[Recorded by Electronic Apparatus]
Thursday, May 16, 1996
.0907 
[English]
The Chairman: Good morning, everyone.
I guess we'll go to the Dairy Farmers of Canada, if that's okay, then to the Canadian Dairy Commission, and then to the National Dairy Council.
We've asked the witnesses - and everyone has agreed - to make their presentations, and then we will have the questions and comments from the members.
I see some people indicating that all the witnesses are not here yet. I understand that. If they're not here, they probably won't be able to present, but they may be here in due course.
Dr. Hedley, it's over to you to begin, please. Welcome to the committee.
Dr. Douglas Hedley (Director General, Industry Performance and Analysis Directorate, Department of Agriculture and Agri-Food): Thank you, Chairman.
My intention is to provide you with brief background facts on the federal subsidy on industrial milk and cream. To help us through this presentation, we have provided you with a deck that is a headline version and with data sheets that I will refer to as I go through the presentation.
Federal payments to producers of industrial milk and cream go back at least to the days of World War II and the price controls during that period. The subsidy re-emerged in the 1950s and 1960s as one of the instruments used by the federal government to help industrial milk producers. Recall that period of extremely low prices and considerable disruption in the market.
All through those years, industrial milk producers faced economic difficulties. Their production was used to make storable dairy products like butter and cheese that were marketed in internationally competitive markets. Their returns per unit were substantially lower than those for fluid milk, their milk quality was lower, and their market was subject to surpluses due to growing surpluses flowing from the fluid milk market operating under provincial fluid milk marketing schemes.
Between 1970 and 1974, the provincial milk boards and the agencies signed on to the national milk marketing plan. This included supply management for the industrial milk, and that was made possible under the Canadian Dairy Commission Act of 1966, with the Canadian Dairy Commission coming into operation in 1967.
As an incentive to participation, the federal government extended the dairy subsidy to industrial milk produced on fluid milk farms when a province joined the plan.
During the 1973-74 protein crisis, the rate of federal subsidy increased quite sharply in an effort to keep pace with inflation and declining milk supplies. In April 1975 a long-term dairy policy was announced by the federal government. As best I can tell, that was the first time that label was used in terms of trying to offer a period of stability to the industrial milk industry. It froze the rate of subsidy at $6.03 per hectolitre. For those of you who remember those days, it was $2.66 per hundredweight.
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Another element of that policy was the returns adjustment formula, which measured cost changes mainly through indexing and allowed the target returns to industrial milk to be adjusted several times a year if necessary to keep pace with the cost changes we were experiencing during that period. We have to recall that at that time the subsidy represented 24% of target returns, or approximately one-quarter of the receipts that farmers received for industrial milk. Whenever a change in target returns was agreed to, the support prices at which the Canadian Dairy Commission bought butter and skim milk powder were changed to reflect that change, while the subsidy rate stayed constant.
The subsidy is paid on domestic requirements, which is a measure of the amount of industrial milk needed annually to supply the Canadian consumers after taking account of regulated imports on butterfat. The subsidy is paid directly to industrial milk and cream producers by the federal government on a monthly basis. The subsidy is administered in terms of butterfat, based on standard hectolitres of industrial milk containing 3.6 kilograms of butterfat per hectolitre. At the end of each dairy year the payments are adjusted to reflect the actual measure of requirements for the year just ended.
Between 1979 and 1986 the scope of the subsidy was extended to cover up to 2.2 million hectolitres of special export production. The rate of subsidy remained frozen from 1975 to 1992 at the $6.03 per hectolitre rate. However, as a result of being frozen in nominal terms, the dairy subsidy came to represent less of the revenues obtained by industrial milk producers. As the table shows, the subsidy fell from being 24% of target returns in 1975 to being 12% in 1990.
Since then there have been three announced reductions in the dairy subsidy, reflecting program funding changes of the federal government. The first of these was a 10% rate cut, which became effective in August 1993. It was announced in the December 1992 economic statement by the Minister of Finance at that time.
The second was two further cuts of 15% each announced in the 1995 budget to be effective in each of August 1995 and August 1996. Finally, the 1996 budget included the announcement of a phase-out of the remaining subsidy through five equal rate reductions each August, starting August 1, 1997. That is some 14 to 15 months away. Thus the subsidy will be discontinued completely effective August 1, 2001.
The next table shows the federal fiscal impact of this on a dairy-year basis. The numbers that go through 1994-95 are actual expenditures, whereas the subsequent years are forecast based on the anticipated domestic requirements of 42 million hectolitres in the industrial milk market. In practice, the domestic requirement tends to fluctuate around this number, so we use it as a forecast number.
Among the issues that arise from the 1996 budget for dairy is the question of pricing in the context of the subsidy rate reductions. I have therefore included in this package some information on the pricing decisions taken by the Canadian Dairy Commission on the two occasions to date when subsidy rate reductions were implemented. You will see from the tables provided that in each case the expected return to the producer from the markets for butter and skim milk powder increased by more than the subsidy rate reduction. Thus producers did not bear the cost of the rate reductions directly in these two cases.
.0915
In conjunction with the 1996 budget announcement, the Minister of Agriculture and Agri-Food, the Honourable Ralph Goodale, announced:
- The federal government will work closely with the dairy sector to put in place a long-term
policy this year to provide more security and predictability for producers and processors to plan
their businesses for the future. This policy will encompass pricing and program issues, which,
combined with the federal budgetary framework, will end many of today's uncertainties.
- That is from Building For Success, the document that was released at the time of the budget.
As a first step in the consultation process, a background paper is being prepared by the Canadian Dairy Commission and Agriculture and Agri-Food Canada. We anticipate mailing that to all stakeholders, with a covering letter from Mr. Pickard, sometime in the next day or so. That covering letter will be asking for input in the dairy policy development process as we go forward from the budget announcement.
Mr. Chairman, those are my remarks to begin. I would be pleased to respond to members' questions when we get there.
The Chairman: Thank you, Dr. Hedley, for that presentation.
I believe the Canadian Dairy Commission has some brief comments to make. Mr. Balcaen, do you have some brief comments? Mr. Balcaen is vice-president of the Canadian Dairy Commission.
Mr. Louis Balcaen (Vice-President, Canadian Dairy Commission): Thank you,Mr. Chairman. I appreciate the opportunity to participate in the discussions this morning. As you indicated, my comments will be brief.
It might be useful to describe to committee members the role the commission plays, as there are a number of players in the dairy industry. Sometimes it's difficult to sort out who is doing what exactly.
The Canadian Dairy Commission is a federal crown corporation that was created in 1966. Among its more important duties, it sets national producer target prices for industrial milk and processor margins, and also sets support prices for butter and skim milk powder.
Another important role is the removal of surplus production from the market, and it does that in cooperation with the private sector - private companies and cooperatives. Unknown to a lot of people, we are fairly active in terms of planned exports and surplus removal, where we sell butter, skim milk powder, cheese and ice cream in some 35 countries around the world.
The commission also administers the federal subsidy payment to dairy producers, as described by Dr. Hedley, and operates a number of programs on behalf of the industry. One of the key things the commission does is to act as a key industry facilitator in a number of fora, the main one being its role in chairing the Canadian Milk Supply Management Committee, or the CMSMC. In that role it oversees the application of the national milk marketing plan, which is a federal-provincial agreement that governs the milk supply management program in Canada.
That committee meets every couple of months. It reviews the markets and production required, sets quotas every August 1, and reviews that during the year. And of course the provincial milk agencies, such as the Dairy Farmers of Ontario and the Fédération canadienne des producteurs de lait in Quebec, are responsible for allocating each province's share of the quota to their own producers.
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The Canadian Milk Supply Management Committee is a group of some 40 people who represent producers, processors and governments from each province except Newfoundland. We also have three national organizations at the table that have observer status - the Dairy Farmers of Canada, the National Dairy Council, and the Consumers' Association of Canada.
The commission is made up of Mr. Gilles Prégent, the chairman and chief executive officer, who could not be with us today. Mr. Prégent is a lawyer and a former chairman of the supervisory board in Quebec.
I am pleased to have with us today my fellow commissioner, Alvin Johnstone, who is from Red Deer. Alvin is the former general manager of Central Alberta Dairy Pool, a cooperative in Alberta that merged with other western cooperatives to form Dairyworld. Alvin is an accountant.
