AGRI Committee Meeting

STANDING COMMITTEE ON AGRICULTURE AND AGRI-FOOD

COMITÉ PERMANENT DE L'AGRICULTURE ET DE L'AGROALIMENTAIRE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, March 17, 1998

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[English]

The Chairman (Mr. Joe McGuire (Egmont, Lib.)): Good morning, everyone. We'll call the meeting to order.

Mr. Proctor has dropped into his caucus. He'll be here shortly. I believe the Reform are also caucusing over today's debate, so they'll be a little late. But I think we should proceed and hear the witness.

I'd like to welcome Mr. Guy Jacob from the Canadian Dairy Commission. Would you introduce your friend with you, and we'll take your statement and then go to questions.

Mr. Guy Jacob (President, Canadian Dairy Commission): Thank you, Mr. Chairman. I'm here with Chuck Birchard, who is director of policy and communications at the CDC, the Canadian Dairy Commission.

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[Translation]

I will be making my presentation in French, but I'll be pleased to answer any questions you may have in either of the two official languages.

First of all, I want to thank you for giving us this opportunity to meet with you and make this brief presentation on the roles and responsibilities of the Canadian Dairy Commission. You have received a copy of the Annual Report, which provides much more detailed information. Overall, the Canadian Dairy Commission is a small Crown Corporation with 67 employees, 62 of whom are permanent. The Chairman of the Commission is assisted by two part- time commissioners who complete the CDC team.

The Commission's activities are highly diversified, and that is what I would like to try and demonstrate. Its annual operating budget is approximately 5.4 million dollars; 2.4 million dollars come from the federal government, 1.9 million comes from dairy producers and the other 1.1 million from the market.

Our official mandate at the Canadian Dairy Commission is to provide efficient producers with the opportunity of obtaining fair return for their labour and investments, while at the same time ensuring that consumers have a continuous and adequate supply of dairy products of high quality.

Of course, even though processors are not actually mentioned in the legislation, we see them as valuable partners, given the very significant role they play in the dairy product chain as a whole.

The CDC administers dairy producers' subsidies for the government of Canada. They represent 146 million dollars in 1997- 1998. As you know, dairy subsidies are being reduced by 20 percent per year and will completely disappear in February of the year 2002.

The Canadian Dairy Commission also chairs meetings of the Canadian Milk Supply Management Committee. The Milk Supply Management Committee is, for all intents and purposes, the organization that manages the milk quota system in Canada. It is this Committee which is responsible for the operation of the federal/provincial dairy product marketing agreement, commonly known as the National Milk Marketing Plan.

The Milk Supply Management Committee is composed of two representatives per province, one producer representative and one provincial government representative, as well as one person to represent processors and one to represent the association that speaks for dairy producers in Canada, namely Dairy Farmers of Canada.

This Committee essentially makes decisions on most of the components of the national plan, and particularly the setting of quotas. Every year it is this Committee that determines the quotas to be allocated to each of the provinces to meet domestic needs.

Thus the CDC's role is really to influence and provide policy direction to the Milk Supply Management Committee, rather than exercise decision-making power per se. On occasion, Commissioners may take decisions on certain issues when Committee members are not unanimous. The Commission also provides most of the technical and administrative assistance that is required to ensure the proper operation of the Committee at the national level.

The Committee also chairs the meetings related to what is called the P9 agreement. P9 is an agreement under which the nine provinces of Canada that are signatories to the national plan—Newfoundland is not part of the agreement, as it does not yet produce much industrial milk—pool their revenues from the sale of milk in the special classes.

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And what are these special classes? I would just note that these special classes are currently the subject of a challenge by the Americans and New Zealand. The special classes are classes within which dairy producers supply the secondary processing sector, in other words, bakeries, confectionaries, and so on, as well as milk intended for export at lower prices.

This system that was put in place following the last GATT agreement to sort of replace the levies that previously applied to milk used for secondary processing in Canada or destined for export.

With respect to the P9 agreement, the Commission also has the ability to influence or try to guide the application of the P9 agreement. It also provides technical and administrative support. In addition, the Commission is the organization that issues permits whereby secondary processors or exporters can purchase milk at lower prices. In other words, in order for an exporter to be able to buy milk at a lower price, he must first obtain a permit from the Canadian Dairy Commission. It is also the Canadian Dairy Commission that has the ultimate responsibility to ensure that secondary processors or exporters that purchase milk at a lower price do in fact use that milk for the purpose for which the permit was issued.

The Commission also chairs the P6 agreement. We have a P9, a P6, a P4, and the Milk Supply Management Committee. So, P6 is an agreement between 6 provinces—Manitoba, Ontario, Quebec and the Maritime provinces—under which producers have agreed to pool revenues from all the milk sold for the domestic market. Therefore, that includes not only unprocessed milk, but all the different types of milk used to make cheese, yogurt, ice cream, and so on.

As regards the P6 agreement, the Commission plays the same role there as it does in relation to the P9 agreement-in other words, a role of administrative and technical support. It is also there to give direction and even act as a mediator, in some cases, between signatory provinces.

The P4 agreement is an agreement similar to P6 but for the four western provinces: British Columbia, Alberta, Saskatchewan and Manitoba, although the Commission does not chair the P4 meetings. With respect to the P4 agreement, which involves pooling revenues from all the milk producers in those four provinces, the Commission provides both administrative and technical support. It may also act as a mediator on occasion to try and resolve disputes between provinces, although it does not chair the meetings of the P4 agreement.

The Commission also manages butter and milk powder stocks needed to ensure orderly supply. When production is high on the Canadian market, the Commission buys butter and milk powder stocks and stores them, with a view to putting them back on the market during periods of low production or, if there are surpluses in relation to domestic requirements, to exporting these butter or milk powder stocks, particularly milk powder, to outside markets.

So, it basically plays an important role in regulating supply, given that dairy production is not stable 365 days of the year. By definition, dairy production goes up and down, depending on the period of the year.

For the purposes of butter stock management, the Commission also sets what is called the support price. The support price is the price at which the Commission announces it will buy back butter or milk powder stocks for the coming year. The Commission recently announced the new price that came into effect on February 1.

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In a way, it is a floor price. No one can sell, either on the domestic market or the international market, at a lower price than the one announced by the Canadian Dairy Commission for surplus removal. So, the Commission's announcement of an increase in the support price clearly influences the prices of the various dairy products sold on the domestic market.

However, the Commission does not set prices for the domestic market; that is accomplished through negotiations between processors and producers, although in some provinces, the decision is made by provincial government authorities. The Commission only announces the price at which it will buy back any surplus, whereas the market and provincial governments set prices for each of the classes in each of the provinces.

The CDC is also the sole importer of imported butter volumes agreed to by Canada in the last round of GATT negotiations. Over the coming year, the Commission will import approximately 2,800 tons of butter, mainly from New Zealand, in order to meet Canada's obligations under the last GATT agreement.

The Commission will redistribute the butter strictly in the secondary processing sector, so that the entry into Canada of these imported butter volumes will in no way distort domestic butter markets. You will not find this butter on your supermarket shelves; it will be used to manufacture secondary processed products.

