Winnipeg Free Press - PRINT EDITION

A small but welcome crack in supply management

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GUELPH -- The Canadian Dairy Commission is finally recognizing it needs to change. We may, in fact, be witnessing the emergence of a new approach: let's call it Supply Management 2.0, if you will.

The commission recently created a new milk class for mozzarella cheese, which takes effect June 1 and is expected to reduce costs for Canadian-made mozzarella used by restaurants that make pizza. But whether or not pizza will become more affordable for Canadian consumers remains to be seen.

Regardless, mounting macroeconomic forces are compelling dairy farmers to rethink their strategy around supply management.

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. Prohibitive tariffs, coupled with quotas, on dairy product imports sometimes exceed 300 per cent.

Many food processors in Canada, including the food service sector, were forced to look for different ways to reduce production costs. Importers found a way to circumvent current rules to escape duties; one company in particular, Pizza Pizza Ltd., became good at it.

Pizza Pizza Ltd., one of the largest pizzeria chains in the country, figured out it could purchase mozzarella in packaged cheese-and-pepperoni pizza topping sets in the United States and import them into Canada. It was estimated as much as 4,000 tonnes of American-made mozzarella was now coming into Canada annually in duty-free kits. While it was very convenient for the company, import volumes became so significant, dairy farmers felt the need to fight.

Unsurprisingly, dairy farmers decided to challenge Pizza Pizza's practice before the courts. It was an obscure, lengthy battle before the Canadian International Trade Tribunal, which is still ongoing, that has led to the loosening of the regulation on imported mozzarella, set for June 1.

The current government in Ottawa has made market access a top priority. Canada is trying to close a trade deal 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 negotiating trade deals.

Essentially, dairy farmers don't have a choice. They need to change, and supply management, in its current unbending, in-adaptable form, needs to improve.

For years, dairy farmers believed altering supply management in any way, however insignificant, would lead to the end of supply management as a whole. And as Canada's economic architecture is so focused on trade, supply management, they believed, could very well disappear one day.

Fortunately, the creation of a new milk category signals dairy farmers are now willing to recognize some situations warrant adjustments.

Because of Canada's demographic situation, domestic growth is impossible. Milk consumption per capita in Canada is at an all-time low, and dairy farms in Canada are disappearing, despite our protectionist policies. In 1971, when supply management in dairy came into effect, there were 122,000 dairy farms in the country. Today, there are fewer than 13,000.

A demand-focused approach to dairy products and research is clearly needed. Supply management once played an important role in our agricultural economy, but those days are long gone.

The commission's move, no matter how small, is welcome news. A new supply-management model should increase the competitive advantage of our food-processing and food-service sectors, not destroy it.

But if this tactic fails to provide continuing evidence that supply management can adapt, it will need to go.

Sylvain Charlebois is associate dean of the college of management and economics at the University of Guelph.

Republished from the Winnipeg Free Press print edition May 14, 2013 A9

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