As you indicated, Mr. Chairman, I'm the vice-chairman of the Canadian Dairy Commission, and I'm a dairy and grain farmer from southeastern Manitoba.
I realize that this session was convened in response to concerns about the elimination of the dairy subsidy. I don't have a great deal to add, as this is not a decision of the commission, although our chairman, along with Dr. Hedley and the chairman, did conduct some fairly extensive consultation within the industry and gave advice to the government on that basis.
I will stop here. I will answer any questions that people would like to ask later on. Thank you.
The Chairman: Thank you, Mr. Balcaen.
Mr. Rivard is the president of the Dairy Farmers of Canada. Welcome to the committee, Mr. Rivard.
[Translation]
Mr. Claude Rivard (President, Dairy Farmers of Canada): Good morning, ladies and gentlemen.
On behalf of Dairy Farmers of Canada, I would like to thank you for asking us to appear before your committee today to address the critical issue of the payment to producers, that is, direct payment.
At the Annual Policy Conference of Dairy Farmers of Canada in January 1996, the Minister of Agriculture and Agri-Food, Mr. Goodale, indicated his intentions to re-introduce a long term dairy policy in Canada as a means of bringing back some stability to the political environment in which the industry operates.
Following the meeting, the minister invited the executive committee of DFC to pursue discussions with him, without prejudice to DFC's position, on the issue of the direct payment on industrial milk.
While we agreed to pursue these discussions, it must be well understood that producers have serious difficulty reconciling the government's messages for moving to freer trade, higher competitiveness and export orientation and its ongoing consideration to withdraw financial support to agricultural industries at a much faster rate than our trade partners, notably the United States and Europe.
In the recent U.S. Farm Bill for example, federal spending on agriculture will be reduced by approximately 23% over the next seven years, and will bring the amount of government financial support to $44 billion in total.
In Canada, the federal government reduced expenditures toward agriculture by 21.5% between 1995 and 1997-98, to $1.628 billion.
This means that by the time the U.S. has phased down its subsidies to $44 billion in seven years, they will still maintain a level of support toward agriculture equivalent to three times the level already announced in Canada, using a ratio of 10 to 1.
Considering the inevitability of the federal budgetary process focusing on the direct payment, the executive committee outlined its willingness to undertake the following actions as communicated in a letter to the minister on February 13, 1996.
.0925
First of all, dairy farmers committed themselves to seek support from the board of directors of Dairy Farmers of Canada for a gradual phase-out of the federal direct payment over a five year period, on the basis of a commitment from the federal government to allow a full pass through of such reduction to the market prices.
Secondly, they committed themselves to seeking a mandate from the board to initiale, on an urgent basis, discussions with the board of directors of the National Dairy Council, to reopen the St-Sauveur Agreement and determine how the phase-out can be recovered from the marketplace in the least disruptive manner over the period.
Thirdly, we will undertake with the processors the development of a long term dairy policy proposal, including the issue of phase out of the direct payment, for presentation to you as soon as possible.
At the time of the 1996 budget, it was announced that there would be a five-year phase out of the direct payment starting August 1, 1997. The undertakings outlined in the letter to the minister were initiated. Unfortunately, the joint DFC-NDC meeting held on May 6 and 7 1996 did not yield an agreement on the implementation of a long term dairy policy.
At the heart of the debate is the issue of full recovery from the market place of the income losses resulting from the reduction in the direct payment. The issue of income loss recovery from the market place is fundamental to Dairy Farmers of Canada and has been recognized by the Minister of Agriculture in his desire to implement a new long-term dairy policy.
A long-term dairy policy is critical for the industry, as it will serve to provide more predictability for producers in the future. DFC regrets that the Board of directors of the National Dairy Council could not support the development of a long-term dairy policy. DFC nonetheless intends to pursue with the minister of Agriculture the development of such a policy.
Within this context, the position of Dairy Farmers of Canada on the announced five-year phase out of the direct payment on industrial milk is as follows.
The direct payment is a consumer subsidy and, therefore, any reduction to it must be recovered from the market place, of course. Being spread over five years, the full recovery would necessitate increases in price of industrial milk around 1.3% or 1.4% per year. Let me point out that even with incremental price increases for recovering higher costs at both producers and processors level over this period, this would still remain well below the level of inflation.
The full recovery of the direct payment reduction would have minimal impact on market demand. DFC believes that the increasing investments made by producers into promotion and advertising programs will more than compensate for the negative market impact of the price increases, thereby permitting continued growth in the markets.
Secondly, in 1995, producers and processors agreed to move away from price adjustments on August 1st and to limit these adjustments to once a year on February 1st, starting February 1st, 1998. Even though the federal government was fully aware of this agreement, it announced the reduction in the direct payment starting August 1st, 1997 for a period of five years. This approach therefore jeopardizes the industry's agreement and disregards the market's responsiveness of moving to price adjustments on February 1st of each year.
Dairy farmers of Canada therefore requests that the federal government delay its implementation of the subsidy reduction until February 1st, 1998 in order to not adversely affect the agreement reached by the dairy industry.
Thirdly, the need to implement price adjustments in a manner which increases the value of protein has long been accepted. The conversion of a reduction in the direct payment made on butter fat to an increase in support price for skim milk powder, only offer producers partial recovery for the income losses associated with the reduction.
We have prepared an illustration of this problem for you which clearly shows that over 16% of current reductions are not being recovered by producers from the market place.
.0930
Dairy farmers of Canada request that full recovery of the income losses be implemented at the time of the reduction. This would mean that a $0.76 per hectolitre reduction in the direct payment, as provided for by the minister of Finance decision on the basis of $0.50 per hectolitre, would necessitate the equivalent of a $0.91 per hectolitre increase in the support price of skim milk powder in order to ensure that this has a revenue neutral effect on producers.
The three points that I've just made are the key elements of the policy related to the elimination of the direct payment on industrial milk over the next five or six years.
I would now be happy to answer any questions.
[English]
The Chairman: Thank you very much, Monsieur Rivard, for your presentation.
We'll now call the National Dairy Council. Mr. Kempton Matte, I believe, is going to make some comments. Welcome to the committee.
Mr. Kempton Matte (President, National Dairy Council of Canada): Good morning, Mr. Chairman. Thank you very much.
All I intend to do this morning is to provide a context with respect to the National Dairy Council and the producer relationship and why it has very important considerations for our sector of the industry.
The National Dairy Council is the body that represents dairy processors from every province across the country. It represents the private sector industry. It represents big and small family-owned concerns. It also represents dairy cooperatives, large and small. Our members collectively process over 95% of all milk produced in the country. We employ some 25,000 people in over 300 plants located in every province in the country.
Our position with respect to the removal of the subsidy was made clear in the consultative process you led, Mr. Chairman, when we indicated a very strong preference for the subsidy remaining in place. We didn't feel even that the funds should be reallocated from their current use, since we felt that the current use provided the very best return for the investment of that money by the federal government.
However, obviously a process of consultation and negotiation took place between dairy farmers and the federal government and an agreement was reached. Subsequent to that agreement a third party was brought in and was asked to implement the agreement. That third party was the dairy processing sector, through the National Dairy Council of Canada.
How the minister and the Dairy Farmers of Canada could agree on a program to fully recover 100% of the removed subsidy from the marketplace without including the National Dairy Council and its members in the loop is beyond me. To the best of my knowledge, the minister does not control the marketplace, nor do the Dairy Farmers of Canada. Indeed, realistically and honestly, nor do the members of the National Dairy Council.
The critical issue here is how you compensate dairy farmers from a marketplace that is not accepting price increases, where a sector of the industry that is and remains a price taker in the marketplace, not a price maker, is expected to increase its prices across the board to compensate over a five-year period in a market showing consistent price decrease trends. To buck those trends in the food industry today to guarantee producers 100% recovery of a subsidy removal makes no sense to me, and it made no sense to the directors of the National Dairy Council.
They suggested collectively that we honour the Saint-Sauveur agreement; that we recover and accept the initial cut, currently scheduled for August 1997, in February 1998; and that at that point, we add to it, in spite of the risk, an amount of money to compensate dairy producers for some of the cost increases involved, and try to deal with that in the marketplace as a first step. At that point we could establish a committee of dairy farmers and dairy processors who would find a formula - it won't be easy, but I'm sure it can be done - that would take market factors into account. I'm not just talking about the CPI; I'm talking about things like market pricing trends, consumer income levels, employment levels and ability to pay. It would take those into account in some kind of formula that would help the group make a recommendation on pricing adjustments from then on.