The Commission is also responsible for surplus disposal. Every year, the Milk Supply Management Committee sets quotas, which are a basically an estimate of the requirements of the Canadian domestic market for all dairy producers, plus a margin to ensure that we will always have adequate supplies of milk to meet domestic needs, plus certain volumes which are considered to be planned exports to markets Canada has traditionally held.

Any overquota production must be exported to foreign markets. The exports can be arranged through private companies, through class 5E or special class permits issued by the Canadian Dairy Commission, or directly by the Canadian Dairy Commission.

The Canadian Dairy Commission remains a major exporter. Last year, its direct exports totalled some 200 million dollars. Those products are exported by the Canadian Dairy Commission through government-to-government sales. Liberia, Mexico, Algeria and Cuba are the four countries the Canadian Dairy Commission deals with on a government-to-government basis. In all the other countries, exports are arranged through the private sector, under special class or class 5E permits.

The Commission also works with the Departments of Agriculture, Foreign Affairs, Industry and Trade to provide information, including on Canada's response to the American 301 challenge. The Commission has a solid data base on dairy producers, the production and use of milk for various purposes and the manufacture of dairy products.

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The Commission is also a source of information for other departments, including Statistics Canada, as well as for provinces who wish to consult the CDC's data.

I have given you a brief overview of the Canadian Dairy Commission's activities. I have been Chairman for just a little over four months. The first goal I set for myself was to achieve greater harmonization of regulations and administrative procedures for management of dairy issues, which vary considerably from one province to the other.

If we succeed in achieving greater harmonization, the clear result will be a simplified system. The Canadian dairy system is extremely complex in each of the provinces. It is that even more complex because of differences between the provinces, and is especially complex at the national level.

I also set as one of my goals to assist in improving relations between producers and processors, relations that are not always harmonious, particularly as we approach the next round of WTO negotiations. Everyone would benefit if there were a significant improvement in relations between producers and processors.

Finally, I would like to play a role in helping the industry as a whole—processors and producers—to either start or continue to adjust to an environment in which the entire dairy sector may well be operating one day, one where it will be forced to compete in a North American, and possibly global, free market. To that end, we are working particularly hard to set up an Optional Export Program that would be more similar from one province to the next, and which would allow the industry, including both producers and processors to continue to grow.

That was a very brief overview. I would now be pleased to answer any questions you may have.

Thank you, Mr. Chairman.

[English]

The Chairman: Thank you very much, Mr. Jacob.

I was just wondering, if you're only four months in the job, what were you doing before?

Mr. Guy Jacob: I've been Quebec deputy minister for almost nine years. For the past three years, I have been a consultant on my own. But I have a Bachelor of Agriculture. I have been involved in the agricultural sector for the past thirty-some years.

Basically, from 1986 to 1994 I was the Quebec deputy minister for agriculture: ADM for three years; and DM for a little over five years. So I have an agricultural background.

The Chairman: Thank you very much.

We'll go to questions immediately, with Jean-Guy Chrétien.

[Translation]

Mr. Jean-Guy Chrétien (Frontenac—Mégantic, BQ): Mr. Jacob, I want to congratulate you on your recent appointment. I must admit that the reaction I have heard to your appointment has always been very positive. The past is always a pretty good guarantee of the future, and your accomplishments in the areas where you held positions are all very impressive.

I want you to know, Mr. Chairman of the Dairy Commission, that I met in my office last week with a producer who operates the Fromagerie La Bourgade in my riding. I just want to digress for a moment because this reminds me of Hygrade franks: the more you eat, the fresher it is, and the fresher it is, the better it is and the more you eat. This producer makes cheese of an exceptional quality that he sells locally. He's not taking anything away from Kraft or other major cheese manufacturers. People tell me they very rarely ate cheese before a travelling salesman offered them cheese from La Bourgade. Before that, they never bought any, whereas now they do. So, he created a need.

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In the course of his first two years of operations, the business used an average of 520,000 litres of milk annually. He was told that henceforth, those 520,000 litres of milk would be his processing quota. The problem, however, is that the business could use up those 520,000 litres of milk in six or seven months, after which it would be forced to close for lack of supply. The owner is struggling like the devil to try and increase his supply, but every time he knocks on someone's door, he is told it cannot be done, that that is supply and demand and that the market is closed. If he doesn't sell, no one will buy any more cheese.

Having said that, in Lennoxville, near Jean Charest's riding in Sherbrooke, there is a large processing plant that I'm sure you have heard of. Milk has to be imported from other provinces, particularly New Brunswick. The distances and transportation costs are enormous. I don't understand what's going on.

There is a very serious problem when it comes to administering the distribution of milk. I was told that it is sometimes brought in from Ontario and New Brunswick. The plant is obviously becoming more prosperous, yet it operates for barely six months of the year. Plant workers have also told me that its products are intended for export. So, there is no danger of flooding the domestic market.

Is that issue part of your mandate? Is one of your goals to take corrective measures for people like Steve Vallée in Thetford Mines, for example, and the Crino firm in Lennoxville? Although I am citing the examples of these two companies this morning, because I remember them, there are many, many other such cases. This situation is creating frustration, both among producers and processors.

Mr. Guy Jacob: Yes, we are hearing the same message from processors and producers, particularly in Quebec, and have been hearing this for a number of years now. Processors are saying they would have markets and could process more milk if the raw material were available.

There is currently a lot of milk in the system all across Canada. Although I don't have the latest figures, I believe current production exceeds the quota by at least 5 percent, which represents very significant milk volumes that would available in the system. You may be aware of the results of the agriculture conference held in Saint-Hyacinthe last week and chaired by the Premier of Quebec himself. That is precisely one of the issues that was discussed by Quebec processors and producers. They talked about the rules for supplying dairy plants that have been established by processors and producers in each of the provinces—what are called plant quotas; based on these quotas, a company, particularly in Ontario and Quebec, is theoretically the owner of a volume of milk that it will not pass on to a competitor who could possibly use it more profitably for value-added products.

Those are provincial rules that are applied and the Canadian Dairy Commission really has no authority to counter that problem. What the Commission can do, however, is try to convince stakeholders, particularly at the Milk Supply Management Committee level, that it would be to everyone's benefit to make the system more flexible, so that milk could be available to those who can use it to expand their operation or produce higher valued products, thereby generating attractive revenues for the producer.

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The provinces still jealously guard their jurisdiction. For the most part, the processors own the quotas and don't want to lose them; as a result, they are opposed to any changes in the existing system. And that is the case in a number of Canadian provinces.

The Commission hopes it will succeed in convincing the industry to set rules that will allow for greater flexibility and better use of milk supplies.

Mr. Jean-Guy Chrétien: I remember meeting back in the early 1980s, in Plessisville—completely by accident—with people who were in charge of arranging for the shipping of tractor trailers filled with milk powder to an African country where there was a terrible food crisis. At the time, I was operating my cow-calf farm and bought milk powder to feed my calves. I was paying more than $25 a bag, when I found out that those same bags, of exactly the same size, were sold to the Dairy Commission for $4.50, which then turned around and sold them for $4.50. On the local market, however, we were being forced to pay 25 dollars—more than five times the price.

