No good alternative if supply management ended: report

A new report says dairy is trivial in the big scheme of North American Free Trade Agreement talks.  |  File photo

Canada should not bow to American demands to eliminate Class 7 milk or the entire supply management system for dairy, said policy expert Al Mussell.

The research lead at Agri-Food Economic Systems said there is no good alternative to the current system.

But Mussell also said Canada should get ready for changes to the system, which are inevitable in a new trade environment.

“What I get tired of are (people) that are in disbelief that we don’t just unilaterally get rid of it,” he said last week after releasing his organization’s latest policy report. “But then replace it with what? The free market? It isn’t a free market anywhere.”

Class 7 milk has become a lightning rod in the current trade discussion after U.S. President Donald Trump identified Canadian dairy as a threat to American dairy farmers.

The class is a way to clear the Canadian skim milk powder market by offering a competitive price in both domestic and export markets. It was first implemented in Ontario and then adopted nationwide.

Canada considers Class 7 milk to be non-subsidized and outside World Trade Organization limits on subsidized exports.

But countries that signed the Nairobi Declaration in 2015 have agreed to eliminate subsidized exports by the end of 2020, and as such Canada will be out of the dairy export market as of 2021. However, Class 7 products would remain outside this limit.

“We’re going to have to find a way that we can maintain incentives for investments and keep our processors growing in that environment,” Mussell said. “Class 7 is a critical element of how we might be able to operate in that environment.”

Mussell and his colleague, Douglas Hedley, argued that the dairy quota system based on butterfat has really become one based on skim milk.

“Absent Class 7, the supply management system has evolved to a point at which it has flipped from being bound by a butterfat quota to being de facto bound by an implicit skim quota,” says the report. “If Class 7 were suddenly removed, the implication would be a mass reduction in the butterfat quota triggered by the need to bring the skim market into balance based largely (and completely as of 2021) on the domestic market.”

The industry would have to cut quota production, dump excess supply and ultimately the system could collapse, the report says.

That would be acceptable to those who call for supply management’s demise.

Martha Hall-Findlay, chief executive officer of the Canada West Foundation, has repeatedly made that case.

In late June, she said supply management is the only one of five main issues on the negotiating table at North American Free Trade Agreement talks upon which Canada can act.

“What are we sacrificing to please a small number of well-to-do producers?” she wrote in a newsletter. “Dismantling supply management is the right thing to do.”

But Mussell said dairy is “trivial” in the big scheme of NAFTA talks.

“You should worry,” he said of the negotiation progress. “But you don’t panic. Some people are saying we need to conclude the talks so just give (in) to them. People don’t understand what’s at stake.”

He also said the Canadian and American dairy systems are more alike than people think. The only differences between the two are that Canada limits supply with quota and Canada is bound by the soon-to-be-gone export caps, he said.

And, he said the implementation of Class 7 actually made the Canadian system more like the U.S. system. The U.S. should be careful what it asks for.

“By requesting a phase out of supply management or removal of Class 7, which will cause the drowning of the milk supply management system and ultimately generate the same result, the U.S. will push Canada toward a dairy policy even more like their own,” said the policy paper.

Lack of supply control, periodic surpluses, lower prices and increased exports from Canada would all result in the need for the U.S. to pay its farmers some type of deficiency payments or subsidies.

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