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Supply management distracts us from Canadian dairy’s long-term future

The issue of supply management polarizes opinion into two sides: Defend the status quo or dismantle the system. Unfortunately, this rigidness masks important strategic issues about how to actually help expand Canada's dairy industry.

While all eyes remain focused on negotiations to conclude the Trans-Pacific Partnership (TPP), we need to keep the longer game in mind.

We need to take the offensive by tackling global subsidy practices that affect beef, pork and other sectors, including dairy. Fortunately, our sustainable agricultural production advantages may give us additional leverage.

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Canada's dairy sector is being squeezed and faces a growing trade deficit. Canada imports large volumes of various milk proteins (known as concentrates and isolates) while our dairy exports are restricted – a threat that receives little attention. Imports of such proteins from the United States are up about 300 per cent since 2010, a trend that may continue once the Canada-EU trade deal comes into force, and possibly also under TPP.

Dairy proteins are important to efforts by food processors to develop innovative and healthy products, such as yogurts and high-protein beverages – and consumers are lapping up these new products both here and abroad.

Under the North American free-trade agreement, these milk protein imports cross the border tariff-free. But Canada's export potential is restricted by a 1995 World Trade Organization ruling that caps our exports of butter, skim-milk powder, cheese and other products.

Canada's supply management system keeps the price of milk products above the world price. This makes lower-cost imports attractive to food processors. Lower-priced and uncontrolled imports of protein concentrates and isolates displace demand for Canada's skim-milk powder, which can then only be diverted into lower-value animal feed – at significant cost to producers.

Simply labelling supply management as "protectionist" misses a critical point. Canada can't unilaterally expand its dairy exports. If we want Canada's second-largest agri-food sector to grow, then we need to consider how expansion in export access would actually take place.

We also need to push back on other countries' practices. Our competitors produce and export milk products by utilizing a complex array of direct and indirect subsidies – and it goes well beyond this one sector.

Legitimate support is given to agriculture in Canada and other countries for good reason, such as to compensate for crop failures. However, certain global subsidies create unfair competition and drive prices down. In part, this enables U.S. agriculture to achieve scale. Food processors avail themselves of these lower-cost ingredients, helping them to export so successfully. This is a competitive disadvantage for Canada. We can't out-subsidize bigger players.

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Subsidies can also encourage environmentally unsound practices. Dairy production in the southwestern United States is successful in part because it draws down on the region's aquifers – a "natural capital" benefit that's not factored into price.

Extended drought is reshaping the U.S. and Australian dairy industries. Soil quality and availability for expansion of the dairy industry in New Zealand may limit future growth.

Across Europe, the Organization for Economic Co-operation and Development has documented examples where pesticide concentrations in surface water and groundwater exceed recommended national drinking water limits. An Irish academic recently admitted that beef farming in Ireland is "not financially viable without EU subsidies" and further claimed that the added costs of greenhouse gases generated from these ventures make beef farming even more uneconomical.

Most of Canada's water and soil resources do not face these pressures. Dairy supply management has not created significant surpluses at the expense of ecosystems. Our country's wealth of water and land confers certain comparative advantages across much of our agri-food sector, if managed properly. Canada could be poised to take the offensive in trade talks by opening up a new front: the relationship between subsidies and sustainability.

With much of the trade access groundwork having been laid, we now need to go beyond driving down tariffs or increasing market access. Targeting foreign government-subsidized practices (including those that encourage unsustainable practices) would be a calculated strategic move.

Raising the environmental bar may eliminate some highly inefficient competitors and those requiring massive investment to meet even minimal sustainable requirements. Prices would better reflect the real costs, which would bode well for our dairy producers and agri-food trade. Taking on sustainability would also require us to improve our practices, such as better tracking and tracing of the origin of ingredients and food and the impacts of their production steps. Consumers, food companies and retailers increasingly expect this, too.

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Canada's next trade strategy could assume a three-pronged approach. First, unravelling these large direct and indirect foreign subsidies and, second, demonstrating Canada's comparative advantages on sustainability performance could benefit the agri-food sector as a whole. Third, with the clock ticking, taking concerted action on dairy export rules may allow Canada to be more competitive, benefiting our producers, agri-food processors and exporters.

Ted Bilyea is chair and David McInnes is chief executive officer of the Canadian Agri-Food Policy Institute. The recent Agri-Food Economy Systems paper Canadian Dairy Exports: The Knowns, Unknowns and Uncertainties was an important source for this commentary.

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