Dairy imports off to a slow start in Pacific Rim trade deal

As dairy, egg and poultry farmers wait for the Liberal government to explain the details of a $3.9 billion compensation package promised in this spring's federal budget, a seriousthreat from imports under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) has yet to emerge.

Tariff cuts began phasing in onDec.30 inthe Pacific Rimcountries that hadratifiedthe deal. Seven of the 11 signatories have ratified so far: Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam.

One of Canada's concessions allowedmoretariff-free imports of dairy, egg and poultry products, which normally are protected from foreign competition byCanada's supply management system.

Dairy farmers hadto "takeone for the team" and give up another share of their market,asthey did inCanada's2016European Union deal and the recently-renegotiated North American trade agreement.

But six months intothe CPTPP's implementation, the pain farmers anticipated has been slow to materialize.

Global Affairs Canada import data showno imports at allfornine of the 16 categories of dairy products.

Importers also haven'tbrought in any chicken, eggs,turkey or broiler hatching eggs and chicks underthe newCPTPP quota.

Even the dairy products that have landed are nowhere near their negotiated limits.

Canada issued import permits allowing500,000 kg of butter before July 31 (the year-end period for dairy industry calculations).But as of mid-June, only 184,515 kg have arrived just over a third of what'sallowed in tariff-free.

The story is similar in other categories:

• Only 8 per cent of the quota issued for milk powder has been used.
• Only 14 per cent of the tariff-freecream powder has landed.
• None of the three cheese categories has reached even five per cent of the tariff-free volumes allowed before the end of 2019.

Imports could rise eventually

It's too soon to conclude the full amount of what Canada conceded in the CPTPP won't be used.

When Canada agreed to morecheese under the Comprehensive Economic and Trade Agreement (CETA), the new Europeancompetition was similarly slow to materialize, but neared itslimit by the end of 2018.

As with CETA's implementation, industry and government officials say ittakes time for importers to findnew suppliers and position profitablenew importsinCanada'sgrocery mix.

Mathieu Frigon, president and CEO of the Dairy Processors Association of Canada (DPAC), said that "withfew pre-existing ties to some of these countries' dairy industries, and with little time to build relations and supply chains, these companies may still be in the process of building momentum."

When the CPTPP quotas were negotiated, the United States was part of the Trans-Pacific Partnership and expected to take upmostof this new Canadian market access.

But then PresidentDonaldTrump's administrationpulled out. The U.S. usedthe NAFTA renegotiationto recapture an even biggerslice of Canada's market.

While butter ships easily from a major global exporter like New Zealand, some of the product categories, like freshmilk and ice cream, are impractical to ship long distances across the Pacific.

"There was therefore little expectation of filling the quantities of certain products," Frigon said.

Nevertheless, to makethe strongest possible case for compensation, the supply managed sector often assumes full utilization of the CPTPP quota by the remaining countries when it calculates how much of its market has been lost to foreign competition.

Despite the early data, the Chicken Farmers of Canadastill believes all the allowable chicken willbe imported.

Without the U.S. in the deal, the only country in a position to export (frozen) chicken to Canada is Chile, CFC spokesperson Lisa Bishop-Spencer told CBC News. Chile's senate has notfinished ratifyingthe CPTPP but it is expected to do so soon, with the agreement coming into force there 60 days later.

Christine Anawati from the Egg Farmers of Canada told CBC News the egg quota is unlikely to be used in the near future becausethere are currently no plants in the CPTPP countries that meet Canadian inspection standards. However, "this could change as member countries take advantage of the business opportunity," she said.

Who gets to import?

The way the government allocatedthis newquota remains controversial acrossboth the dairy sector and grocery supply chains. A public consultation is underway until Aug.31 to consider better ways to determinewho gets to import and potentially profit from these limitedfarm products.

To the dismay of Canada's retail sector, the import permits for roughly 90 per cent of the CPTPP quotawere allocated to dairy processors.DPAC anticipates$730million in lost returns oninvestmentsbecause of the CPTPP.

Previously,permits to import European Unioncheese (and the associated profits) weresplit 50-50 between dairy processors and the retail sector, with half of the available quota required to go to "new entrants" under terms the Europeans negotiated.

Thatsystem was not considered a success. In particular, the Europeans were highly skeptical that Canada's dairy sector could be trusted to import the full amount of quota cheesemakerswere allocated, because the foreign imports inevitably compete with or replace domestic products.

Documents obtained by CBC News under the Access to Information Act show that in July 2018, the government remindedimportersthat if they did not intend to use their full quota, they had to return it by August 1tobe re-allocated to another importer prepared to fulfil the commitmentor risk losing the rightto importinfuture years.

At the time, Canada did not appearon track to import the full amount of its cheese commitment to the EU.

While the documents are redacted to block specificnames, they revealnumerous importers returnedunused quota while others scrambledfor what was re-offered, as the government tried to ensure all the quota would be used.

Other documents showofficials collectedearly import data prior to meetings with European officials, who were concerned the EUwasn't getting the market access itnegotiated. While specificnumbers were redacted, the Europeans appear to have been toldhow much cheese was imported by new entrants versus established players, as well as the breakdown ofimports betweenCanadian cheesemakers, distributors and retailers.

CBC News asked for these numbers but wasrefused. Global Affairs Canada says it does not compile this sort of information as part of its policy analysis.

Compensation details coming

In March, the federal budget proposed up to $2.15 billion in new funding to "sustain the incomes of eligible dairy, poultry and egg farmers" to deal with anticipated losses from CETA and the CPTPP. The exact criteria and method of delivery for this assistance are expected to be revealed this summer.

A further $1.5 billion has been set aside to protect the value of investments in production quota. (Farmers pay for the right to produce and sell certain volumes annually intothe marketing boardsystem.)

If the price of domestic production quota is not diminishedby these trade deals, this part of the compensationmay never be required.

The federal government has yet to announceany plans to compensate for losses fromthe revised NAFTA. A working group of industry and government officials is considering a long-term strategy for the supply managed sector's future.