European cheese imports serve up tough choice for Champagne

More European cheese is set to ship to Canada tariff free this summer, as a hotly anticipated part of the EU trade deal rolls in.

Nearly 18,000 tonnesmay sound like a lot. It's actually arare, thinslice of Canada's tightly controlled cheese market.

The knives are out among those eager to carve it up for themselves.

So Trade Minister Franois-Philippe Champagne has a tough call to make: who gets to import itand reap the rewards?

• 'We are ready': Canada-Europe trade deal set to kick in, mostly, by July 1
• $350M dairy programs to help dairy farmers, processors compete under CETA

Proponents of the Comprehensive Economic and Trade Agreement (CETA) stokedexpectations among cheese lovers eager for high quality, lower-priced options.

The trade department sought advice on how to allocate the new tariff rate quota (TRQ) last year, but has keptmum about what it heard and what it intends to do.

SylvainCharlebois, a researcher in food distribution and dean of Dalhousie University's Rowe School of Business, said consultations were"highly politicized."

But if new quotaisn't divvied up correctly, he said, "you actually can jeopardize the quality of the products that we already have."

'Difficult to justify politically'

Retailers arguethey should import all the new cheesebecause that's what's most efficient.

Not so fast, Canada's dairy sector says: we're the ones whose products are threatened, so we should get a cutto offset that risk.

Quebec Agriculture MinisterLaurentLessardhas weighed in, askingChampagne, who represents a rural Quebec riding, to support the domestic industry byallocatingimport quota toprocessors.

"The government needs to make a decision, and make an announcement quickly in order to prepare," Jacques Lefebvresaid.

As head of the association representing Canada's dairy processors, he's worriedsmaller operationswill be disadvantaged if it's all donein a rush before CETA is provisionally applied on July 1.

Creating a profitable new business line for big retailers "is difficult to justify politically," Lefebvresaid.

Will demand last?

Canadian dairy prices are controlled by limiting how muchmilk farmers can sell. Imports are strictly regulated: beyondanegotiated quota, the tariffs onincoming dairyproducts are so high they're priced out of the market.

In talkswith the EU, Canada agreed to more tariff-free cheese, equivalent toabouttwo per cent of Canada's overall milk production.

The government will allocate16,000 tonnes of new, tariff-free quota annually for fine cheesesand 1,700 tonnes for industrial cheese.

CETA also requires Canada to reallocate800tonnescurrently held by other countries to the EU, on top of the 13,471 tonnesof European cheese that already enter tariff free under World Trade Organization (WTO) rules.

Imports make up about five per cent of Canada's current market. The new EU cheese will bumpthat to nine per cent (7.5 per cent will be from Europe.)

Champagne's department saysdemand is risingby about one per cent per year, so as the EUimports increase gradually over five years, the Canadian industry willadjust.

But this growth in sales something Canadian cheesemakers argue they drove, with their marketing goes to Europeans, in return for other things Canada gainedin CETA.

"Demand is robust but is it going to last? Because we're getting older," Charlebois said. Plus,many immigrants don't seedairy asa major part of their diets.

"Demographics will absolutely affect how big the pie will be going forward. And that's going to affect the ability of some of our cheese to survive."

'Not a replacement'

CETAintends to shake up the market by requiringat least 30 per cent of the new annual quota to goto "new entrants" who don't currently import cheese: a new entrant could be anyretailer, distributor,cheesemaker or producerco-operative that wants to expand product lines.

Processorsare unlikelyto bring in cheeses that competewith what they make they're more likelytoimport more unusual cheeses. Profit from their distribution could thenbolsterexisting businesses.

Grocers, on the other hand, care aboutsales margins. While some cheeses sellas loss leaders, the markup on cheese can be as high as 100 per cent, on top of what retailers chargefor product placement.

Large retailers couldsell EU cheese under store brands. Canadian products could be replaced with European cheese, if that's what's profitable.

In their pitch to the government, retailers have suggested importquota be allocated based on a store's current market share or in other words, where domestic cheese is alreadyselling.

David Wilkes, senior vice-president of the grocery division of the Retail Council of Canada, says the government has a "unique opportunity" to ensurenew cheesesreach consumers efficiently.

He saidgivingquota to processors or distributors could add 20 to 40 per cent to product costs.

"We recognize the need to support both domestic and imported products throughout our stores," Wilkessays."It's not a replacement. It's a growth opportunity for both categories."

'Not necessarily' lower prices

Will consumers pay less if retailers import it all?

"It's not necessarily a lower price point,"Wilkessaid, noting that profit margins vary by store."That will be the decision of the individual retailers."

Cheese demand is highly elastic, Charlebois explains but consumers are used to paying for expensive cheese.

"It's a dangerous road" to predict stores will drop prices, he said. Why would they, when sales are up?

Early on, consumers mayhave more choice and there may be price wars. But then some businessesmay drop out.

Less competition over time would be"a highly undesirable scenario as far as I'm concerned," the professor said.

Charleboissuggests splitting quota between retailers, large processors and artisan businesses.

"If youdon't give quota to those in the [cheese]business, you may penalize those who are actually doing well," Charleboissaid. "My concern is that the real innovators in the industry will be forgotten."