Is that policy of buying product at very low prices and reselling it at very low prices to developing countries or very poor countries still being followed?

Mr. Guy Jacob: The Commission does not have any mandate with respect to food aid per se to underdeveloped countries. The Commission may sell milk to CIDA, but we will sell it at the international price, and not at a reduced price. We have no humanitarian mandate. However, one program did allow, and still allows, veal calf producers to obtain a special class permit and to continue to buy their milk powder at a price similar to the international price. But we're really talking here about a special class permit, like for any other product to be used by processors.

Mr. Jean-Guy Chrétien: One last question Mr. Jacob. I was a little taken aback earlier on when you said that we sold milk to four foreign countries on a government-to-government basis. You named those countries, one of which was Mexico. I was surprised because Mexico exports butter oil to Canada. What do we sell them? Cheese and butter?

Mr. Guy Jacob: For the Canadian Dairy Commission, the Mexican market is strictly limited to milk powder. All the other dairy products sold in Mexico that originated in Canada would have to get there through private exporters. Basically the Commission has exclusivity in Mexico for milk powder alone.

Mr. Jean-Guy Chrétien: I see.

Mr. Guy Jacob: That's one of the things we've been wondering about: how can we continue to deal with Mexico on a government-to- government basis when it is a signatory of the Free Trade Agreement? This is an issue we are currently reviewing.

[English]

The Chairman: We'll now go down to Mr. Calder.

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman, and good morning, gentlemen.

In my other life I'm a poultry farmer, so I have a vested interest in supply management. At any of the committees at which I've appeared, one of the things I've stressed is that if I'm going to defend supply management during the upcoming WTO negotiations that are going to start in 1999, I need something that's defensible.

I notice that, on the bottom of page 12, you say you're looking for “the achievement of an industry-driven long term dairy policy”. I'm wondering how that fits into the WTO, because on the next page you say you want “maintenance of Canada's compliance with international trade commitments”. Further on you even say you're getting ready to put “interventions in the Committee on Agriculture of the World Trade Organization.”

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I guess my question would be what you foresee this industry-driven, long-term dairy policy to be. What's in it? And what are these interventions that you're going to be making to the World Trade Organization?

Mr. Guy Jacob: Through the last GATT negotiations, all direct subsidies to exports had to be eliminated. The way the dairy industry reacted was to create special classes whereby some milk could be sold to exporters at lower prices than those being used for the domestic market. I guess both the Canadian government and pretty well everyone else involved in Canada feel this method is compatible with the GATT agreement and compatible with the next. It's at least going to be part of the discussion at the next WTO negotiations. Whether the different countries will agree that you could have a different or multiple-class pricing system is acceptable or not will probably be a major part of the next round of WTO negotiations.

As we stand today, it's not the dairy commission as such but the Canadian government that is convinced that the way we are doing it now is compatible with Canadian obligations under the last GATT agreement. Also, having different classes of pricing for the different utilizations of milk is being done by many other countries as well.

What we mean by “industry-driven” is that we should have a system that's flexible enough to be able to supply both the Canadian domestic market and to address the export possibilities that may exist. At the end of my presentation, I just mentioned the idea of an optional export program, whereby an individual farmer would decide—it would be his own business decision—to produce over quota for export markets at a price that an exporter or a processor would be willing to pay.

Let's suppose we managed to get that through the Canadian system. Suppose a company that has an overseas market addresses itself to the dairy farmers' association with an offer that it is willing to buy so much milk at a given price for a given period of time. The farmers' association turns around and informs its members that they could have a contract with a given company for so much milk for that period of time at a given price. If the price is not good enough, the dairy farmers won't take it. If the price is interesting or acceptable—and it could be different from one farm to another....

We heard some farm leaders saying they're not going to produce under the cost of production. While that may be true for many dairy farmers, it may not be true for others who would be willing to do so. As a matter of fact, right now probably around or over 5% of the production over quota is being paid at the international price, which is around $20.

So let's give the dairy farmers and processors and exporters the choice. We have a system in place to address the domestic market, and in parallel there is a system whereby someone who has a market could offer to buy the milk and the dairy farmers are free either to produce for that market, if the price is interesting, or not to produce for that market. Offer and demand play over and above the domestic market.

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Mr. Murray Calder: I see a danger here, though. Right now the supply management system has worked on the principle that to a certain extent we have control over pricing. If you get into an export policy like the one you've described right now, I want to know what the safeguard is that we won't lose the power of pricing.

What could happen here is an exporter could establish export contracts, and you're telling me if the dairy farmer takes a look at it and he isn't making enough money, he's not going to produce it. But I see a problem here. If an exporter has developed a contract and he can't get the product here, he's going to source it somewhere else. He's eventually going to come knocking at my door, saying the producers here in Canada won't produce the product: “Where am I going to get the product? I have these contracts.”

Mr. Guy Jacob: It's either way. We can decide to stick with the domestic market only. We have an industry that's pretty well mature and it's not going to keep growing. Opinions differ, but we're not going to grow very much in the domestic market. So if we look forward to some growth within the industry, that has to come out of developing export markets.

There may be producers who are happy with the system and if they are given a choice they could stick with the system. Others want to go. Others want to expand. Others want eventually to be in a position to compete on the North American and even the world market.

Whether we like it or not, when we entered the GATT agreement and decided on tariffs being imposed on dairy products, by definition those tariffs were going to go down. How long it will take, and what will be the issue of the next round of the WTO, no one knows. I've said publicly that whether it's 10, 15, 20 years...no one knows, but at some time we'll be operating in a North American market, and we'll have to compete at whatever the world price will be at that time.

We have to say either we're going to stick to the domestic market and live with it as long as it lasts—but what is going to happen the day after, I don't know—or slowly, for the dairy farmers who want to move in that direction, we have to get adjusted to prices that will be a blended price between the domestic market and the international market. We will be preparing ourselves for that day.

Mr. Murray Calder: One quick question along that line. Product that is being produced for export: what mechanism do you have in place to track that the product is in fact exiting the country? If it doesn't exit, you're going to cause a surplus within the domestic market and also depress the wholesale price.

Mr. Guy Jacob: What is being considered now under the OEP program...and there's an optional export program in places now—in Quebec, Ontario, Alberta, and some other provinces. It's different from one province to the other. But the idea is that when a company enters an OEP program, it has to remove overseas all the ingredients of that milk that he is buying.

He gets that milk under a permit by CDC, and it's up to CDC to visit with those different companies and make sure the volume of milk they have bought under an OEP or under a special class permit is being used for the purpose the permit was obtained for. That's our role: along with provincial authorities, to make sure, when someone gets a permit either for a special class or for an export program, that the milk is being used for the purpose the permit was issued for.

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The Chairman: Thank you very much, Mr. Calder.

So what you're saying, Mr. Jacob, is bye-bye supply management in dairy. It's just a matter of when. At your Vancouver meeting, how did the producers react to your statements? You made the same statement there.

Mr. Guy Jacob: Yes.

The Chairman: What was the reaction from the producers at that meeting?

Mr. Guy Jacob: I had the same message from the dairy farmers of Ontario, and there were 400 to 500 dairy farmers in that room. There was a question period and I didn't get blasted for it.

