused on cutting industrial tariffs, leaving agricultural protections in place for a variety of very good reasons. Clearly, having faced food shortages and starvation in the very recent past, Europeans were not keen to throw calorie production to the vagaries of "the market." Nor, as it turned out, were Americans, for quite different reasons. Some agricultural sectors were not amenable to freer trade regimes.

Dairy is one of those. As noted, Americans and Europeans recognized this back in the 1950s when they asked for, and received in 1955, a waiver of all agricultural obligations, including dairy. Has the context in which that was granted changed substantively since then? Not objectively, but perhaps it has in government and private sector attitudes where every item now represents a tradable commodity and every item is financialized.

That means that dairy is now in the crosshairs of those who want to exploit perceived international trade opportunities. China, or so we in the West continue to believe, wants high quality Canadian milk because, well, it is high quality Canadian milk. Much better than the stuff they produce. In our collective imagination, a tsunami of our dairy produce would be flowing westward across the Pacific once we gear up for dairy exports to Asia. However, right wing organizations like the Conference Board of Canada denounce the fact that we cannot exploit those willing and demanding markets because of our system of supply management. If we could just get rid of it to take advantage of obvious opportunities, or so they think, Canadians could only benefit.

But is this true? Is the People's Republic willing and able to absorb the millions of tonnes of dairy that we could ship and, perhaps more importantly, would the average Canadian beneift? I would say not on both counts, and if the Conference Board believes that that will happen, I have a bridge to sell in Florida. Most importantly, only about seven percent of total global dairy production is traded internationally, a figure that has not changed in some years. So, should Canadian dairy decide to ship to export markets, (something it is not at all geared up to do), it would be another competitor for that seven percent.

New Zealand is discovering this now, as northern hemisphere production gets cranked up on this promise. Forecast returns to their dairy producers call for a decline in the price received. Further, Canada is a higher cost producer of dairy products -- we must have expensive barns and buy or grow feed to keep cows cozy, well-fed and productive over our long winters. In Australia, New Zealand or the southern US where they have a geographical advantage, these are not required. In the case of NZ, cows are kept outside all year and graze on grass. And while the average New Zealand cow produces only about 3,500 kg of milk per year, which is dwarfed by the Canadian cow's 10,500 kg, those facts also make that country a very cheap and competitive producer of dairy products.

New Zealand farmers recognize this and use it to their advantage. That feeds directly into NZ's cornering of the international market in dairy products; it controls about 34 percent of that, which makes the country a dairy superpower. Indeed, even the American dairy organization, the National Milk Producers Federation, is wary of going head-to-head with the big New Zealand cooperative, Fonterra. The NMPF has demanded that the US not negotiate free trade in dairy with NZ within the context of the on-going Trans Pacific Partnership negotiations because "US-New Zealand dairy trade does not occur on a 'level playing field.'" Unfortunately for us, it is this dairy hegemon, NZ, that has the Chinese dairy market cornered.

So, where would Canada fit into this frenzy given that the US and Australia are both looking to export more dairy to the People's Republic, to say nothing of the European Union and New Zealand's stranglehold on the Chinese market? The Canadian company, Saputo, recently bought Australia's Warrnambool Dairy for use as a platform for exports to China. At the same time, Australian dairy farmers are experiencing the hardest times in decades - they are leaving the sector in droves because they are unable to make money, despite very high global milk prices.

In 2013, Australia produced only 9 billion litres of milk, down from 11.2 billion litres a year in 2004, a 20 percent decline. Part of that reduction reflects an inhospitable export environment. As the massive supermarket, Woolworths, Australia fresh food chief, Pat McEntee, has noted, export markets are "tough." Even domestic markets in that country are difficult, now that a few companies are no longer cutting milk with permeate, a watery, greenish waste product from the production of cheese that was added to milk to cut costs. When Australians discovered this addition, they were quite hostile! As for the US, there is a general consensus that dairy prices are going up by as much as 20 percent in some important markets as processors look to exploit Asian markets. After all, there is only so much milk to go around.

So, given the example of other countries, which sectors do we think would benefit from increased export sales? Consumers? Processors? Producers? I would think processors and those transnational corporations that sell overseas, but not consumers and producers, at least based on the experience of others whose dairy industries have begun to exploit international markets. Milk in NZ is much more expensive than it is in my province of Ontario. Further, to jump into export markets would mean getting rid of our rational and reasonable system of supply management, which provides consumers with competitive prices while also allowing farmers to earn a living wage. However, that is the objective of those ideological opponents of supply management. Regulation of any sort, in their eyes, is a bad idea, regardless of its obvious advantages for all sectors. Do we want NZ milk prices in Canada. And New Zealand is the darling of the deregulation set, although they don't understand the nature and operation of that system.

Let there be no misunderstanding; increased exports of dairy to countries like China will come at a direct cost to Canadians in the form of higher milk prices, as Americans are discovering. That would also change the nature of the Canadian countryside as supply management is compromised and mega-farms with a few thousand cows become more the norm, with adverse affects of small town life in rural areas. And we want to do this to crowd into an international trade in dairy products that is only seven percent of total global dairy production? As history has definitively demonstrated, if we were successful it could only come at the expense of some other country's exporters, who would then compete on price, which would replay the age-old dairy drama of increasing international surpluses, and lower prices, as dairy farmers become desperate to sell their product. We don't participate in this roller coaster in Canada, to the benefit of consumers, producers and processors. Let's hope it stays this way!