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No concessions. No surrender.

That's the public stance of Canada's dairy and poultry industries as they furiously lobby the federal government to resist making concessions to gain entry into a massive Pacific Rim trade deal, now being negotiated in Hawaii.

Dairy farmers have mounted a major advertising and public-relations push, highlighting what they say are all the benefits of the status quo, including jobs, stable prices, family farms and healthy cows.

Behind the scenes, however, industry officials acknowledge that all is not well within the supply-management system, and that major reform is essential.

Various industry players, including provincial marketing boards and major dairy processors, such as Saputo Inc., have begun negotiations aimed at "modernizing" the system.

Modernization seems innocuous, even hopeful.

But supply management was facing an existential crisis long before the Trans-Pacific Partnership (TPP) and the European free-trade deal came along.

Modernization is all about saving the carefully calibrated system from outright collapse.

"The industry is approaching a crossroads beyond which the existing policy framework is no longer sustainable," senior Dairy Farmers of Ontario officials acknowledged in a briefing paper, presented at an industry conference earlier this year.

"Producers and processors must put their differences aside, their heads together, and find the way forward. Failure to do so in the upcoming negotiations … is not an option."

Even in Quebec, which produces nearly 40 per cent of Canada's milk, there are winds of change. A group called Union Paysanne produced a 2014 report, Towards Supply Management 2.0, endorsed by prominent former dairy industry leaders, that recommended a partial dismantlement of milk and poultry quotas.

"Doing nothing condemns supply management to slow death by asphyxiation," the report concluded.

The crux of the problem starts with the three essential pillars of supply management: limiting dairy imports, fixing prices paid to farmers and carefully matching production to consumption. Weaken just one of these, and the system becomes unstable, and ultimately unsustainable.

Rapidly growing quantities of imported concentrated milk protein – mainly from the United States and Mexico – have been steadily displacing Canadian milk in the making of cheese and yogurt. Dairies, even ones owned by farmer-owned co-operatives, do this because it's cheaper. Protein concentrates enter Canada duty-free at the significantly lower world price, skirting Canada's prohibitive 241-per-cent tariff on fluid milk.

To meet domestic demand, milk farmers must chronically overproduce. The surplus is then bought up, dried into powder and sold as cheap animal feed.

But the surplus is becoming increasingly unmanageable: 80,000 tonnes of skim milk powder per year, or the equivalent of 800 million litres of fluid milk. In recent months, farmers in Ontario have acknowledged dumping significant quantities of unwanted protein-rich skim milk, after the butterfat has been removed to make cream and butter.

"Right now, we continue to be challenged on a daily basis and there is no obvious end in sight," Dairy Farmers of Ontario chairman Ralph Dietrich said in a recent letter to members.

New trade deals will swell the surplus even more as more duty-free dairy products enter the country.

Most other countries would deal with such a surplus by dropping their prices to encourage consumption, or exporting. But under World Trade Organization rules, Canada can't do that. Its farmers are deemed to be subsidized because they get higher than world prices for their milk.

And for decades, Canadian farmers have paid themselves steadily rising guaranteed prices. They get a blended price for their milk, reflecting how much goes to high-value products, such as cream and cheese, and how much becomes animal feed.

The growing surplus creates a chronic drag on prices, forcing farmers to charge dairies relatively more.

Canadian dairies, such as Saputo and farmer-owned Natrel, have responded by investing in more profitable foreign operations, while relying on growing quantities of cheap imported milk protein in Canada.

Dairy farmers say the answer to this existential dilemma is to discourage imports of milk protein concentrates by lowering the wholesale price of milk protein in Canada. And by charging less, farmers believe they can still grow and legally sell some of that protein on world markets.

But given that the TPP and European free trade would open Canada's market even further, modernization looks more like a stop-gap measure than a permanent fix.

And other countries aren't likely to allow a new foray into exports to go unchallenged, as long as supply management remains intact.

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