Some farmers came to me and asked me if I was sure of what I was saying. I said, listen, either you believe me and I'm right and you'll be happy that you believed me, or you believe me and I'm wrong and then you'll be that much better. But if you don't believe me and I'm right, then you're in trouble.

We've been hiding from the fact that eventually it's going to happen, and it's not going to happen in the next couple of years. Let's figure that in the next round of WTO, which will be starting in 1999 to 2001 theoretically...from 2001 to 2008 the reduction won't be important enough, so at the end of the next round of the WTO we will still have pretty good protection against imports. And then we get into the next round of negotiation, which ends up in, say, 2011 or 2012. I suppose it could be at the end of that round of negotiations when the tariffs get low enough that they don't stop imports from coming in, but also our products from going out there.

I believe that supply management, at least as we know it, is not there forever. I truly believe this. It's important that this message is being sent out to the dairy farmers, instead of saying we don't have to worry, it's going to be there and we're going to be protected forever.

The Chairman: Nobody has thrown milk on you for your statements.

Mr. Guy Jacob: No.

The Chairman: But at the same time, we see the government saying that under any MAI agreement the supply management has to be protected. It's on the protected list. Everybody has their protected lists, and one of ours is that the supply management of commodities is going to be protected. Now you're saying that the government is saying to producers that these commodities are safe under the concept of supply management. And you're saying that eventually in the next round of WTO more than likely we're going to lose this and we're going to be in a free trade position on these commodities.

Mr. Guy Jacob: I want to be clear. First, what I said in Vancouver or what I said in Toronto doesn't involve the minister or Ag Canada. It's my own personal belief that at some point in time the tariffs we are applying now on dairy products, which in some cases are over 300%, will be gradually lowered, and when we entered the tariffication system it was with the understanding that those tariffs will be going down at a rate that has to be negotiated.

We negotiated the rate at which those tariffs would be going down from the year that we had the GATT agreement to 2001. We know what the rates will be in the year 2001. At the next round of WTO they will be also negotiating the rate at which those tariffs will be going down.

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What will be the success of Canada? I'm sure Canada will fight hard to maintain that rate as slow as possible. But by definition, at some point in time the tariffs will reach a level so low that they won't be able to stop imports from coming in. That was clear the day we entered the tariff verification system, to my mind anyway.

The Chairman: Mr. Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): I, too, would like to congratulate you, Mr. Jacob, on the important duties you have been given, which you are currently performing and which you will continue to perform in the coming months and years.

Since we're talking about imports, I would like you to address the butter oil and sugar blend issue. I don't believe I'm the first to raise this important problem. I would like to know what your organization's position is on that. What support are you providing? What exactly are you doing? What pressure can you bring to bear on the federal Department of Agriculture so that it takes corrective measures?

I have documents here that say that the current government's inertia is costing the Canadian economy and dairy producers some $50 million a year. I know that this issue is currently before an international tribunal, but in the meantime, imports continue to enter Canada and Quebec and that is hurting dairy producers.

I would be interested in hearing your views on this.

Mr. Guy Jacob: For the Commission, it was clear from the outset that the issue of butter oil and sugar blend was a political one.

Because the Canadian Dairy Commission must be a neutral organization and because it does deal both with processors and producers, it adopted an early position of complete neutrality on this issue. This is a highly political issue, and the Commission prefers not to get involved in that debate, being a neutral organization.

Mr. Odina Desrochers: You don't even want to offer an opinion?

Mr. Guy Jacob: No, absolutely not.

Mr. Odina Desrochers: But what do you have to say to the people who put their trust in the Canadian Dairy Commission, given that you have adopted a position of neutrality and say you intend to maintain it?

Mr. Guy Jacob: I believe that the guarantee, both for producers and processors, of good service from the Canadian Dairy Commission lies in its ability to act as a mediator or arbitrator on any given issue.

Mr. Odina Desrochers: In that case, do you intend...

Mr. Guy Jacob: That being the case, it is clear that this is a debate or issue that affects both processors and producers. It is an issue that became political right from the very start. According to one line of argument, officials from Agriculture Canada apparently promised at one point that this would be protected. So, once again, it was neither the Commission nor the people that work there. I believe our position of neutrality is well accepted by producers. I'm not being pressured in any way by producer associations to take a position in this debate. And I fully intend to maintain that position of neutrality.

Mr. Odina Desrochers: In that case, where would you suggest dairy producers facing this problem should go for help?

Mr. Guy Jacob: They know perfectly well where to go without my telling them. They are currently engaged in a political debate, with politicians.

Mr. Odina Desrochers: Fine, I respect that. It was mentioned earlier that this issue was before an international tribunal. You said you were prepared to play a mediator role. Would you be willing to take the place of the tribunal in order to help resolve this problem?

Mr. Guy Jacob: I said that we often had to act as a mediator between provinces, or between producers and processors, in issues affecting the milk supply management committee or the operation of the federal/provincial agreement on the marketing of dairy products. As far as I know, the issue you refer to is completely different from the ones normally handled by the Commission and from the kind of situations where we are prepared to act as an intermediary.

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Mr. Odina Desrochers: You say that subsidies will disappear in the year 2000. Are you proposing any palliative measures to replace this money that will no longer be part of producers' incomes?

Mr. Guy Jacob: The decision to eliminate dairy subsidies before the year 2002 is once again a political decision by government. However, when the Canadian Dairy Commission set the support price, the price at which it buys back products for the purposes of surplus removal, and which it announced last December although the effective date was February 15, it agreed to recover from the market that part of the subsidy that had been eliminated.

Will the Commission's position or decision be the same for each of the years in which the subsidy will be reduced? I cannot say at this time, and I would not say so even if I did know. For the current year, the reduction of the dairy subsidy has been entirely recovered by the market.

In some of my public statements, I have said that my understanding was that the dairy subsidy was originally meant to be mainly a subsidy for consumers and that if that subsidy were reduced, it appeared to the Commissioners, given the announcement of one last increase, that it would be logical to recover that part of the reduction through the market.

[English]

The Chairman: Mrs. Ur and Mr. Harvard.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): Thank you, Mr. Chairman.

I have other questions, but just to continue on what you're speaking about now, what is the North American price for dairy, and how is it arrived at?

Mr. Guy Jacob: As for the North American price for dairy, they have in the U.S. so many different classes of milk, of pricing for milk. Maybe they don't have as many as we do in Canada, but there are different prices, depending on the region, the utilization, and so on and so forth.

Mrs. Rose-Marie Ur: So are we on a level playing field here?

Mr. Guy Jacob: Well, depending on who you talk to.

Mrs. Rose-Marie Ur: I'm worried about Canada.

Mr. Guy Jacob: It depends on the opinions of different people. It depends on who you're comparing yourself with. I really don't know whether we're that much more expensive than those in the U.S. I've seen figures that say the prices of our dairy products compare with those in the U.S.

Mrs. Rose-Marie Ur: I'll move on, because I have a lot of questions.

What is the subsidy system in Europe? Are they going to do away with that when we start renegotiations? We already made some strong concessions, and you're saying we all have to get on the same level playing field. Do you see that happening?

