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Is Canada Ready for the Dairy Wars?
August 2, 2015

New Zealand Trade Minister Tim Groser might be forgiven for having been a tad testy toward Canada when he arrived in Hawaii this week for negotiations on a vast new Asia-Pacific trade pact. The “Saudi Arabia of milk” has seen its dairy dream sour and Canadian protectionism is a sore spot among Kiwis.

Milk is to New Zealand’s economy what oil is to Canada’s. And after the boom, came the bust. Global milk prices have sunk 63 per cent since early 2014, the result of a supply glut not unlike the surge in shale oil production that has depressed crude prices. Facing sliding incomes, New Zealand’s dairy farmers are expected to cull one-in-six cows this year. The central bank, which cut interest rates in June and July, says more easing is needed. Many Kiwis are suddenly reassessing New Zealand’s decade-old decision to go all-in to become a global milk superpower.

As the head of giant Kiwi dairy co-op Fonterra, Theo Spierings, said in June: “The world has changed and the unprecedented global volatility we’re experiencing now is the new normal.”

The New Zealand experience is likely top of mind for Canadian International Trade Minister Ed Fast as Ottawa decides how far to go in opening up this country’s dairy sector to imports from other countries participating in the Trans-Pacific Partnership. Mr. Groser said New Zealand is looking for “commercially meaningful access” to Canada’s dairy market, but that much “hard yakka” (Kiwi for hard work) would be needed if a deal is to be reached at this week’s talks in Hawaii.

Critics of Canada’s supply-managed dairy sector, which guarantees prices to dairy farmers based on the average cost of production, say it encourages inefficiencies that cost Canadian consumers billions of dollars annually. Production quotas cap supply. And sky-high tariffs ensure our market remains closed to all but a tiny wedge of dairy imports. Canadian Council of Chief Executives head John Manley calls it “the last vestige of Soviet-style central planning on the planet.”

Advocates of opening our dairy market to global competition insist it would be a boon to the most efficient farmers and processors, allowing them to grow by exporting their products internationally. But that belies the painful fate that would likely await the vast majority of Canada’s 12,000 dairy farms. Having been sheltered from competition for so long, the relentless demands for lower costs and higher productivity would overwhelm most family-run dairy farms.

Those demands are only growing fiercer. The European Union’s move earlier this year to abolish milk quotas is expected to lead to a surge in production in countries with the most efficient dairy sectors, particularly the Netherlands, Denmark and Ireland. They are aiming to take on New Zealand in the Chinese market and will push for wider access to Canada’s dairy market than the tiny amount they stand to get in the pending Canada-Europe free-trade agreement.

Then there’s the United States, where industrial-sized dairy farms with more than 10,000 cows are not uncommon. (The average Canadian dairy farm has 77 cows.) At the TPP talks, the United States is pushing harder than any other country for access to the Canadian dairy market.

New Zealand’s dairy sector rode the Chinese boom until growth there flinched. China now has big stockpiles of whole-milk powder, New Zealand’s main export, leading most analysts to predict that low global milk prices (and a weaker Kiwi economy) will be around for a while.

That is likely good news for most of the world’s consumers, provided processors and retailers pass on those savings. But it’s bad news for New Zealand, which bet that China’s thirst for its milk would be unquenchable. Not only are European producers now eyeing the Chinese market. Domestic production is growing fast in China – one particular operation has 140,000 cows.

Were Canada to finally join the global milk market, consumers here (particularly the poorest ones) would benefit most. Dairy farmers, not so much. But that is what free trade is all about. As Adam Smith wrote in The Wealth of Nations: “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.”

Countries prosper by focusing on what they do best. New Zealand has big competitive advantages over Canada in milk production, including year-round, pasture-based dairy farming. But as New Zealanders are now discovering, being a milk superpower requires a strong stomach.

By Konrad Yakabuski
Souce: The Globe & Mail


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