.0935
Unfortunately, that kind of approach was not acceptable to dairy farmers because it did not contain a five-year guarantee of price increases, so a stalemate was reached.
I have no magic solution to offer here, but I submit to you that there are some very fundamental issues involved. One is the whole question of a third party being pulled into a bipartite agreement, with a key role to implement the outcome of that agreement, without having been party to the discussions in the first place.
Second, we have the whole issue that was raised in Mr. Rivard's comments about the butterfat-protein-solids-nonfat relationship in pricing and how that affects certain sectors of the dairy processing industry. For several years now, in recognition of the dairy farmers' complaints that they get in effect short-changed as the industry responds to consumer demands for lower-fat products, every single price increase has been put on the solids-nonfat portion of milk - every single one.
If you are a yogurt manufacturer in this country, what amounts to a 2% or 3% price increase for your colleagues in the industry amounts to a 9%, 10% or 11% price increase for you. What we are doing is systematically choking off the manufacturers of low-fat products, in particular yogurt. This industry was growing at a very rapid rate, and the rate of growth has slowed dramatically as it's been forced to absorb these increasing prices.
So that's another issue that is far more complex than the simple, superficial view that as the market for low-fat products increases, we have to shift more value from butterfat to skim milk powder. It has repercussions well beyond just the primary producer level. That does not in any way remove the legitimacy of the claim the dairy farmers make. I just want to make the point that there's an equally legitimate claim for people on the other end of the spectrum.
There is another fundamental issue of great concern: who in the world is worrying about the consumer in this equation? We at the National Dairy Council have said in many public fora that we support supply management, that we have supported supply management and that we continue to support supply management. But we have cautioned that in an administered pricing system, we can only pay into that system what we can get in the marketplace. We can't pay more into the system than we can get in the marketplace. It is our contention that there isn't enough attention paid to that. The ability of the consumer to pay is key. With all due respect, the only people playing in that playpen are the dairy processors and their customers.
So there's possibly a lot of research that needs to be done and a lot of thought that has to be given to how this particular program is going to be implemented - if it's going to be done in a way that, as it plays itself out, is simply not a negative for everybody involved in the dairy industry.
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It's very easy to take the easy road and say that we will ask the minister to instruct the Canadian Dairy Commission to simply add the subsidy amounts to support prices for dairy products - under current policy that would all be skim milk powder - and change the target price, and then the provincial agencies will just work that through every class category of pricing. You may well. That could be done. You'd could find that for every penny you go up in price there's an offsetting loss of volume and you shrink the industry. Who wins? Nobody wins.
Thank you, Mr. Chair.
The Chairman: Thank you very much, Mr. Matte.
We have had all the presentations now, so we will begin our round of questions and comments with Mr. Landry, Mr. Easter and Mr. Hoeppner.
[Translation]
Mr. Landry (Lotbinière): I would like to thank the witnesses for appearing here this morning.
In order to begin our discussion of the dairy subsidy, let's take page 4. When I look at the list of new subsidy rates that would lead to the total elimination of the subsidy, as well as the document tabled by Mr. Rivard this morning, where he says that Americans will have three times more support than Canadians, I ask myself questions that I will put to you too. Will Canada be able to compete with that country? Secondly, do we find this equity between Canada and the United States in another market? Thirdly, what is the percentage of our exports?
[English]
Dr. Hedley: The changes that have been made through the budgets in dairy subsidy in no way affect the trade levels between Canada and the United States. Those markets are relatively separate. There is approximately 3%, growing to 5% over this decade, of imported product coming into Canada, some of it from the United States, but the budget and the changes in the subsidy level in no way affect that trade or trade level.
As a result, it's very difficult to make comparisons between Canada and the United States in terms of equity, levels of subsidy or anything else. What the U.S. is doing at the present time really does not affect the markets in Canada.
[Translation]
The Chairman: Mr. Rivard.
Mr. Rivard: First of all, as to the first question concerning competitiveness, you must know that, since the adjustments made in Canada for the GATT, the producers, through the national policy and interprovincial negotiations, have made comments.
If you don't process your products yourself in certain markets which are at risk because of import competition, for instance in the case of an American import product or even in certain markets that export to Canada, the cost is entirely carried by the dairy producers, who sell at lower prices. In most cases, there's a difference of 30 to 40%, compared to the Canadian price. Canadian producers revenues are therefore totally affected by this system.
I would like to add that, of course, in order to comply with the GATT regulations, there aren't any subsidies for these exports. I think that my paper adequately shows what is wrong with competitiveness.
You're asking producers, or an industry, to compete with the American treasury. I must answer to you that, unfortunately, we cannot compete with the American government or with the EEC, because the playing field has not been levelled.
Mr. Landry: What is the percentage of our exports?
The Chairman: Mr. Matte, go ahead.
Mr. Matte: It's about 5% at this point, but that's a maximum. Normally, it's 2 or 3%.
Mr. Landry: Thank you.
The Chairman: Is that all?
[English]
Mr. Easter.
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Mr. Easter (Malpeque): My question is similar. With the reduction in subsidy and moving to negotiations with the industry on where we go from here relative to picking up some of the loss for producers, where does that...?
The Dairy Farmers of Canada have outlined in their paper and you've just said that we're not really on a level playing field with Europe and the Americans. That point has been raised here consistently. This committee may even have to say that the Department of Finance, with its gung-ho attitude to deficit reduction, is leaving the Minister of Agriculture very little flexibility to have an industry that is cost-competitive with the rest of the world.
We're emphasizing exports. Mr. Matte has made the point that the processors have to be in a position to be able to sell their product and the consumers have to be able to buy it. Producers have to be in a position to compete effectively with the rest of the world as well.
Mr. Hedley, do you have anything you can table with us, now or in the future, that will show us where we are vis-à-vis our competitors in GATT obligations? How far below the threshold established at GATT are we, versus the Americans? Where are we at in terms of amber, green and red policies in GATT? We need that information.
Mr. Rivard, where do you see us?
Mr. Matte, given the changes that are being made to supply management and so on, how do the processors here stack up against the processors in the United States in terms of selling to consumers in Canada?
The Chairman: I believe the three questions started with Mr. Hedley, so we'll go to Mr. Hedley, then to Mr. Rivard and then to Mr. Matte.
Dr. Hedley: I do not have all that information here with me today, but I would be happy to provide it to members.
The Chairman: Okay.
Mr. Easter: I have one other point on that, Mr. Chairman.
The other factor that has to be tied in here that's often ignored - and it's something we've been raising at this committee as well - is we've moved to cost recovery. As we've said before, in Agriculture alone we have 42 cost recoveries under deficit reduction. Then we also have the impact of bringing in cost recovery in Fisheries and Oceans that applies to us, in Customs that applies to us, etc.
It gets to be a magnitude of cost recovery. I'm not critical of the government for what it's doing, but we have to recognize the impact. If there's an overburden on Agriculture, then we have to move to address it.
I would like those factors tied in as well. The Americans are not moving to cost recovery as we are. They're not even reducing their subsidy regime as we are. So I'd need that as well, Mr. Hedley.
Sorry, Mr. Chairman.
Dr. Hedley: Mr. Chairman, I think the department has already agreed to provide that information to the members.
The Chairman: That's right.
[Translation]
Mr. Rivard: Concerning competitiveness, there's a definite difference in prices. There are many factors which influence this gap between Canada and the United States, such as monetary policies and the exchange rate. Our tariffs protect us, but the results of a Canada-US opinion poll on this issue will be out this summer. It's difficult to compare competitiveness, because they are two different countries. Presently, for instance, the Americans are setting up programs to support their industry as far as exports are concerned. What is the government here doing? I've told you that the Canadian government is putting zero cents into exports subsidies! I'm not saying that the government should invest money in that, but we should look into policies that the GATT allows us in terms of "green" or "amber" programs and the way to set them up.
I find this highly abnormal. Moreover, to understand the dairy industry, you must know that, from 1984 to 1994, the price of milk paid to producers increased by 17.1%, while the price of dairy products for consumers increased by 41.5% over the same period. So you can see that we are distinctly below the inflation rate and that we, as well as the processors, are trying to ensure that our sales increase.
In my opinion, we have acted as a responsible industry. The difference in competitiveness is that the producers carry all the costs of competitiveness between Canadian and American prices, through differentiated pricing.