Mr. Guy Jacob: What I've been saying publicly so far is that we should try to establish a level playing field, or a more level playing field, between provinces so they don't compete with each other.

You see, the picture has changed quite a bit. With the arrival of Parmalat, Unilever, and Nestle, even Saputo up to a certain point, you now have big players in there. Those guys are operating on a national or worldwide basis.

Hopefully, we'll arrive at a system in Canada whereby we have a more level playing field for producers and processors.

Mrs. Rose-Marie Ur: That's fine for us, but—

Mr. Guy Jacob: As far as comparing ourselves—

Mrs. Rose-Marie Ur: —if we're going globally, we all have to do it, sir.

Mr. Guy Jacob: —with Europe, the United States, and so on, I'll tell you frankly that I'm not much of an expert on that line. I know you had Mike Gifford here. Those guys are really the experts, but I'm—

• 1005

Mrs. Rose-Marie Ur: Okay, I'll move on. As I said, I have a lot of questions.

In your document here, you want to respond to any possible trade challenges through the Dairy Commission. Obviously there weren't positive results with DFC going to the CITT. Why did that not happen, working through you or the umbrella group? Where do you find the lack of want to go there?

Mr. Guy Jacob: I'm sorry, could you—

Mrs. Rose-Marie Ur: Okay, you're saying that the commission works closely with major stakeholders, organizations, including the Dairy Farmers of Canada, and goes on the whole list of further processors and everything else. Then you say several issues affecting the dairy industry are directing and shaping the Dairy Commission's objectives, and maintenance of Canada's compliance with international trade commitments and response to any possible trade challenges and that—I'm going back to the question that was asked here earlier.

You say you're a non-political group and you're not going to get involved, but—

Mr. Guy Jacob: I could probably just interpret what's there.

My comprehension is that CDC, when they wrote that, was considering things like the U.S. challenge now on Canada's supply management, the next round of WTO negotiations. Those are the kinds of actions that CDC gets involved in, helping out in producing information for those cases.

My impression—and I don't know if Jack wants to join—is that we never said we would get involved internally with something like what's going on in the butter oil and sugar blend issue. Again, right at the beginning, the Dairy Farmers of Canada directed that issue to the Government of Canada. Never did that subject come to CDC, at any point in the discussion. I guess DFC chose themselves to direct that issue to the Government of Canada and never requested or wanted the help of CDC. I guess they understand that we have to remain neutral in that subject.

Again, I have never had any kind of request or pressure to have CDC involved in the debate.

Mrs. Rose-Marie Ur: Do you feel they should have? Do you think there would have been another alternative there or a help in this process?

Mr. Guy Jacob: It's a political decision, and it should stay that, at that stage.

Mrs. Rose-Marie Ur: Okay.

You also stated here this morning that it's your personal belief regarding supply management. As president of the Dairy Commission, is your view the same, carried through as president?

Mr. Guy Jacob: As I guess I've read somewhere in a farm magazine, a farmer said, well, he's saying so because he's new on the job; he'll learn; he'll know better once he has been around for a while.

I've accepted, as chairman of CDC, to express publicly my views. I can't say they are the views of everyone within CDC, but I can tell you they're also the views of the other commissioners at CDC.

Mrs. Rose-Marie Ur: I'm troubled by that, because I find it's asking the fox to guard the chicken coop.

Are they really going to be there for the best interests of the dairy farmers, then? If this is a position among commissioners, I would think.... You keep saying you're a neutral body. Well, you're speaking both ways. I find that a little difficult to understand. Maybe you can enlighten me on that.

Mr. Guy Jacob: I guess supply management is going to be there for quite a while. I guess supply management has to be defended, but somewhere down the line—-

Mrs. Rose-Marie Ur: You're saying “I guess.” That's not—-

Mr. Guy Jacob: I've heard dairy leaders also saying that the day we entered tariffication, it meant that somewhere down the line those tariffs would be reduced. It's a fact, whether we like it or not. It's a fact and it's going to happen some day.

• 1010

That doesn't mean we're not going to defend it. That doesn't mean we're not going to try to make supply management last as long as possible and make it work as best as it possibly can. But the fact is that sometime it's going to end, at least as we know it today.

You have a choice. You can tell the farmers, don't worry, it's going to be there forever; rest happy, you'll be protected forever. Or you can tell them that somewhere down the line it's going to happen. And with respect to whatever is more responsible, I've chosen the second one.

The Chairman: Thank you very much.

Mr. Harvard.

Mr. John Harvard (Charleswood—Assiniboine, Lib.): Thanks, Mr. Chairman.

First of all, Mr. Jacob, I want to thank you for your candour with respect to what you believe to be the future of supply management in the dairy industry. I appreciate that. Really, I have only two or three questions.

If the future is what you believe it to be, what comes after supply management in the dairy industry? Do we then have a free market, an open market free-for-all, where the big and strong win and the weak and the small fall by the wayside? In other words, if we were to have an open market free-for-all, does that mean, then, that only the big operator will win and that eventually there will only be, let's say, a few very big dairy farmers in any given region or any given province?

And if that's the case, what happens to producer prices? Do they necessarily fall? Will dairy farmers be making less? Or could they make as much as they're making now? Or could they make more?

The other thing is that even though supply management disappears—at least, supply management as we know it—could there still be some kind of system of managing supply?

As I've said before, and I'll say it again, because I've used the analogy, General Motors does manage its supply. If General Motors determines...and of course there are not thousands and thousands of dairy producers aboard and maybe it's just a small executive committee of General Motors that can decide what the Canadian market, let's say, might absorb at any given time. They may decide that the Canadian market can absorb 4,000 trucks or something like that. If that's their judgment—and they could be a little off—they're not going to go out and manufacture 8,000 or 20,000 trucks for the Canadian market. They'd be cutting their own throats, wouldn't they? Then they'd have an oversupply, with trucks all over the place on parking lots, on dealers' lots, and they would have to do something about it.

So basically it's the three questions: Do we see the end of the small operator? Do prices fall, or what happens to prices? And can there be some way of managing supply so that the Canadian producer has some control of his own life?

Mr. Guy Jacob: I believe we'll have some way of marketing the milk on a collective basis so that the dairy farmers keep that bargaining power they now have with an orderly marketing system.

So far, all we hear is price per hectolitre. We hear that we're now getting $52 or $53 or $54 per hectolitre of milk produced, and that if we sell for the special classes at $42, we're losing money. I guess we'll have to evolve from this way of saying things to an approach where the net revenue of a dairy enterprise will be considered rather than the price per hectolitre. It's something like saying I'm making $20 an hour and I'm not going to work for anything less than that. If we didn't have the special class we have now, which represents 16% of our production, and probably even more this year, because of the over-quota production being pretty large, that would mean we would have to cut the quota.

• 1015

So it's a choice the dairy farmers have made. Either they produce strictly for the domestic market or they accept producing for further processors at the lower price, to get some kind of a blended price. Right now the producers, because of the special classes, are getting a blended price; the price for the domestic market plus the price for the special classes. I guess that's going to be the way it evolves.

