PRB 98-5E
ANALYSIS
DAIRY BLEND IMPORTS AND
SUPPLY MANAGEMENT IN CANADA
Prepared by:
Jean-Denis Fréchette
Economics Division
October 1998
Revised 19 August 1999
The
economic importance of imports of butteroil/sugar blends under tariff item 2106.90.95 goes
far beyond the displacement of 3.086 million kilograms of fat (roughly 2% of the Canadian
market sharing quota (MSQ)). Even if the value of those imports, approximately $20
million, is viewed in relation to producers total revenue of $3.8 billion in 1997,
the numbers do not reveal the real problem underlying dairy blend imports.
Butteroil
blend imports are the first tangible impact of the tariff system put in place as a result
of the Uruguay Round in order to open up markets and liberalize trade. The ultimate goal
is to clear the way for better distribution of the worlds agri-food resources but,
before that can be achieved, there is a necessary transition phase that tariffs help to
make more progressive. All countries know the rules of the tariff game and its potential
impact on domestic markets, but some industries in some countries are finding the impact
to be harder to deal with than they had anticipated.
Whether
or not the classification of butteroil imports under tariff item 2106.90.95 rather than
0404.90 or line 2106.90.33 is the result of an administrative error by Revenue Canada
employees, as some observers seem to be claiming, the fact remains that a growing number
of imported dairy products or blends will be on the Canadian market in the future. The
Canadian International Trade Tribunals prediction that the penetration by butteroil
blends could reach 25% of the fat requirement for ice cream and replaceable fat for
processed cheese illustrates only one facet of what might lie ahead for the dairy
industry.
For
processors of dairy products, the value of dairy blends is still primarily economic;
that is, they allow dairy products to be manufactured at the least cost, whether for the
domestic market or for export. For Canadian dairy farmers, this means they will
have to constantly evaluate the flexibility of supply management and their willingness to
provide milkfat at a competitive price. The optional export program, which gives exporters
access to milkfat at competitive prices, has been a qualified success among producers.
Further, the proceedings taken by the United States before the WCO against Canadian
tariffs applicable to Class 5 milk products, whose pricing system aims to help
exporters and processors stay competitive on world markets, could very well make dairy
farmers less inclined to provide milkfat on the basis of a dual pricing system.
For
government decision-makers, the challenge will be to support a viable form of supply
management that can be reconciled with growing imports (itself a contradiction) and at the
same time get Canadian consumers to agree to "subsidize" a dairy industry export
strategy that forces them to pay higher domestic prices. Finally, as far as consumers
are concerned, the debate over butteroil/sugar blends shows that with the increasing
development of new products, there may be a lack of product information and a need for the
regulations governing the labelling of agri-food products to be reviewed and amended.
Substituting butteroil for cream is certainly valid from the standpoint of an ice cream
manufacturer who wants to stay competitive, but where labelling regulations require
nothing more than the words "dairy content" to describe the butteroil
substitute, it can be asked whether consumers are really able to make an informed choice.
Even
though the tariff and market access system will continue to provide a buffer against
massive imports of dairy products, there will be other cases where imported dairy blends
manufactured (whether deliberately or not) to circumvent the tariff-rate quotas will
compete with milkfat produced in Canada. Moreover, the development and penetration of new
dairy or "dairy-like" products will increase as markets open up. The next wave
of "dairy products" to create a stir could well be butter blends, butter
substitutes containing up to 70% vegetable oil. Such blends are tremendously popular in
the United States, where they are sold as dairy products, even though they are more
closely related to margarine. Butter blend imports are subject to a tariff-rate quota of
more than 200%, but their production in Canada, already permitted in some provinces, could
well take off.
This
new instalment in the history of butteroil/sugar blend imports opens one more crack in the
structure of supply management and again raises the question "where is the balance
between the intrinsic rigidity of supply management and the flexibility needed for it to
grow?" |