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As I mentioned before, we've been selling to our processors since August 1st of this year. For example, if the market prices which are competing with American prices collapse, the producers will carry that cost, according to a pre-established formula.
I'll give you an example. Take a production which is supposed to go on certain export markets. We presently have a Canadian margin of about 6%, which in fact represents two margins, one of 4% and the other of 2%. If international prices fluctuate, with a surplus in supply, the producers bear the burden of those differences.
As to competitiveness, you've certainly noticed that grain prices have increased significantly. Over the last year, there's been an increase of about 40%. This week, there was even talk of 45%.
I'll give a few numbers. A year ago, you could buy corn at $120 or $125 per ton, and it is now $375 in Quebec. As to price of milk, the cost recovery formula doesn't allow us to recover it all every week instantly.
The dairy producers would like the Canadian government to take on these elements. If it withdraws, dairy producers hope to get compensation which will allow them to stay in business.
There's another factor that has influenced the production cost. For instance, animals are sold which have been culled, and the price of beef has dropped very dramatically. That must be considered as a loss of income. Producers must carry it without being able to recover it in the market.
I'm not saying there should be an immediate compensation to the situation, but these are problems that producers must live with. We want to act responsibly, but we also expect the government to act responsibly. It asks us to be competitive on international markets, but we hear double - and even triple - speak that isn't logical at all, unfortunately.
[English]
The Chairman: Mr. Matte.
Mr. Easter: All you have to do is sell it, Kempton. No problem.
Mr. Matte: I'll just stick to answering your question.
Some hon. members: Oh, oh!
Mr. Matte: Actually your question about whether the processing sector is competitive in terms of serving the consumer and so on is a very key question and one that is of real concern to our organization.
Because all kinds of stories were floating around about our plants being, in some people's opinions, decrepit and almost outdated from a technology base, and because others were saying quite the opposite, that we were rapid adapters of new technology, last year our board undertook a pilot benchmark study of the ice cream processing industry. That study was completed last fall and showed without question that, certainly in the ice cream sector, our plants are competitive with the United States.
It did show some weaknesses, which the ice cream industry is addressing. It deals with the fact that we don't have the extreme economies of scale and plant size that exist in some operations in the United States. On the other hand, we do have a very modern plant base, we have highly skilled management and the processing cost part of the equation is very much in hand, with very competitive labour rates and competitive taxation. A lot of numbers that a lot of people are very surprised about came out.
Subsequent to that, our board considered the issue again and said, if there was to be an opening of the market beyond the access provisions already granted through the WTO, what sector would likely take a hard hit? There was general consensus that cheese would probably be one where the Americans in particular would be very interested in coming into the country, so they undertook a benchmarking study of the cheese industry. That study is well on its way to completion. We expect completion by mid-July, so we should know by then exactly what the state of the processing sector in the cheese industry is.
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We are currently considering the feasibility - our problem is money, of course, as is everyone else's - of a benchmarking study for the yogurt industry, which we know has real problems in terms of input costs of raw milk. We want to know whether the plant base is sufficiently strong assuming you have competitive milk pricing and also fluid milk.
So far - and the preliminary results of the cheese work confirm this - the process side of the industry appears to be competitive. The major problem in delivering a finished product at, call it a North American competitive price if you like, is the problem we're really here talking about, the larger problem of producer income, basically.
Milk is our single largest cost factor, and it's priced above the American. If you're going to use the U.S. as the measure, then there's no mystery here. It doesn't imply any inefficiency or anything else. We're a high cost base; that's all.
If the floodgates were to open and some producers decided to adjust their production practices and processes - whatever they do on the farm - to meet U.S. competitive pricing of raw milk, we want to know whether or not we ourselves have done the homework and would be able to deliver. We're increasingly more comfortable that in fact we would be able to meet the competition from a cost throughput standpoint.
The Chairman: Mr. Hoeppner.
Mr. Hoeppner (Lisgar - Marquette): Welcome to the committee, gentlemen.
I heard somebody say we export about 2% to 5% of your products and probably import very much similar to that. We've heard from the Americans that Minuteman missiles will attack the grain farmer. What types of missiles do you expect from the U.S.?
Mr. Matte: Mr. Hoeppner, I agree with you. We heard about the missiles aimed at the grain farmers. They use academics for the dairy industry; they aim the academics at the Canadian dairy industry.
One of the most widely quoted studies was done at the University of Philadelphia. I stand to be corrected, but I think it's Philadelphia.
Dr. Hedley: It's Pennsylvania.
Mr. Matte: Thank you. I knew it started with a ``p''.
They claim there is $1 billion worth of market in dairy in Canada available to the U.S. if they could just get in here. This statement was made at the National Milk Producers Federation meetings in the United States and got everybody hopped up on this great market.
But I must tell you that in my role I attend the board of directors meetings of counterpart processing organizations in the United States, and frankly, their knowledge of Canada is abysmal. It is appalling, to be honest with you. They have absolutely no idea what they're talking about. We take their competitive threat very seriously because they're nothing if not a fast read, but there is no easy way here.
There's one other thing also. There is a general recognition that our dairy products are of higher quality than theirs. So we bring some very strong assets to the marketplace, but the bottom line is you still have to sell the product at a competitive price, and many consumers will compromise on some of the other issues because of the price pressure they feel every day of their lives.
Mr. Hoeppner: Yes, I agree with you. Are you doing something to counteract that type of propaganda? I was reading a B.C. newsletter, The Dairyman, and it seems to me even the banking industry in B.C. is attacking him, the Hongkong Bank especially. How do you fight an enemy like that?
Mr. Matte: It's very difficult to do, and it becomes a very debatable issue as to whether you're more successful if you tackle it publicly or if you tackle it internally. Our approach has been to deal with it within the meetings we attend, where we take the opportunity to deliver a tough message about the Canadian industry not being about to roll over and play dead, and not to expect anybody to put kid gloves on and welcome them at the border.
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In spite of the rhetoric and so on, in terms of actual marketing plans there's clear evidence that the U.S. companies have refocused on Mexico, as opposed to Canada. Except for some companies in the northern border states that are more knowledgeable and recognize the difficulty of the marketing task, most American dairies don't even think about Canada. What they think about is Mexico.
Mr. Hoeppner: So are you winning the battle by counteracting with your own propaganda?
Mr. Matte: Touch wood. We hope we are at least making inroads.
The Chairman: Mr. Rivard would like to comment on that.
[Translation]
Mr. Rivard: My drift is much the same as Mr. Matte's. You mention propaganda, and I think there's a lot of propaganda in the United States. The Pennsylvania study was carried out on shaky grounds in terms of estimating the market shares that a province can take, particularly concerning British Columbia or the Ottawa market. For the Montreal market, the share is smaller. When you know the distances between borders, it's hard to see the logic.
Concerning this debate, it's important to state, and the Canadian government has shown this, that a paper was signed by both parties and it must be complied with. I think that our chances are good in this area.
You also mention the missiles. Of course, there could be a counter-attack. The Americans have started launching small missiles at China. There could eventually be some reaction between the industries. We know that if the Americans won in this area, and we lost, two very sensitive industries - peanuts and sugar - would be attacked. They have import quotas, the same as we, and tariffs. So I think there will be a deduction. I think there will be discussions. For the time being, we have to go one step at a time.
[English]
Mr. Hoeppner: I would hate to read this next statement just because of Mr. Easter. It might make him feel good, but I think I have to read it: Any ignoramus fortunate enough to inherit a few hundred thousand dollars worth of land and equipment and willing to work for less than minimum wage without unemployment insurance benefits can make a go of farming. I think that holds true in pretty much every farming industry.
When I talk to my dairy farmers - and we have some very open discussions - the one issue that is always brought up is the cost of quotas. How are you going to deal with that? Pretty well half of the equity in a dairy farm today is quota value. I think that has to somehow change or be adjusted so that you can be protected.
[Translation]
Mr. Rivard: I'll give you my point of view, with all its possible limitations. In Canada, we chose a system termed supply management and we have to adapt it. The producers chose a way to split the market between themselves, which is termed quotas. In the United States, they use another system. As soon as the supply reaches a certain level, the price of milk is lowered, without the consumer benefitting. It's important that Canadian consumers be aware of this system. At that point, the strongest one takes over, until there's an industry imbalance throughout the regions in the United States. You just have to look at what happened in the North Eastern United States compared to the Midwest.