There will likely be farmers who are be interested in putting a few extra cows in the barn and producing at a marginal cost, to consider the overall revenue of the farm rather than the price per hectolitre. There will be farmers who will be willing to build an extension to the barn to put extra cows in there, to produce under OEP. Under the optional export program we've had sales at 27, 28, 30-some. That varies depending on what markets the processor is addressing himself to. Again, it's going to be an individual decision, we hope.

Mr. John Harvard: But will there be fewer producers, but larger?

Mr. Guy Jacob: I would think so. It has been the trend for many years and it will likely—

Mr. John Harvard: How far can that go?

Mr. Guy Jacob: I don't know. But either we accept producing for export or we stop growing.

Mr. John Harvard: But if the trend is towards, say, greater volume with narrower margins, but you offset that with larger sales, greater volume of production, that seems to me a suggestion towards fewer producers but larger ones, and dramatically so.

Mr. Guy Jacob: Some dairy farmers might be happy with producing the amount of milk they are now producing at the price per hectolitre the domestic market is giving them. They are happy and will stay at that as long as supply management as we know it is around. There will be other producers...and they have made that choice already. They are producing 5%...and some dairy farmers are producing up to 115% of their quota right now; 15% of the milk is being sold through CDC at $20 or $19 on the international market. So it's evolving there already.

If we could manage to put in some kind of a system instead of having just over-quota production, which is there this year and might not be there next year...no one can really count on it. A dairy farmer just happens to be producing over quota. Through an OEP, through an optional export program across Canada, similar in all provinces, we would establish a framework for this over-quota production and get a better price on the international market for this over-quota production. That's all we're trying to do.

The Chairman: Mr. Chrétien.

[Translation]

Mr. Jean-Guy Chrétien: Mr. Jacob, you opened a Pandora's box when you spoke of the elimination of supply management in Canada. I am sure you are aware that it is not rare to hear people say that the value of a dairy producer's quota represents between 25 and 50 percent of the total value of his farm. In many cases, the quota is valued at more than a million dollars.

• 1020

So, a dairy producer who is told by the Chairman of the Canadian Dairy Commission that in the foreseeable future, his quota will no longer be worth a cent may well throw milk on you, Mr. Chairman. If no one did it in Toronto or Vancouver, well, it could well happen. I know full well that some people will wince when they hear that.

In December of 1993, I was at a meeting in Saint-Georges-de-Beauce attended by more than 500 dairy producers. This was just a few days before the new government, which had just been elected on October 25, 1993, signed the GATT agreements, that then became the WTO agreements. The number one concern of dairy producers was the potential disappearance of their quota and eventually, of course, a drop in its value. Again last month, quota transfers were being agreed to at very high prices. The guy who bought quotas worth 100,000 dollars last week or a month ago and who hears your comments today is not likely to feel very safe. Is there anything you can say to reassure him, given the comments you have just made?

Mr. Guy Jacob: First of all, the speech was given in Vancouver and was addressed to dairy producers across Canada. At that meeting, there were producers in attendance from all the provinces, as well as a very large Quebec delegation that included the President of the Quebec Dairy Producers Federation and his Director General. Following my speech, they came over to tell me that my speech was fine and that it had something in it for everyone.

The text of that speech was published in La Terre de chez nous. There was a very long article on it. Last week, I attended the three day agriculture conference in Saint-Hyacinthe and no dairy producer came up and gave me a dressing down. I think dairy producers appreciate the fact that someone is giving them the straight goods. If we're talking about a 20 year period, or possibly longer, dairy producers will still be buying quotas for which they pay top dollar, knowing that the return on their investment will come in seven years and that supply management will still be there in seven years.

So, it is probably still attractive for dairy producers to buy quotas, except that in the long term, if we were to put in place an Optional Export Program, producers would have a choice, either to buy quota and produce at the domestic quota price. Or to produce under an Optional Export Program which would not require him to pay for a quota. Pressure on the value of quotas would also be affected in that case.

Mr. Jean-Guy Chrétien: You said earlier in response to John Harvard that certain producers were producing as much as 115 or 117 percent of their quota under the special class for export.

Mr. Guy Jacob: Yes, just for overquota products.

Mr. Jean-Guy Chrétien: That's strange. Some producers are telling me that to export products under the special class, they are being paid between 20 and 22 dollars per hectolitre. So, they can only exceed their quota by 2 or 3 percent.

Mr. Guy Jacob: In Quebec, the Dairy Producers Federation has allocated 3 percent of the quota for the Optional Export Program. But any dairy producer in Canada can produce 100 percent overquota, if he so desires; there is no limit to overquota production. The 3 percent is allocated to an Optional Export Program. In fact, Quebec said it would put 1 percent of milk volumes into the Optional Export Program to be sold, but just to be sure it actually got that 1 percent, it said a quota of 3 percent. But that has nothing to do with overquota production. There is no contractual obligation.

• 1025

So, at the present time, a producer operating in Quebec or anywhere else in Canada can produce double his quota and receive for that additional volume the international price, which is either 19 or 20 dollars, depending on what the Canadian Dairy Commission can offer on markets. But there is no restriction on overquota production.

Mr. Jean-Guy Chrétien: Thank you very much for that clarification. I would like to ask you another fairly precise question. On page 15 of your report is a table showing provincial shares of the national market sharing quota. You also give the percentage change since August of 1992. I'm surprised to see that there has been an increase of 10 percent in British Columbia, of 3 percent in Albert and of 7.6 percent in Quebec. That percentage varies from one province to the next. All the provinces, with the exception of Prince Edward Island, have had an increase. Mr. Chairman, you are from Prince Edward Island, aren't you? Could you briefly explain why, for example, there was such a large increase in British Columbia, when Prince Edward saw its share drop?

Mr. Guy Jacob: I don't know whether I can give you a complete explanation. Certainly provinces have set up among themselves a quota/grant program under which a province or producers in a province may buy quotas from another province. It is worth noting that some significant quota volumes were purchased by Quebec producers from producers in Ontario, and as a result, the latter has closed off its quota grants, as it has the right to stop selling quotas beyond a certain threshold.

Mr. Jean-Guy Chrétien: Is that under the P6 agreement?

Mr. Guy Jacob: Yes, but I believe it is also in the P4 agreements; this is true for both pools. I don't know whether there is any further explanation, but that is certainly one of the reasons why quotas are being transferred from one province to the next.

Mr. Jean-Guy Chrétien: Thank you.

[English]

The Chairman: Mr. Bonwick.

Mr. Paul Bonwick (Simcoe—Grey, Lib.): Thank you, Mr. Chairman.

As with my colleagues on both sides of the table, some of your comments have caused me great concern. You mention that they're long range, but I think they still cause concern for me and my colleagues based on some of the commitments that the minister and the government have made.

I want to clarify the role of the CDC, and specifically your own. Yours is an appointment by the minister, and by order in council, correct?

Mr. Guy Jacob: Yes.

Mr. Paul Bonwick: I'm just reading something on page 5 here:

The CDC serves as an advisory body for the Minister of Agriculture and Agri-Food, given its key role in the national dairy industry. It is largely responsible for the administration of the National Milk Marketing Plan.

