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A fresh batch of cheese curds is prepared at a dairy near Woodstock, Ont.GEOFF ROBINS/The Globe and Mail

Saputo Inc. and other dairy manufacturers are seeking compensation from Ottawa over the Canada-European Union free-trade deal, arguing that they – not milk farmers – will be the main victims of the landmark pact.

The prospect of more duty-free European cheese entering the country will deal a massive blow to Canadian cheese manufacturers, the industry warns in a submission sent to federal and provincial governments and obtained by The Globe and Mail.

Dairy farmers were cast as the biggest losers from free trade with Europe when the deal was unveiled last fall.

But Don Jarvis, president of the Dairy Processors Association of Canada, said "the pain will be felt at the manufacturing level."

Losses to dairy manufacturers could reach $184-million a year, according to the document. Mr. Jarvis predicted untold lost jobs and plant closings.

The industry wants Ottawa to assign most of the new cheese import quota created by the trade deal to existing Canadian cheese processors in a way that "mitigates the damage."

The manufacturers also want the phase-in of the higher European cheese quota extended beyond seven years and staged "gradually."

Cheese quota is enormously valuable because it gives importers the right to import set quantities of cheese at low world prices and then resell it in Canada, where retail prices are among the highest in the world.

Dairy manufacturers already hold a large share of existing import quota and therefore are best-positioned to "ensure orderly marketing of the new allocation" while minimizing disruption to cheese makers, according to the document.

Jeffrey English, a spokesman for Agriculture Minister Gerry Ritz, would say only that the "views of dairy processors are being considered," in keeping with a pledge by Prime Minister Stephen Harper to compensate the dairy industry for any losses they suffer as a result of the deal.

Under the tentative Canada-EU agreement, Europe will more than double the volume of duty-free cheese it can sell in Canada – to 31,100 metric tonnes from roughly 13,500 metric tonnes now.

The normal tariff on imported cheese is 245.5 per cent – part of a regime designed to shield Canada's tightly regulated dairy supply management system from foreign competition.

The industry complains it's saddled with a host of competitive challenges that are not of its own making, including raw milk prices that are nearly twice as high as in Europe, numerous interprovincial trade barriers and costly cheese compositional standards. The way milk is allocated, province-by-province, has forced the industry to maintain "small plants in numerous locations across the country, impeding economies of scale and resulting inefficiencies," according to the document. There are currently 413 dairy plants in Canada – 85 per cent of which have fewer than 100 employees.

The industry estimates that cheese imports could grab 8 to 10 per cent of Canadian consumption as a result of free trade with Europe, up roughly 4 per cent now.

Manufacturers are also urging Ottawa and the provinces to modernize the supply management system. But the Dairy Processors Association of Canada stopped short of calling for more radical reform, such as dismantlement of the supply management system.