In Canada, you don't see the producers' situation. You only see what shows up, which is to say a quota price of $40 or $42 per kilo. It could be said that that's an anti-competitive investment. I'm not saying we don't question this way of doing things. But first of all, not even 2% of the production is transferred on an annual quota basis. It is therefore minimal.
Secondly, producers found ways to transfer farms. If all farms were to be transferred with quota at full value, it's clear that farmers would not be able to survive anymore, nor even stay in business.
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An indirect analysis of the figures from the federal funding corporation and those from Quebec shows that, generally speaking, farms with quota value included are transferred at about 50% of their value when it's a father-son transfer.
For arms-length transfers, farms are transferred at about 75% of their total value including quota. Just to give another example, when a farm is broken up, you can get back about 90% of its value.
Each one of the industry's sectors uses that kind of economic rules while taking competition into account. There are also plant quotas when there's goodwill, as it's called. I think it's not much different in other sectors. If you buy a McDonald's franchise, for example, depending on where you set up, you'll have to consider the population base and ask for a taxi licence or a trucking licence.
In my opinion, we're not much different from other industrial sectors. But with the rules the producers have adopted, we'll have to see how many of us stay in the production sector.
[English]
Mr. Hoeppner: Correct me if I'm wrong, but when I talk to my dairy farmers I get the impression that the quota was set up to regulate production, and then through political manoeuvring by provinces it became of value. You are stuck with this not just because of your own initiatives, but even more so because of politicians. Is that correct?
[Translation]
Mr. Rivard: You're right, but it's not only the politicians. A lot of people interpret this their own way, and I think that we can all be somewhat right depending on our points of view.
As for quotas, Canada uses a overall quota taking into account Canadian consumption and whatever export levels have been decided. As I said before, we are now exporting about 6% of the total production from all producers.
Seven percent of our production goes to American export markets and others. Of course, we have excess production going to the international market for which there are no quotas because it's what we call surplus. The producers themselves shoulder those costs and must submit to the vagaries of the international market.
[English]
Mr. Hoeppner: Yes.
The Chairman: Mr. Calder.
Mr. Calder (Wellington - Grey - Dufferin - Simcoe): I'm going to have to sit down and explain the system to you some day, Jake, because I know you don't understand it.
A voice: Do you have a week?
Mr. Calder: I don't know if I have that much time.
The Chairman: I wonder if he thought all of the politicians were in Parliament? I think there are a few in politics that aren't here.
Mr. Calder: Gentlemen, in your brief you mention that the U.S. Farm Bill will reduce subsidies by 23% over the next seven years, but the U.S. will still be subsidizing at three times the level of Canada if you take into consideration a ten-to-one population ratio formula.
Mr. Matte, you mentioned our processing sector, but because of our higher labour rates, our processing sector is only competitive right now with a lower valued dollar. Is the U.S. system of subsidy still GATT-green if it's that much higher than ours? If so, why? You're talking about a long-term dairy policy. Have you considered trying to match our system with the U.S. system, or is that just not achievable?
[Translation]
Mr. Rivard: The figures are there for the subsidies. We know the Farm Bill is now being examined and it shouldn't be long before it passes in the U.S., but you can't question their subsidy level as long as it has non been readjusted. Of course, we'll reevaluate if they readjust, but for the time being, there's certainly room for interpretation in the area of subsidies and the way they are implemented.
The Americans negotiated the so-called Blair House Agreement with the EEC; it's a "blue box" for a seven- or nine-year period during which subsidies can be granted for restructuring. We know that they'll use that rule to redeploy their subsidies and help producers.
The EEC is going to the same thing. Some subsidies were reconverted into this "blue box" and will help producers modernize their operations.
I'd like to point out that apart from the subsidy that now exists for producers, no other subsidy has been granted by the Canadian government to milk producers as per the GATT agreements.
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There was an evaluation in 1992 and a list of 112 different American subsidy programs was drawn up. In our opinion, with the rules we had at the time, a case could have been made for retaliatory measures. I think the government should get together with us to reevaluate how each country upholds its commitments; we have to see if they are upheld or not.
[English]
Mr. Calder: I think Kempton had -
The Chairman: Kempton, did you hit a nerve?
Mr. Matte: Not so much a nerve, but I just want to make the point that the benchmarking studies that we have done, and the one currently in place, do take exchange rates into account.Mr. Chairman, I will make the ice cream benchmark study available to the members of the committee. I will also undertake to make the cheese study available when it is published.
Mr. Calder: To flip that on its head, if our dollar goes up in value, that's one more impediment to our processing sector in Canada being internationally competitive relative to other countries, right?
Mr. Matte: There is no question that selling into a market with a rising dollar is always tougher than selling into market with a lower dollar. The proof of that is cross-border shopping. What stopped cross-border shopping, in spite of everybody patting themselves on the back, was the change in exchange rates.
Mr. Calder: Yes, I've used the argument that every time our dollar goes down a cent, our export trade goes up $1 billion, and that's 12,000 to 14,000 permanent jobs. Obviously that is a problem we have to deal with.
Thank you, Mr. Chairman.
The Chairman: Mr. Rivard, you had another brief comment.
[Translation]
Mr. Rivard: If you don't mind, Mr. Chairman, I'd like to make a brief comment. Together, Quebec and Ontario produce over 80% or our industrial milk. I'd like to introduce John Core, my VP for Ontario who would also like a word. But before that, I would like to say something about competitiveness.
It was said before that certain price adjustments could not be transferred to consumers anymore. The example I will give you - and we could provide you with the data - is that the price of milk from April 1992 to January 1996 increased by 10.28% whereas the retail price during the same period for all milk products, cheeses, etc. increased by 14.49%.
The processors say they have problems which, I think, have nothing to do with price. There are competition rules. There is a concentration in our processing industry and there's a rule on concentration for food store chains that by-pass the system to a degree. In terms of Canada-U.S. competition, we know there's a price and production cost formula in the U.S. as well as the processor's margin. For comparison's sake, I should tell you that in Canada, the processor's margin on milk products is $7.97 whereas in the U.S. it is $5.12.
John, you had a comment.
[English]
The Chairman: Mr. Core.
Mr. John Core (Vice-President, Dairy Farmers of Canada): Thank you, Mr. Chairman.
I have a couple of comments. Murray, you were asking some questions about the level of subsidization in the United States. I want to make a couple of comments about that because I think it's extremely important for us in agriculture to understand what's happening in the United States and Europe. They signed the same GATT agreement that Canada did, but they've chosen to maximize the level of subsidization they can put into agriculture as per the terms of the GATT agreement. Canada could have chosen to do the same thing.
I understand the fiscal problems that Canada faces, but what Canada has done goes far beyond the level of subsidy reduction for agriculture required under the GATT agreement. That would put us at a competitive disadvantage if we were to lose the NAFTA panel, for instance. We have no intention of losing the NAFTA panel process, and that's why it's so critical that what Canada negotiated in both of those trade agreements is stuck to and defended. We must make sure the Americans are obligated to stick by those rules.
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If we were to lose the NAFTA panel, the Americans have chosen to keep their high level of subsidization. This creates a competitive advantage for their producers and we have no level playing field. That would have a dramatic impact on the Canadian agricultural production and processing sector. That also applies to the size of the market the processors have in the United States, which necessarily means they have some efficiencies of size because of market size, because of the higher level of subsidization. So that is a critical issue.
From the Dairy Farmers of Canada's perspective, we reached no agreement with the Minister of Agriculture and Agri-Food about the subsidy reduction program. What we did was enter into discussions with the minister. The minister called us and said that the Government of Canada intended to reduce the subsidy to dairy farmers across the country, and asked, if that was a given, what our advice was about the process under which this was done. We did not reach an agreement. We simply offered advice, saying that if that was the reality facing us, this is what we would prefer to have happen. We made it clear, Mr. Chairman, that cost recovery was part of that.
The Chairman: Mr. Landry.
[Translation]
Mr. Landry: With all this reorganizing, we have to be concerned about job creation and maintenance. I'd like to know if there's any risk of job losses with all this restructuring at the present time.