I may have been mistaken, but if I understood you correctly, you're suggesting there is no future for supply management down the road, that farmers, producers, should in fact prepare themselves for that eventuality. That's your own personal belief.

When you're speaking at committee or these functions, are you speaking with the minister's blessing? Is he aware of your statements, and does he support them? That's the first question.

If the minister in this government or a future government gives you—and more so Mr. Gifford and the negotiators—the mandate that it will be protected, period, can it be? That's my second question.

You have suggested that the direction is one by which we are no longer able to maintain a supply management system in Canada, that the inevitable is a free market throughout North America, and possibly internationally or in world markets as well. I'm just wondering if that is in fact your position as the chairperson. Are you assisting in educating or preparing producers for that eventuality, either with or without the minister's authorization?

That's fine for now, and then I have one response when you're done.

• 1030

Mr. Guy Jacob: I didn't request any kind of blessing from the minister to express my views. CDC is somewhat autonomous in its functioning. Occasionally the minister might call me in to seek advice, and I'll then express my views to the minister. But he also hears the views of other people, and then he decides which way he's going to go.

So I don't have the blessing of the minister, nor did I get any kind of blame from the minister. I suppose he is aware of some of my statements that were made quite publicly.

I hear the minister talking about orderly marketing. We believe we're going to have some kind of orderly marketing somewhere down the line. It's not going to be a free-for-all, such as what they may have in the U.S. We'll have collective bargaining again. We'll have some kind of supply agreement between producers, but it's not going to be supply management as we know it, the kind whereby we keep stopping imports from crossing our borders. What I'm saying is that somewhere down the line those imports will be coming in.

Was your second question whether or not the minister could order his people to protect supply management?

Mr. Paul Bonwick: Government with or through the minister.

Mr. Guy Jacob: I suppose so, and I believe it's its firm position that supply management has to be protected through the next round of negotiations, that it has to be there as we know it after the next round of negotiations. Again, though, maybe I am not expressing myself clearly.

Mr. Paul Bonwick: I think you are, but it concerns me.

Mr. Guy Jacob: What I am saying relates to somewhere down the line. The day we entered into the tariffication system, it meant that those tariffs would be going down. It was understood by everyone around the table that those tariffs would go down. It's a matter of how long it will take and how successful Canada will be in the next round of the WTO in terms of maintaining a rate of reduction that's as slow as possible. Also, something else that we're involved in in the next round of the WTO will be access to the different markets, but mainly our own.

Mr. Paul Bonwick: You said you don't have the minister's blessing, and as an arm's length organization you really don't need it. As the chairperson of an arm's length organization, you're entitled to establish your own opinions on it. I would suggest that you do have a responsibility, certainly from my perception, because yours is a political appointment by the government. In turn, I would assume that as such, you would be following the government's direction. As far as I know, the government's direction at this point is not that we are going to abandon supply management, not now and not six years from now, in 2004. Certainly that's not something that's been conveyed to me personally, and I don't know that it's been conveyed to any of the rest of the committee members. If that is the case, though, I find it very disturbing.

I'm trying to find out if you have some sort of insight into the government of the day that I don't have, something suggesting that there is going to be some compromise. You made a statement that everybody at the table knew the tariffs were eventually going to be eliminated when we bought into this. This is news to me. It's certainly not my understanding that my government's position is that at some point in time—whether it be tomorrow or whether it be 2004—we were going to give up supply management. I've never heard that from anybody else on my government's side.

Mr. Guy Jacob: When we replaced article XI with tariffication, it was understood by all countries signing the GATT agreement that the basic objective of the last GATT negotiation was that those tariffs would be eliminated in time. That was public information then, and it's still public information now.

• 1035

What Canada said—I truly believe in it, and I was deputy minister for Quebec at the time—was that we will protect supply management by achieving high tariffs. Those tariffs were very high, as they are today. They are sufficiently high to protect supply management.

As for those tariffs, at the last GATT negotiation a reduction rate was negotiated and accepted by all parties. This meant that at the end of the first round, or the first GATT applications, we would have reduced our tariffs, if my memory's correct, by some 20%.

In the next round of negotiations—I'm pretty sure you heard from Mike Gifford—there will be two things involved: the reduction rate and the multiple-class pricing system. These will be involved mainly in the next round.

Mr. Paul Bonwick: Thank you very much. Can I just finish? Am I done?

The Chairman: We have McCormick, Ur, Calder and Harvard.

Mr. Paul Bonwick: I'm done.

The Chairman: You're done. Next, McCormick.

Mr. Larry McCormick (Hastings—Frontenac—Lennox and Addington, Lib.): Thank you, Mr. Chair. Thank you, gentlemen, for being here.

Back to the butter oil and sugar blend just for a moment, you mention that it's a political issue. When I sat in this same seat one day, the importer sat next to me. He mentioned an individual at his company who, as an importer, had gone twice to Revenue Canada to obtain a permit to bring this product into the country. Well, I thought that when you went twice for a new product...it should have raised a flag a lot sooner. But when we have this importer approaching the government body or group for this permit...perhaps I fail to see where that results in this being a political decision following that application.

Mr. Guy Jacob: Right at the beginning, Dairy Farmers of Canada went directly to the minister's office, and even to the Prime Minister's Office.

Mr. Larry McCormick: Excuse me. Yes, I know, but let's go back. It started when a company, an individual, went to Revenue Canada to ask for a licence, permit, or whatever. Sure, the follow-up action was political, but maybe I should say this: does it have to be political? What would be wrong with the fact that...? I mean, the facts are there.

Mr. Guy Jacob: Well, the decision to impose a tariff line on the butter oil and sugar blend doesn't belong to the Canadian Dairy Commission, it belongs to External Affairs. The Dairy Farmers of Canada then addressed themselves directly to the ministry. Even if they had come to CDC, we were in no way in a position to introduce a tariff line. That's not our business. We don't have that kind of authority. They can't come up to us for the authority to stop importing the butter oil and sugar blend. So we weren't the proper body to address in that issue.

They addressed themselves to the minister, the negotiator of the last trade negotiations, our Ag Canada people, and External Affairs people, not the Canadian Dairy Commission.

Mr. Larry McCormick: You know, hindsight's—

Mr. Guy Jacob: It's not an issue in which CDC could be involved.

Mr. Larry McCormick: Thank you. Hindsight is great, but you would think that when you sat down originally—all players were there in Switzerland, Dairy Farmers of Canada, the government—when you had a 51-49...it was kind of close to the border, you might think something would come along. You might think there would be new products.

But, sir, we see there's a long-term demand for this product that's being imported, the butter oil and sugar blend. So if there's a long-term demand, are you looking at how...? When you find a need, you fill it. It can be a win for everyone.

• 1040

Your mandate is to buy and sell products and balance the market. Is there room here for you to be involved in this product down the road, or today?

Mr. Guy Jacob: In what way? Provided the new tariff line is imposed or borders are shut down. The CDC has no influence or authority to act along that line.

Mr. Larry McCormick: Fine. After this ruling is made and life continues and marketing continues, there will still be that demand. It would seem there would be an opportunity there for your group to get involved in this market, to help meet the market demand.

