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Cows stand in a barn at the Mount Kolb dairy farm in Caledon, Ontario, Canada, on Wednesday, Nov. 18, 2015. (James MacDonald/Bloomberg)
Cows stand in a barn at the Mount Kolb dairy farm in Caledon, Ontario, Canada, on Wednesday, Nov. 18, 2015. (James MacDonald/Bloomberg)

KONRAD YAKABUSKI

Canada’s dairy producers are waking up to the realities of global trade Add to ...

The scene is a country restaurant overlooking what looks to be an idyllic Laurentian lake in summer, as the better half of an English-Canadian couple on vacation gushes over the local gastronomy.

Garçon, qu’est-que c’est le cheese dans le my wife’s bouche?” the woman’s husband asks in what’s left of his fragmented high school French.

It turns out the fromage in question is Oka, a Quebec delicacy long associated with the Trappist monks who first created it in 1893. As the waiter explains, the local fromagerie was all out, so he had his cousin ship some in from Toronto – only his French pronunciation of Canada’s largest metropolis leaves the couple wondering about the location of this city they’ve never heard of.

If you live in Ontario and haven’t seen this award-winning TV ad, you must have been living in an underground cheese cave for most of the past few years. Those who have seen the spot, along with similarly whimsical Oka ads run in Quebec, seem to have taken the bait. Oka volumes rose by 50 per cent in the two years to the end of 2015, according to its manufacturer, Agropur.

The giant diary co-op’s decision to invest millions in the ad campaign, whose spots are the subject of water-cooler banter in Quebec, was as much a defensive move as an offensive one. Declining fluid-milk consumption in Canada and the prospect of an onslaught of imported fine cheeses entering the country tariff-free under pending trade agreements forced Agropur’s hand. The ad campaign aimed to cement Quebeckers’ loyalty toward their beloved Oka and to crack the Ontario market, where Oka sales and brand recognition were relatively low.

Canada’s supply-managed dairy sector often seems to be living in a time warp, insulated from the market forces and creative destruction that drive efficiency. But protecting the 3,500 dairy farmers who effectively own it while staying competitive against multinationals such Saputo, Kraft and Danone has forced Agropur to become one of the more dynamic and innovative players in Canadian food processing.

Backed by $770-million in recent financing from a host of Quebec Inc. actors led by Caisse de dépôt et placement du Québec and National Bank, the Longueuil, Que.-based co-operative in 2014 purchased Davisco Foods International, a large U.S. producer of cheese and whey, and invested heavily in the Quebec factories that make Oka and its its iogo brand of yogurts.

The three-year-old iogo line is produced by Ultima Foods, a joint venture between Agropur and Agrifoods International, a Western Canadian co-op owned by British Columbia, Alberta and Saskatchewan dairy farmers. Also backed by an expensive national ad campaign, the iogo line claims to have captured 13 per cent of yogurt sales nationally and 19 per cent in Quebec. Overall 2015 sales approached $6-billion, including its Natrel fluid-milk division.

The need to stay competitive, however, has put Agropur on a collision course with its own farmers as it seeks to lower production costs. Until last May, it was importing cheaper U.S. milk-protein concentrates as ingredients, displacing domestic milk. It temporarily halted the imports, however, after regulators in Canada created a new class of lower-priced industrial milk destined specifically for cheese and yogurt production. The solution is a stop-gap measure, however, that cannot be sustained without permanent subsidies or raising prices on other dairy products.

Quebec farmers have held regular protests to pressure Ottawa to close what they call a loophole that enables U.S. milk-protein concentrates to enter Canada tariff-free. But to do so would be to risk a costly Canada-U.S. trade war that could sideswipe the entire industry. Canada’s dairy sector is already in the crosshairs of U.S., European, Mexican, Australian and New Zealand farmers, who recently complained to the World Trade Organization about this country’s “increasingly protectionist policies.”

The foot-dragging surrounding ratification of the Canada-Europe Comprehensive Economic and Trade Agreement (CETA) and Trans-Pacific Partnership (TPP) has spared Agropur from having to compete against more fine cheeses imported duty-free from Europe and elsewhere. CETA alone would double the volume of European fine cheeses entering Canada free of tariffs.

Agropur appears to be hedging its bets. It already markets dozens of foreign cheeses, and is now angling to obtain additional quotas to import more duty-free European cheese under CETA. Needless to say, this does not sit well with some its own farmer-owners, who see this as leading to the potential cannibalization of Agropur’s domestic brands. But it’s an example of the contortions a Canadian co-op such as Agropur must go through to retain market share.

For now, the success of the Oka and iogo ad campaigns have given Agropur and its farmers something to crow about. But adapting to new trade realities, while keeping its farmers happy, will only get harder with each passing day.

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Follow on Twitter: @konradyakabuski

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