Mr. Rivard: I'll give you the figures off the top of my head, but we can send you the data. For our analysis, we ordered a Canadian study on the Canada-U.S. positions. If memory serves, we were talking about 45 to 50% job loss in Canada's agro-food sector if the results were to be favourable to the Americans. This study included poultry, eggs, and the other quota sectors. So it's very important and what John and I said shows very well that there is no level playing field and the rules are too different. That means we can't compete on equal terms. Unfortunately, some of the industry sectors will not be able to survive especially the dairy industry as a whole as we know it today.
[English]
The Chairman: Excuse me, Mr. Rivard. I think Mr. Landry was referring to the change in the support level of the subsidy. You're referring to what might happen if there was one result or another as far as the NAFTA panel goes.
[Translation]
Mr. Rivard: Fine. I'll give you clarification. There's a basic principle which is that Canadian milk producers must have a long term dairy policy and be able to get back cost increases of 200 to 300% on the price of corn, for example, concentrates, gasoline that has just increased drastically in Canada and react to disappearing barriers. All that isn't just a matter of subsidies. You also need a milk policy so that the producers and the different sectors of that industry in Canada will be able to survive the vagaries of international trade. It's global in nature.
I mentioned that the producers accepted to consider those sectors where we could not be competitive and I'm thinking about the U.S. and other imports, to adjust their price structure so that industry and those jobs would not be lost for Canada. But there must be reciprocity. The Canadian government must ensure that we have the necessary tools to be competitive by allowing us to make enough income to stay in business. You allow Bell to do that because of the principle of profit making. We're not even talking about profits, just about the survival of the industry and, more specifically, an average farm income.
John mentioned that in Ontario, a farmer only has $17,000 left to see to his family's needs. In Quebec, it's about the same thing. This morning, we're talking about $8,000 to $10,000 less depending on the size of the farm. Run the figures yourselves: $17,000 less $8,000 to $10,000. What's left? Do you think that these people are going to stay in business long and without any unemployment insurance to fall back on, on top of that?
[English]
The Chairman: Mr. Matte, did you wish to comment? You don't have to. I just thought you were indicating that you might. No comment?
Okay, Mr. Landry.
[Translation]
Mr. Landry: I'd like a clarification. When you gave the 45% to 50% figures, is that over five years?
Mr. Rivard: Yes, and we can provide you with that data.
Mr. Landry: Perfect. Thank you. Thank you, Mr. Chairman.
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[English]
The Chairman: Mrs. Ur.
Mrs. Ur (Lambton - Middlesex): The NDC and the DFC have had a compatible working relationship in achieving pricing for the first two 15% reductions. As you were going through your briefing, May 6 and 7 did not provide such productive results. Are your differences such that you can't continue your good working relationship and achieve the goals you did on the first two 15% reductions?
Mr. Matte: I think our good working relationship will continue. I think both parties have worked very hard over the years at maintaining a good working relationship in spite of some pretty fundamental differences on some issues. Whether or not we can come to a mutual agreement on the further subsidy reductions is a very difficult question because of the elements in place.
We have no argument with the principle that the loss of subsidy revenue should be recovered for the dairy farmers. Our difficulty is how a CEO of a company, private or public or cooperative, commits his or her firm to a five-year fixed schedule of price increases when they have no control over the market. When they get mail that says ``ABC Corp., for the next six months, take notice that we're accepting no price increases'', this is not pie in the sky. This is real. CEOs are saying that it is irresponsible for them as CEOs. They can't go back to their board and say that on $1 billion in sales, actual number, they made $10 million last year, and that they have agreed to a program whereby they're going to increase their product prices, their input prices, each year for the next five years. Think about it. How quickly is that person going to be in that position? Not very long. That's the dilemma here.
The outcome has to be based on some kind of negotiated process. Our board put forward a proposal that the dairy farmers found they couldn't accept because it did not contain a five-year commitment on a 100% pass-through. At least that's our understanding of their reason. They can confirm it or whatever. We're prepared to meet with dairy farmers and continue the discussion, but as long as both positions are where they are, I find it difficult for us to bridge that gap.
I have said in many fora that the processing sector, which has steadfastly supported supply management, nonetheless has to face a far different reality than the dairy farmer does. Our reality is that we have one foot in supply management, but our other foot is firmly planted in the consumer market, which is a free market. For us that changes everything. It's easy to agree to a principle, but bridging the gap between the principle and a reasonable application is a major challenge.
The Chairman: Mr. Core.
Mr. Core: There's no question in my mind that we'll continue to work together. We have and we've resolved these kinds of issues before.
I do want to comment on some of the things Kempton has said. I should say upfront that we sympathize with the predicament the processing industry in this country is finding itself in because of the level of concentration at the retail level in this country. There's no question in the discussions I have with people in our province that tremendous pressure is being exerted by the retail sector when they send letters out to the effect that they will not consider any price changes for the next x number of months. If there's a question that needs to be looked at, it's whether this level of concentration at the retail sector is to the advantage of Canadian agriculture and Canadian processors.
When I look at what has happened in the retail price market, I'm told by the processors that they've been unable to pass on many of these price changes. But when we look at what's happened to retail prices, they have moved more over the last three years in dairy products.... I have numbers here from April 1992 until January 1996 that show that the total retail price of cheese in this country moved 14.49%. The market price guarantee for milk moved 10.28%.
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I believe our processors when they say they're under tremendous pressure in that marketplace, yet the retail prices continue to move. So I have to ask the question as a producer: is unfair pressure being put on that processing sector by the retail trade? I have to pose the question. I don't have an answer to it, but I pose the question.
As well, when we look at what's happening in the Ontario market, Kempton says he has a foot in both markets. Yes, he does, but the border is still closed up to the level of allowable imports and the tariff protection vis-à-vis what our retailers can access outside our country. It is not a free and open marketplace because the amount of product that can be imported into this country has a tariff wall around it. The allowable access of product is there.
So I sympathize with the predicament the processors find themselves in. My solution to that predicament is that the Minister of Agriculture and Agri-Food should announce a five-year dairy policy that announces that those past subsidy reductions will be passed through into the marketplace. He should inform the retail sector in this country that those are allowable pass-throughs that he expects will be passed through into the marketplace. That takes the pressure off our processors. It's clearly part of a five-year dairy policy of the Government of Canada that these will be passed through into the marketplace.
I'm really encouraging working with the processors to find a solution so that those price increases can be passed on to the marketplace. That is what's important to us, Mr. Chairman.
The Chairman: Mrs. Ur, did you have another question?
Mrs. Ur: The briefing this morning said that the National Dairy Council did not support the development of a long-term dairy policy.
Mr. Matte: At this time. We believe it's premature to try to put all the elements, which in our estimation are far more than just price, in a long-term dairy policy to be announced on August 1, when you have the outcome of the NAFTA panel on August 15. That could make everything you just agreed to virtually irrelevant. It's better to know what you're dealing with and then deal with it properly.
Mrs. Ur: I certainly agree with you there. I just wondered if it was other than that.
Mr. Matte: No, that's what it is.
The Chairman: Mr. Rivard.
[Translation]
Mr. Rivard: If Canada didn't have a dairy policy, we probably wouldn't have any dairy industry anymore. A lot of changes were made to policies and there were attacks against them, although maybe not as important. We have had the GATT negotiations and the free trade negotiations with the Americans. The dairy industry didn't grind to a halt for all that. If memory serves, we were discussing those questions when the minister of the day announced the latest dairy policy. Life doesn't come to a halt because an American panel is meeting. We use the elements we need to win on that panel, but the producers believed the commitment made by the Canadian government when GATT was signed to come up with a consistent dairy policy. At this point, the producers are becoming extremely worried. We are being asked to be competitive while the government, because of its decisions, like doing away with the subsidy, is widening the competition gap. Use your brains to come up with the tools; we're all intelligent people here in Canada and we all want to work together.
The discussions we're having with the processors are interesting but I'd like to remind you that the decision in terms of policy is still up to Mr. Goodale as Minister of Agriculture and Agri-food. He must send a signal to that sector of the industry while there's a debate on the increase, the adjustment or the recovery of the cost of the subsidy from the consumer. I think the situation has to be looked at that way.
[English]
The Chairman: Mr. Collins.
Mr. Collins (Souris - Moose Mountain): Mr. Matte, when you made your presentation, one thing you said was that you would like to see the subsidy stay in place. We all would like to see those things happen, but the reality is that it's not going to be the case. I certainly agree with you that if you don't set a policy, we could sit around here till hell freezes over and argue about small items or large items, but we will never agree.
