Tariffication in the Dairy Industry

Nelson Coyle

Commission canadienne du lait, Ottawa, Ontario

Good afternoon I want to thank Dr. Coffin for inviting me to say a few words as discussant this afternoon and to congratulate Professors Schmitz and Papillon on their papers.

This is not my normal turf - a gathering of ag economists. At the CDC, we work very closely withour stakeholders and of course, play a major role in the economy of the dairy industry as the largest exporter of dairy products and as the buyer of last resort. This is the context in which I want to place my remarks.

It may be useful to recall a comment by Mike GiffordonthenatureofthecaIculationsthatwent into setting the level of tariff protection for sup- ply management -it was “art” rather than “sci- ence”. This “art”, in the case of Canada, was highly derivative. We were not Grand Masters, forging a new style but rather our negotiators watched while the EC and the United States brought a decidedly post-modem touch to the calculations and then we copied them carefully.

This was a business decision Why would Canada open its borders when the borders of the commercial giants remain resolutely closed? How are our farmers and processing plants to compete if we expect them to accept major vol- umes of imports at lower prices while they arc denied the opportunity to reciprocate? Why should Canada open its borders to US ice cream when part of the modest import access offered by the United States for ice cream was granted to that giant of dairy economies - Jamaica and none to Canada?

It helps to retain a sense of humour when looking at trade issues.

Cheese is sometimes available at about $2SOperkgonthe worldmarket. Ourindustry needs about $5.50 per kg to obtain current re- turns. It doesn’t take much calculating to dem- onstrate that, to maintain current protection levels, a tariff of over 100% is needed to pro-

tect supply management. There are no doubt some in the audience

who have no desire to protect supply manage- ment. I will not attempt to change your minds - but it is worth pointing out that our dairy industry is more environmentally sound than in countries that are encouraging mega devel- opment, provides stable employment for thou- sands of Canadians, is the cornerstone of the rural economy and society in major parts of Canada and is technically efficient to the point that semen and other aspects of dairy technol- ogy are major exports.

The problem with the world market is that it is too often a dumping ground for the last 10% of production that a domestic industry does not want. There is nothing rational about the price, therefore. No long term milk price series will provide guidance on what the price of cheese should be. The EC and the United States don’t want to deal witheachother’s left- overs in their markets - and neither does the Canadian dairy industry.

However, to characterize the international marketplace as “leftovers” isn’t fair either - there is a lot of marginal or incremental pro- duction that ends up being exported. The Irish took over our chocolate industry in the 1980s with subsidized exports using milk that wasn’t wanted within the EC but that the EC was re- quired to buy -or to subsidize for export. And now that the new GATTAVTO agreement is curtailing overall subsidy levels and with the strength of their currency, Canada has a chance to resume production of chocolate from Cana- dian milk - and maybe even to export some of it ourselves. In Europe, there may be other uses for this marginal production that can be more profitable, particularly in the current price environment.

This is the context that we are working in

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- an assumption that tariff levels will be sus- tained over the next six years, providing ade- quate protection to the Canadian industry along with an ongoing desire to repatriate those parts of the Canadian market where pos- sible that have been taken over by imports in the past and that can be supplied by Canadians. At the same time, we expect to maintain an active export program, supplemented by addi- tional, optional exports that I will speak about in a minute. Of course, the outcome of the pos- sible trade panel with the United States will be very important in the viability of this scenario.

The repatriation of our domestic markets is also a business decision. It is good business to try to supply as much of our domestic market as possible, using price discrimination to do so. One of the realities of the marketplace is that tariff quotas are becoming less and less relevant over time. More and more dairy prod- ucts are being consumed in a form that places them outside of the import control system both in the home and in restaurants. The spe- cial class system being put in place on August 1 will allow our industry to supply these mar- kets.

It is good business to try to increase exports. This is not as difficult as it may seem (particu- larly in the current market environment of high international prices) because we have been ex- porting dairy products for many years. But there will be a new optional program launched in the new dairy year which will allow indi- vidual producers to make the choice to in- crease exports provided that a reasonable offer is available. In turn, exporters will have the ability to enter into long term, ongoing market

contracts since they will be able to obtain as- sured supplies.

This will have the effect of allowing the industry to make better use of existing capacity and improving efficiency which should in turn benefit the domestic consumer. Tariffication shouldn’t affect this market expansion be- cause many of the markets will be in countries without high tariff barriers or in products not covered by tariffs.

In summary, the following points need to be made about tariffication and the dairy in- dustry.

1. In the major trading countries, it will be business as usual in the dairy sector in terms of price levels.

2. Current market conditions as well as the constraints on subsidized exports appear to be having some effect on the international trading environment.

3. High tariffs are needed by the Canadian dairy industry to ensure that imports will not come in and disrupt the domestic market for traditional dairy products. Certainly, a tariff level of 40% would be woefully in- adequate.

4. The domestic industry is moving to ex- pand through price discrimination and an optional export program. This will position the industry to better accommodate what the new WTO round brings as well as any changes required because of NAFTA.