Dairy imports off to a slow start in Pacific Rim trade deal
Six months into the CPTPP, relatively little foreign competition has materialized
As dairy, egg and poultry farmers wait for the Liberal government to explain the details of a $3.9 billion compensation package promised in this spring's federal budget, a serious threat from imports under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) has yet to emerge.
Tariff cuts began phasing in on Dec.30 in the Pacific Rim countries that had ratified the deal. Seven of the 11 signatories have ratified so far: Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam.
One of Canada's concessions allowed more tariff-free imports of dairy, egg and poultry products, which normally are protected from foreign competition by Canada's supply management system.
Dairy farmers had to "take one for the team" and give up another share of their market, as they did in Canada's 2016 European Union deal and the recently-renegotiated North American trade agreement.
But six months into the CPTPP's implementation, the pain farmers anticipated has been slow to materialize.
Global Affairs Canada import data show no imports at all for nine of the 16 categories of dairy products.
Importers also haven't brought in any chicken, eggs, turkey or broiler hatching eggs and chicks under the new CPTPP quota.
Even the dairy products that have landed are nowhere near their negotiated limits.
Canada issued import permits allowing 500,000 kg of butter before July 31 (the year-end period for dairy industry calculations). But as of mid-June, only 184,515 kg have arrived — just over a third of what's allowed in tariff-free.
The story is similar in other categories:
- Only 8 per cent of the quota issued for milk powder has been used.
- Only 14 per cent of the tariff-free cream powder has landed.
- None of the three cheese categories has reached even five per cent of the tariff-free volumes allowed before the end of 2019.
Imports could rise eventually
It's too soon to conclude the full amount of what Canada conceded in the CPTPP won't be used.
When Canada agreed to more cheese under the Comprehensive Economic and Trade Agreement (CETA), the new European competition was similarly slow to materialize, but neared its limit by the end of 2018.
As with CETA's implementation, industry and government officials say it takes time for importers to find new suppliers and position profitable new imports in Canada's grocery mix.
Mathieu Frigon, president and CEO of the Dairy Processors Association of Canada (DPAC), said that "with few pre-existing ties to some of these countries' dairy industries, and with little time to build relations and supply chains, these companies may still be in the process of building momentum."
When the CPTPP quotas were negotiated, the United States was part of the Trans-Pacific Partnership and expected to take up most of this new Canadian market access.
But then President Donald Trump's administration pulled out. The U.S. used the NAFTA renegotiation to recapture an even bigger slice of Canada's market.
While butter ships easily from a major global exporter like New Zealand, some of the product categories, like fresh milk and ice cream, are impractical to ship long distances across the Pacific.
"There was therefore little expectation of filling the quantities of certain products," Frigon said.
Nevertheless, to make the strongest possible case for compensation, the supply managed sector often assumes full utilization of the CPTPP quota by the remaining countries when it calculates how much of its market has been lost to foreign competition.
Despite the early data, the Chicken Farmers of Canada still believes all the allowable chicken will be imported.
Without the U.S. in the deal, the only country in a position to export (frozen) chicken to Canada is Chile, CFC spokesperson Lisa Bishop-Spencer told CBC News. Chile's senate has not finished ratifying the CPTPP but it is expected to do so soon, with the agreement coming into force there 60 days later.
Christine Anawati from the Egg Farmers of Canada told CBC News the egg quota is unlikely to be used in the near future because there are currently no plants in the CPTPP countries that meet Canadian inspection standards. However, "this could change as member countries take advantage of the business opportunity," she said.
Who gets to import?
The way the government allocated this new quota remains controversial across both the dairy sector and grocery supply chains. A public consultation is underway until Aug.31 to consider better ways to determine who gets to import — and potentially profit from — these limited farm products.
To the dismay of Canada's retail sector, the import permits for roughly 90 per cent of the CPTPP quota were allocated to dairy processors. DPAC anticipates $730 million in lost returns on investments because of the CPTPP.
Previously, permits to import European Union cheese (and the associated profits) were split 50-50 between dairy processors and the retail sector, with half of the available quota required to go to "new entrants" under terms the Europeans negotiated.
That system was not considered a success. In particular, the Europeans were highly skeptical that Canada's dairy sector could be trusted to import the full amount of quota cheesemakers were allocated, because the foreign imports inevitably compete with or replace domestic products.
Documents obtained by CBC News under the Access to Information Act show that in July 2018, the government reminded importers that if they did not intend to use their full quota, they had to return it by August 1 — to be re-allocated to another importer prepared to fulfil the commitment — or risk losing the right to import in future years.
At the time, Canada did not appear on track to import the full amount of its cheese commitment to the EU.
While the documents are redacted to block specific names, they reveal numerous importers returned unused quota while others scrambled for what was re-offered, as the government tried to ensure all the quota would be used.
Other documents show officials collected early import data prior to meetings with European officials, who were concerned the EU wasn't getting the market access it negotiated. While specific numbers were redacted, the Europeans appear to have been told how much cheese was imported by new entrants versus established players, as well as the breakdown of imports between Canadian cheesemakers, distributors and retailers.
CBC News asked for these numbers but was refused. Global Affairs Canada says it does not compile this sort of information as part of its policy analysis.
Compensation details coming
In March, the federal budget proposed up to $2.15 billion in new funding to "sustain the incomes of eligible dairy, poultry and egg farmers" to deal with anticipated losses from CETA and the CPTPP. The exact criteria and method of delivery for this assistance are expected to be revealed this summer.
A further $1.5 billion has been set aside to protect the value of investments in production quota. (Farmers pay for the right to produce and sell certain volumes annually into the marketing board system.)
If the price of domestic production quota is not diminished by these trade deals, this part of the compensation may never be required.
The federal government has yet to announce any plans to compensate for losses from the revised NAFTA. A working group of industry and government officials is considering a long-term strategy for the supply managed sector's future.