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I understand from your point of view that you want to have some stability as to where you go from here in the next five years.
I remember that one of the things with the farmers in Saskatchewan was get your butterfat content up. They all worked to get it up, and then all of sudden the game changed and they had to start reducing it. I don't know how quickly you make those adjustments, but it is tough. It is tough.
I find, Mr. Matte, that on one hand you'd like us to say to the people of Canada ``keep subsidizing'', but who's going to get into the playing field? We're in some difficult straits here. I had the feeling that you felt we could wave a magic wand and continue for a while. I wonder whether you would like to -
Mr. Matte: Yes, I'd love to comment on that.
Mr. Collins: I thought you would.
Mr. Matte: First of all, what I said was that we supported the dairy farmers in their demand for the subsidy to stay in place. I don't need a lecture about the fiscal realities we have. We recognize that as well. That's what we're dealing with in the marketplace. We know the level of unemployed. We know the difficulties dairy farmers face. I said we recognize and are sympathetic to the fact that the subsidy removal has a real impact at the farm level. If the government supported the industry in the way it committed itself to, it could easily have used those subsidy funds in ways that would have qualified under its international agreements to keep the benefit flowing back to the farm gate. It could have done that. It chose not to.
I don't dispute the decision. I know why it did, but the reality is that our sector of the industry is being asked to replace it, and because of the fiscal realities we're saying we don't think consumers are going to put the money on the table to replace it, if we can even get the request out there through the wholesale, retail chain. Since we can't drive price, we have to take price, and all the indications are that we're not going to be able to do that. We can't make promises we don't have the ability to keep. We just can't do it, and that's why we can't meet those commitments.
Mr. Collins: Okay.
You know that some of the plants in Saskatchewan were closed down. I'm sure you're aware of that. Estevan was one that may have fallen into that category. Far be it from me to lecture you, but I take some umbrage to the fact that you think we don't have a concern here. We bloody well do. I understand that.
I appreciate, Dr. Hedley, that you have given us a document that gives us an overview - and to the gentleman sitting next to you, I apologize - but I think we have to get into the world, as you said. How are we going to work this thing out? Are we going to sit back and say we won't try to work it out or because I can't get what I want, we won't move?
I understand both sides of your coin. The dairy farmers come with a concern, as do those from the producers' side. How can we assist you to overcome, in the short term, what might be an impasse, so that you have some long-term commitment as to where you go? I think the point was well made. Is the government in a position to facilitate that pass-through mechanism? I'd like you to expand upon it.
The Chairman: Mr. Matte, do you want to comment first?
Mr. Matte: If I may, Mr. Chairman.
I take your point. If fact, I agree with you. Estevan is a perfect example. How do you get through a situation in which, as a processor of milk, for example, you find yourself selling to your customer a litre of milk for less money today, less money changing hands on that sale today, than there would have been five years ago? How do you do that and stay in business? Eventually, after you've gone through all your process operations, you've trimmed all the fat, you've cut all the fluff, and you're down to the brass knuckles, you have to consolidate your operations, you have to release people, and that hurts. In many rural communities, as you know much better than I do, the dairy plant is the largest employer. Those companies don't want to shut those plants down. As we sit here today, I know of twelve plants that will be shut by the end of this summer; I know of twelve. That's the difficulty.
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[Translation]
The Chairman: Mr. Rivard.
Mr. Rivard: In just about the same vein as Kempton and maybe for the same reasons, the industry has undertaken a huge restructuring especially in the number of plants. The producers have felt the impact.
In the Lower St. Lawrence in Quebec, where I come from, more specifically Trois-Pistoles, a butter plant processing over 120 million litres had to cease operations for different reasons. The Quebec producers had to carry the cost of the adjustment then. Over 120 million litres now have to be processed farther away and the producers have to shoulder $2.50 in transportation costs.
So when we're asking you for a consistent dairy policy, we expect the Canadian government and the other stakeholders to give us the tools we need to stay in business because we're tied down.
The lady MP asked us earlier if we'd continue to talk. We have no choice; we have a specific relationship as the sector of the industry for industrial milk producers.
In Quebec, the shutdown of two closer plants during the last six months meant an increase in transportation costs of the order of $1.2 million for the producers. Our processors tell us that we can't get back the amount by adjusting the market price. How are we expected to stay in business?
You wanted to know how the government could help us. The only way would be to be consistent with its policies; that's why we emphasize how necessary it is to have a dairy policy. Without it, neither the processors nor ourselves will be able to remain in business. We will self-destruct and we'll see all our jobs exported to the U.S.A. I don't want to depend on the Americans; when Canada or other countries have become dependent on others for their food, they were squarely taken advantage of.
[English]
The Chairman: Mr. Reed, then Mr. Hoeppner.
Mr. Reed (Halton - Peel): I'd like to touch on an area that is directly out of financing but indirectly involves our competitiveness. It was touched on by Mr. Matte initially. That area is the quality difference that exists or is perceived to exist between the Canadian product and the product from outside Canada.
I think the consumers of this country should really want to know what it is they are buying when they buy a litre of milk in Canada and pay perhaps a small premium for it compared with the U.S. product.
I should also say that I have a couple of confectionery manufacturers in the riding I serve, and one of them has complained to me about the price of milk and about their consideration of using alternatives.
I wonder whether you could lay out the importance of the quality differences and how it does affect our competitiveness in the long run.
Thank you.
Mr. Matte: Without being defensive, I'm not an expert on this aspect of the industry, but very clearly in the minds of Canadian consumers and in reality we have in Canada a stronger regulatory base through which dairy products evolve. We have good product standards based on international standards; we have good quality assurance programs, which are private programs within plants; we have an excellent plant inspection system; and so on and so forth.
Canadian consumers have gotten accustomed to a very high level of quality in Canadian dairy products. We have a labelling system that has delivered that message also. This is an asset that in our view has to be protected, preserved, and built upon. This has underlined our concern as processors. Consider, for example, the possibility of the use of some management tools. I I don't want to get into the debate about it, but this has been our concern with respect to our BST - how you integrate the use of that kind of a product into the system for those who feel that it's worth while and still offer the choice to consumers, because consumers are increasingly demanding more choice and more specific choice.
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It places the dairy processor, who is restricted by very specific advertising guidelines - government-mandated processes and rules and requirements for the labelling and advertising side - by processing methods, by good manufacturing practices, and so on, into a very highly regulated environment. There's no complaint with this; that's the reality in which we operate.
Mr. Reed: Does the fact that we dwell so much on quality maintenance give us a competitive edge under GATT, for instance, when the prospect of a product entering this country rears its head?
Mr. Matte: I think Canada has traditionally used the quality argument very wisely and constructively when developing its export markets. As for using that argument to respond to an import challenge, I think largely the test is still to be made. I think it will withstand that test to a reasonable degree, but at the end of the day the marketplace will pay a premium of only so much for quality.
The mass of consumers will buy below that quality premium, because they know that the basic quality, the quality of the standard product at the ``average'' price if it's of Canadian origin, is a very high quality.
This is where labelling comes into play, and this is where it's very important for a consumer to be able to see at a glance on a label produit du Canada or ``Product of the U.S.A.'' and make that distinction.
Mr. Reed: Mr. Rivard was going to say something.
[Translation]
Mr. Rivard: It certainly is another incentive, but it's not the only one we should set up. We've already invested large amounts in the order of several millions of dollars. We're working in cooperation with the processors to promote the use, in Canada, of a seal of authenticity for canadian milk products using a little blue cow. A good number of processors are already using that logo a bit like the red seal on dairy products in the U.S.
But when we're talking imports or exports, money talks. For example, three weeks ago Europe decided to use a higher subsidy level for its butter because stocks were too high. The international price reacted and dropped right away.
We must be perfectly clear on this point. Producers cannot indefinitely compete with any nation's treasury. In this specific case, the Europeans implemented that subsidy and the international price of butter dropped right down. In Canada, the producers are the only ones to bear those costs and when we're competing in those markets, we have to adjust our price downwards just like our competitors to keep those jobs in Canada; so we have to indirectly adjust our price to that level.
In the absence of any consistent policy, we can't continue meeting that competition; we won't be able to stay in business. We want to maintain a viable dairy industry in Canada, but we need the tools to do it.
[English]
The Chairman: Mr. Balcaen.
