11/20/2011 04:00 EST | Updated 01/19/2012 05:12 EST

Canada Supply Management: Free Trade Talks Could End Food Pricing System

MONTREAL - Canadian cheese lovers, Marianne Renaut feels your pain.

The Belgian-born Quebecer is shocked by the high price of Canadian dairy, and trips to the grocery store here can rekindle a longing for the bargains available in Europe.

So what's the story with Canadian grocery prices?

It begins with supply management.

The system is a hidden, ubiquitous part of everyday life — one many Canadians aren't even aware of.

It affects the market for Canadian milk, cheese, yogurt, chicken and eggs — which can be vastly more expensive here than in the United States, with the gap widening, according to the OECD.

It is a staple of the rural economy. And it's now the subject of an increasingly heated debate, amid international free-trade talks and growing doubt about its long-term future.

The decades-old system was designed to protect Canadian farmers from volatile market fluctuations with made-in-Canada minimum prices. It also imposes tariff controls on foreign competition and sets quotas for domestic producers.

Critics say it artificially drives up prices at the cash register and limits innovation. Farmers, meanwhile, argue that it preserves their way of life and cross-border price comparisons only tell part of the story.

News last week that the federal government might face pressure to abandon it during negotiations for a trans-Pacific trade zone created political sparring in Ottawa.

But the protectionist system appears secure, at least in the short term. Meanwhile, observant Canadian shoppers who regularly travel abroad can continue comparing the selection and prices.

A randomly selected sample from last week illustrated the gap in prices at big-chain grocery stores in Washington, D.C., London, U.K., and Montreal.

A 300-gram block of old cheddar was (in Canadian dollars): $3.58 in Washington, $4.85 in London, and $6.99 in Montreal.

The price per gram of yogurt was also vastly different. In Montreal, a 500-gram container cost $3.99. In London, it was $2.18. In Washington, a much larger, 900-gram tub was available for $4.08.

"There are a lot of things that are more expensive in Europe — especially homes, clothes, shoes... But not food," said Renaut, who makes weeks-long visits to Belgium, England, France and the Netherlands several times a year.

"I'm always, always amazed when I come home here that I say: 'Wow.' "

"Groceries are very, very expensive here."

Supply management came into effect for the dairy industry in the late 1960s, and in the early 1970s for poultry and egg producers, as a means of protecting Canadian farmers from highly unstable world prices.

Such a system isn't unique to Canada, either, as other countries have also put tariffs on certain products.

Historically, it has had the steadfast support of politicians. Since its inception, Canadian policymakers from all parties have defended supply management for farmers, who wield considerable political influence.

Dismantling the deeply entrenched system wouldn't be easy anyway, since years of profitability have driven skyward the overall value of quotas given to individual farms. They have been estimated at $30 billion — or about $25,000 to $30,000 per cow — and compensation would be necessary if it were killed.

But critics of supply management say it's time for governments and farmers to consider changes because ballooning prices hurt consumers and impede free-trade negotiations.

"(The price of milk) is so high that a kilo of cheese is more than a kilo of steak," said Garth Whyte, president of the Canadian Restaurant and

Foodservices Association, which represents 30,000 members in its $63-billion industry.

"This is a system that's 40 years old (and) was written on a typewriter. The typewriter's gone, but the system remains."

Whyte's organization, which launched a campaign called Free Your Milk last month to push the issue, said restaurateurs are also struggling under the burden of mounting dairy prices.

He said he doesn't want to hurt the farmers, but he stressed that something has to be done.

"All we're saying is let's just sit down and talk about this," Whyte said.

But a canyon-sized chasm separates the debate's opposing camps.

Regulating milk production is crucial because, for example, even a one-per-cent national surplus in the U.S. can drop the price by 50 to 60 per cent, says the vice-president of the Dairy Farmers of Canada.

Ron Versteeg, who also runs a 100-cow milk operation near Ottawa, said the system allows dairy farmers here to make a decent living.

Versteeg questions the accuracy of retail-price comparisons. American and European dairy farmers receive direct and indirect government subsidies, while Canadian producers do not, he said.

He also noted that, under any new system, there's no guarantee the savings would be sent downstream to shoppers.

"One of the myths of consumer-product pricing is that any savings in production costs are always passed right on to the consumer and that just doesn't happen," Versteeg said.

When it comes to free-trade deals, Versteeg said Canada has signed several in the past, while keeping supply management intact.

He's confident the government will protect the system in its negotiations for the Trans Pacific Partnership.

Last week, the Harper government promised to do just that. But as the opposition pointed out, the price of admission to that negotiating table, for Canada, included at least a willingness to discuss supply management.

Both main opposition parties warned that, after the government moved to eliminate the Canadian Wheat Board, it could fold under pressure to abandon the dairy and poultry systems.

In the meantime, Canadian shoppers can continue sampling delightful quality cheeses and blaming the bitter aftertaste — the price discrepancy — on protectionist market systems.

"The pound and the Euro are much cheaper today than what they were 10 years ago — but even 10 years ago, I thought it was more expensive here," said Renaut, who buys quality cheese in Europe for a fraction of what she pays here.

"I'm always very happy to go back there, especially for the food."