PRB
98-5E
ANALYSIS
– DAIRY BLEND IMPORTS AND
SUPPLY MANAGEMENT IN CANADA
Prepared by:
Jean-Denis Fréchette
Economics Division
October 1998
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 world’s 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 is the result of an administrative
error by government employees, as the DFC claim, 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 Tribunal’s 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 decisionmakers, 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?"
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