Mr. Balcaen: Mr. Chairman, I wanted to comment on Mr. Reed's reference to the confectionery sector in his riding, which is looking at or threatening to use some alternative products. I want to say a few words about it, because I think it's an extremely important question that the industry is addressing.
To go back about four or five years, particularly when the Canada-U.S. trade agreement was signed, as the tariff barrier was coming down the impact of competition on Canadian further processors was accentuated.
The commission, with the cooperation of the industry, has put in place special classes whereby competitively priced product is being supplied to the further processors.
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About a year ago an agreement was arrived at between further processors, processors and producers. A mechanism to set prices and the frequency at which prices were changed or adjusted was agreed to, as was a provision for review, and that review is now under way. It has been difficult to get good input from the further processing sector as to what is wrong with the present process.
There was a meeting in Toronto yesterday where a number of GPMC members were represented, the bakery council and so on. A number of people were there - the National Dairy Council and Dairy Farmers of Canada. The commission was chairing that meeting. There will be another one this afternoon where some recommendations will be made to the Canadian Milk Supply Management Committee.
I think the industry has been very receptive to the concerns of the further processors. Perhaps what's been lacking is more serious participation in the discussions by the further processors - not just by saying the price and the frequency of change aren't right. I think we've been saying bring some answers, not just questions. My sense is that has been forthcoming in the last few weeks.
I'm pleased the producers agreed to postpone the May 1 price adjustment in order for that to happen. I hope this is useful.
What I'm saying is that it's an important question for the industry because it does represent a growth area, and certainly the mood of both producers and processors has been very positive in addressing those concerns. I think we all want to keep that business in Canada, as well as the jobs and so on.
The Chairman: Thank you.
Mr. Matte did you have a comment on that?
Mr. Matte: On the point that Louis made, I was going to....
The Chairman: Mr. Hoeppner.
Mr. Hoeppner: Mr. Chairman, I think everybody around this table wants to see milk producers or farmers stay viable or become more viable. However, I wonder if we're fighting a losing battle in the sense that we'll probably never have a level playing field. That really worries me when I look at the U.S. and how our own financial house is in disarray. We're paying huge amounts of interest to foreign countries.
I just got this article out of The Financial Post, and I'd like you to comment on whether it's more propaganda or is factual. It says the New Zealand dairy board estimates that the average dairy farmer will receive a record pay-out for this season. The financial bonus comes from unexpected high production and a combination of skillful international marketing and good markets. It goes on to say that despite higher production, increasing numbers of farms are being converted to dairy. That's a positive sign for them.
On the next page Martin says the board moved quickly to seize new opportunities, including slightly better access to Europe and the U.S. We are selling cheeses that have not previously been seen in the United States and are tailored for American tastes.
Are we behind these guys? They have restructured themselves. Is that what has to happen? When you look at higher labour costs, I don't think they are higher than the U.S. if take-home pay is taken into account.
The Chairman: I see Mr. Core moving up to the table. I think he wants to comment.
Mr. Hoeppner: There are a lot of questions here.
Mr. Core: There are a lot of questions. The key thing is that the whole New Zealand dairy industry was structured to be an export industry. They've gone through periods of severe financial strain on dairy producers in New Zealand. At the moment they say it's because of good planning, but they're making more money because for the first time in history the world price has moved up to 26¢, 27¢ and 28¢ a litre. It's come up in those kinds of cycles before, but it always goes back down to very low disposal prices.
So it's not so much good planning on New Zealand's part as just luck of the draw that their prices are pretty good in the world market right now. I expect they'll come back down.
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The Chairman: There are New Zealand dairy producers in town today -
Mr. Core: There are, and I'm meeting with them tonight, so I'm just getting my arguments ready.
Mr. Hoeppner: Would you ask them whether it was a Liberal government that did that for them?
Mr. Core: The other thing I'd like to comment on is that there's been a lot of discussion -
The Chairman: It sure wasn't Reform.
Mr. Core: - about how the New Zealand agricultural industry restructured itself for the globally competitive environment, but what hasn't been mentioned is the phenomenal amount of farm debt that was written off in New Zealand at the time of restructuring. If you wanted to write off all of the farm debt that Canadian farmers have, I guarantee you that we could take a lower price. It doesn't matter what the commodity is if you write off all our debt, but that's just not realistic in our environment. So a lot of issues come into play here.
Mr. Hoeppner: But if we don't restructure or become competitive and do the marketing and increase our production for world export, we may have to do exactly what you're saying.
Mr. Core: The reality is that the world export market for dairy products is about 7% of world production, so it's a very small market. It always has been, and in our view it always will be. It's a market of disposal, a market of last resort.
However, the Australians and New Zealanders do have some advantages that allow them to be more competitive in the world market - their climate and grazing systems, which we cannot do in our northern climate.
Mr. Hoeppner: I'd like to give you another example -
The Chairman: Jake, there are people who want to comment on that.
Mr. Hoeppner: Just quickly.
The Chairman: Okay.
Mr. Hoeppner: The Netherlands are about half the size of Manitoba, but they have exceeded us in exports and imports. They have to import natural resources to manufacture the exports. How are they doing it? What is wrong with us that we can't do it?
Mr. Core: If you examine what's happening in Europe, their level of subsidization to agriculture has far exceeded Canada's level of subsidization. Domestic prices have been extremely high, and that gives them the ability to do things like that.
The Chairman: Mr. Rivard
[Translation]
M. Rivard: John was mentioning that in Europe the subsidies were in the order of 43%; I don't have the most recent data at hand, but it was more like 36% for state subsidies. I would remind you that Holland is part of the EEC. This morning, we were talking about an objective of zero interference by Canada in the area of policies.
[English]
Mr. Hoeppner: So you're telling us that we're in the worst of two worlds. No subsidies is good and higher subsidies is good. We're sitting in the middle and we can't survive.
[Translation]
Mr. Rivard: That's what GATT was trying to level off. We have just come through the first year of implementation of those policies in the dairy sector. We will have to live according to the new provisions of GATT. There's going to be a second round of negotiations and I assume that Canada is already preparing for it. We have to get our analysis ready.
GATT's objective is to open up the competition. We said that if the playing fields were levelled and there were equity between the different sectors and the different countries, then we could deal with that question. That's what GATT is trying to level off, but what access have some countries given to date? Canada has played by GATT rules. Do we have the same access to the U.S. as the Americans? Just try to export ice cream or yogurt to the States. No way. With utmost respect, that's what we have to look at.
[English]
Mr. Hoeppner: So you're saying - and I want to get this on the record - that the Liberal government signed the GATT agreement but hasn't learned how to shoot the marbles.
[Translation]
Mr. Rivard: I'm telling you that a game is being played right now. I'll leave that to the politicians, but I can share my perception with you; the Americans are playing the game and they interpret the rules the way they want by reading between the lines. Up to a certain point, we have to watch their moves and make some smart moves of our own. Canadians aren't dumb or dumber than the Americans or the others.
[English]
Mr. Hoeppner: I agree with you.
The Chairman: Mr. Matte.
We'll have to close it off after Mr. Matte, because the next committee is waiting to use the room.
Mr. Matte: Mr. Chairman, I want to make a comment with respect to why the National Dairy Council does not support the current requests by dairy farmers for a long-term dairy policy. I don't want committee members to go away thinking that there's been a fundamental change in our position here.
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It's important to remember that we haven't had a long-term dairy policy for many years now, and when you consider the trade and political context in which we find ourselves, given the NAFTA panels and so on, our question is why now - why not wait and do the job right? As members of the committee have said, the whole context of dairy is changing. If we're going to make rules for the next five years, let's know what it is we have to rule on and rule with and rule within. That's why we prefer to wait until we know the outcome of the panel. Hopefully it will be favourable to us and then we can proceed.
Thank you.
The Chairman: Thank you very much, gentlemen and committee members.
As a closing comment, there's no question that the Canadian dairy industry is an important one and an evolving one. And those of you sitting at the end of the table...all of you will be the players representing many others as the industry evolves. Having watched the industry in the last few years, I've seen the evolution that has taken place in the industry.
And I certainly have confidence that the evolution will take place in such a way that the industry can continue to grow and strengthen. It will not be easy. There will likely have to be some give or take, some push and poke, and maybe some shove and pull as well. Personally, I am confident that it will take place in such a way.
We thank you very much for coming before the committee today, for making your views clear and for answering the questions of the committee members.
The meeting is adjourned.