09/12/2012 05:04 EDT | Updated 11/12/2012 05:12 EST

How Trade Negotiations Could Affect Your Groceries

The average Canadian likely knows more about the "Caramilk secret" than it does about the issues currently on the table in two major trade negotiations that could significantly impact the Canadian food industry. Clues about the status of the talks and the issues on the table have largely come only through leaked information and speculation.

In this two-part series, I will let you know about two controversial elements of the negotiations, and how our food may be affected.

The Trade Talks

Canada is currently negotiating two trade agreements -- one with the European Union (the Comprehensive Economic and Trade Agreement, or CETA) and another with 11 countries, including the United States, Australia, New Zealand, Mexico, and Singapore (the Trans-Pacific Partnership, or TPP). Among other things, these agreements aim to facilitate trade and investment between member countries.

CETA talks have been going on since May 2009. The talks are secret, and information is piecemeal. Some insiders say the agreement will be negotiated by the end of this calendar year.

TPP talks have been underway since 2007 but Canada only recently joined the negotiation. One sticking point to Canada's involvement: our system of supply management -- the first of two food-related issues on the table in the CETA and TPP negotiations.

Supply Management

In Canada, the egg, dairy and poultry industries operate under a system of "supply management." The system was put into place in the 1960s and 1970s and is essentially a quota system that limits how much food is produced, and imposes high tariffs on imported goods. The goal of the system is to ensure that the Canadian need for these products is primarily filled by Canadian farmers.

There is no question: supply management is a hot issue, especially in Canada.

Those in support of the system argue that it ensures fairness for dairy farmers, and benefits milk processors, consumers and the Canadian economy. In this camp, protection and predictability are essential to successful industry.

Critics of the system argue that supply management leads to inefficiencies and inflated prices, and stifles innovation and trade with other countries. The way the system is run means there is not often excess milk available for new players in the market. And even if there was extra available, the high tariffs imposed on imported products make it difficult (if not impossible) for those new players to come to Canada. In this recent article, the president and CEO of the Canadian Restaurant and Food Services Association claims inflated prices caused by supply management mean Canadian restaurants can't use cheese and other dairy products as much as they would like in menus.

The recent case involving Chobani Greek Yogurt highlights the battle between protection for Canadian farmers and innovation and improved trade in the Canadian food industry.

In April 2011, the manufacturer of Chobani yogurt applied for permits to import the yogurt (duty-free) and sell it in the GTA for "test marketing." The manufacturer would be eligible to import the yogurt duty-free if it was determined that a "unique production process" was used and that investment in Canada was planned. Assuming testing was successful, the company committed to invest millions of dollars in a manufacturing plant in Ontario.

In October 2011, the Government granted the permits, meaning that Chobani yogurt could be produced for the GTA using lower cost U.S. milk (the United States does not have a system of supply management; instead, the Government pays direct subsidies to dairy farmers to support their incomes, resulting in lower milk prices in the US than in Canada).

After the permits were granted, a number of Canadian companies (including the producers of Yoplait and Danone yogurts) challenged the issuance of the permits. They highlighted serious concerns about the alleged negative impact on Canadian jobs and investment in dairy processing in Canada, and argued that the permits conferred an unjustified competitive advantage to the manufacturer of Chobani, given its ability to use much less expensive U.S. milk -- the battle lines were drawn.

In a decision released in June 2012, the Federal Court determined that the Government's decision to grant the permits was reasonable. As of yet, no appeal has been launched and the window to do so is closing.

This case highlights the issues relating to supply management in Canada: trade, investment, innovation and competition vs. protection.

And indeed, supply management is very much on the table as Canada negotiates the CETA and TPP agreements. All of the countries involved in these negotiations want supply management gone -- they want full access to the Canadian market for their companies.

In fact Canada was initially rejected from TPP discussions because of supply management. The fact that we're now involved in the negotiations has led some to conclude that Prime Minister Harper is willing to discuss scrapping the program.

No question, there will be heavy pressure on the Canadian government to abandon the system in both the CETA and TPP negotiations.

So, what does that mean for us Canadians? Dairy, egg and poultry farmers may get the raw end of the deal -- they will lose their protected market. However, hopefully the Government can ensure a fair and safe transition from supply management that protects our farmers.

On the other hand, other Canadian industries (including many non-dairy or poultry Canadian farmers) will get increased access to foreign markets.

And as for the rest of us, if you believe the critics who say supply management leads to inflated prices, we can look forward to less expensive products and hopefully a whole lot more yummy cheese-based dishes in our favourite restaurants.