European cheese imports serve up tough choice for Champagne

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

Nearly 18,000 tonnes may sound like a lot. It's actually a rare, thin slice of Canada's tightly controlled cheese market.

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

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

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

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

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

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

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

'Difficult to justify politically'

Retailers argue they should import all the new cheese because that's what's most efficient.

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

Quebec Agriculture Minister Laurent Lessard has weighed in, asking Champagne, who represents a rural Quebec riding, to support the domestic industry by allocating import quota to processors.

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

As head of the association representing Canada's dairy processors, he's worried smaller operations will be disadvantaged if it's all done in a rush before CETA is provisionally applied on July 1.

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

Will demand last?

Canadian dairy prices are controlled by limiting how much milk farmers can sell. Imports are strictly regulated: beyond a negotiated quota, the tariffs on incoming dairy products are so high they're priced out of the market.

In talks with the EU, Canada agreed to more tariff-free cheese, equivalent to about two per cent of Canada's overall milk production.

The government will allocate 16,000 tonnes of new, tariff-free quota annually for fine cheeses and 1,700 tonnes for industrial cheese.

CETA also requires Canada to reallocate 800 tonnes currently held by other countries to the EU, on top of the 13,471 tonnes of European cheese that already enter tariff free under World Trade Organization (WTO) rules.

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

Champagne's department says demand is rising by about one per cent per year, so as the EU imports increase gradually over five years, the Canadian industry will adjust.

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

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

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

'Not a replacement'

CETA intends to shake up the market by requiring at least 30 per cent of the new annual quota to go to "new entrants" who don't currently import cheese: a new entrant could be any retailer, distributor, cheesemaker or producer co-operative that wants to expand product lines.

Processors are unlikely to bring in cheeses that compete with what they make — they're more likely to import more unusual cheeses. Profit from their distribution could then bolster existing businesses.

Grocers, on the other hand, care about sales margins. While some cheeses sell as loss leaders, the markup on cheese can be as high as 100 per cent, on top of what retailers charge for product placement.

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

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

​David Wilkes, senior vice-president of the grocery division of the Retail Council of Canada, says the government has a "unique opportunity" to ensure new cheeses reach consumers efficiently.

He said giving quota to processors or distributors could add 20 to 40 per cent to product costs. 

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

'Not necessarily' lower prices

Will consumers pay less if retailers import it all?

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

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

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

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

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

Charlebois suggests splitting quota between retailers, large processors and artisan businesses.

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