Mr. Guy Jacob: I am not suggesting it, and I want to make that clear. Yes, if that product were to be supplied under a special class at a price competitive with that of butteroil sugar blend imports, then it could be produced in Canada and we could probably replace the butteroil sugar blend issue. But it is the producers' decision not to accept that the cream being used for ice cream be supplied to processors under a special class rather than the regular class, which is at a higher price. Again, I want to make it clear I am not suggesting it is the way to go.

The dairy farmers have chosen to try to get a tariff line to stop those imports. Whatever happens after the CITT has issued its decision, whatever that is, if you are asking me what the CDC can do, the day the farmers tell us to issue a special class through the CMSMC, the Canadian milk marketing committee—that we should be issuing special classes for products that would be replacing betteroil sugar blend—well, CDC could do that. But it is not for us to decide. I told you at the beginning we are more of a body that operates on decisions made by the CMSMC, where the dairy farmers and provinces are the decision-making body.

The Chairman: Colleagues, just for your information, we will not be able to proceed with the second part of our program because we do not have a quorum, so we will do that Thursday. It's a travel motion. We need nine here.

Have the Dairy Farmers of Canada or you yourself figured out, Mr. Jacob, at what price we would have to supply their product in order to compete with the imported blends?

Mr. Guy Jacob: As far as I know it hasn't been done, and no one is prepared to do it until a decision is rendered by CITT and then by the Government of Canada. You don't work on an alternative when you think you could win on the first part.

It's very important that it be clearly understood that what I've just said is not a suggestion. I am just stating a fact.

• 1045

The Chairman: So until there's a decision in June or July, the Dairy Farmers of Canada will not figure out how much they have to sell that product for in order to be competitive with the imports.

Mr. Guy Jacob: If they're looking at it, they haven't informed us.

The Chairman: Yes.

Mr. Guy Jacob: I'm not aware of anything like that being done.

The Chairman: Mrs. Ur.

Mrs. Rose-Marie Ur: Thank you, Mr. Chair.

In your briefing here, your annual report, on page 20 you show your optional export markets. I'd like to know what number of farmers took the opportunity to produce 10% above their quota for export marketing. I don't want to know the volume. I want to know the number of farmers who really got excited about this.

Mr. Guy Jacob: With respect to the optional export program, next week we—the vice-chairman of CDC and myself—along with Richard Doyle of the Dairy Farmers of Canada and Kempton Matte of the National Dairy Council, are undertaking a tour of processors' and farmers' organizations across this country to find out what guidelines would be acceptable to all provinces involved. So far we have as many optional programs as there are provinces. Quebec is just selling...they've sold 27 million hectolitres of milk this year under an OEP.

Mrs. Rose-Marie Ur: Sir, that's just exactly what I said I didn't really want to know. I wanted to know the number of farmers who took this program up.

Mr. Guy Jacob: In Quebec it's a collective, so there's not one farmer saying, “I will produce for an OEP.” Whatever the over-quota production is there, Quebec is selling some on a collective basis. And Ontario is saying whenever the price is over $32 it's going to be a collective. Right now Ontario just sold 17 million—

Mrs. Rose-Marie Ur: I'm not a dairy farmer, but there must be—

Mr. Guy Jacob: —so there's not a true optional export program existing whereby we could tell that there are so many farmers who applied to it and are producing under an OEP.

Mrs. Rose-Marie Ur: I find that a little bit hard to believe, because if you have a quota system and you know what you have to produce or what you're allocated, and if there's no record as to the number of litres you over-produce for your optional export program...there must be some kind of computer tracking system that says farmer whoever—

Mr. Guy Jacob: We have at CDC—

Mrs. Rose-Marie Ur: They have to get paid.

Mr. Guy Jacob: —the exact number of farmers who are producing 5% over quota, the number of farmers who are producing 10% over quota, 15% over quota and so on. But those farmers are not producing for an OEP. They're just producing over quota, which ends up, in some provinces, in some kind of a collective sale and being presented as an OEP. That is the case in Quebec and Ontario. In Alberta, there are contracts between the producers and their association and the processors, which is more like a true optional export program.

But whatever over-quota production ends up in the system is being removed by CDC, except what a province like Quebec or Ontario is taking out of that over-quota production and selling as an optional export program. To produce for an OEP is not an individual engagement by any farmer in Ontario or in Quebec. They're just producing over-quota milk without any kind of engagement on their part to produce a certain amount of milk at a certain period.

Mrs. Rose-Marie Ur: I find that a little hard to understand.

But do you think that by over-producing, these farmers are contributing to their own demise? It's much like—and the Reformers aren't here—dual marketing under the Canadian Wheat Board. Are you opening up the venue or the gates for this to collapse?

Mr. Guy Jacob: We're not opening up anything. The CMSMC, the Canadian Milk Supply Management Committee, has decided that there was no limit to an over-quota production. It's not a CDC decision. That was decided by the dairy farmers themselves.

Mrs. Rose-Marie Ur: That's what I'm saying, that it's the farmers, not CDC or anyone else. That's my question. Are the farmers who choose to do this in fact weakening the system?

Mr. Guy Jacob: Last year the quota was cut by 3%. A farmer had the choice of reducing his production by 3%. He could sell one cow out of that barn and reduce his net revenue. He had to reduce his production because the quota was cut last year by 3%. That's the choice he has.

• 1050

He may decide to keep his production at the level of the previous year and then produce 3% over quota. Then it may happen that this year the feed was a little better, the climate was a little better, and it just happens that he's producing 6% over his quota. That milk is being removed by the CDC at the international price.

The Chairman: We still have two questioners and we have to be out of here by 11 a.m.

Mr. Calder.

Mr. Murray Calder: Thank you very much.

I've really enjoyed this this morning. This has been very enlightening and I have to say that I appreciate your being very candid.

I have two questions and both of them relate to quality. One is quality of life within rural Canada if in fact the scenario that you're talking about does take place. Currently, for instance, by OECD figures, about 57% of the value of milk production in Canada is through producer subsidy equivalents and the average herd size in Canada is about 56 cows. The same producer subsidy equivalent in the United States is around 48% and the average herd size in the United States is about 110. It's 2% in New Zealand and the average herd size is 205. Right off the bat, if in fact we're talking about subsidies being lowered, obviously we're going to see fewer dairy farmers and larger herds, and I think that's going to cause a major disruption within rural Canada. I'd like your comment on that.

The other thing is we're looking at New Zealand right now and it's obvious that the New Zealand dairy industry has decided that it's going to be export oriented. It's basically exporting a low-quality product: butter oil, cheap high-salt-content butter, industrial cheeses, the list goes on. In your scenario of supply management being out the door sometime in the future, New Zealand would be a very good example of what the dairy industry of the future is going to be if we're going to be operating on world prices. I'd like your comment.

We should bear in mind, too, that I think there are people in the United States who have taken a look at that same scenario and the Northeast Dairy Compact in Wisconsin, for instance, has been formed. So in fact there are issues of supply management popping up in the United States right now, and I'll just use that one particular one in the dairy industry.

Mr. Guy Jacob: Again, I'll repeat, yes, we'll always have some kind of marketing agencies or marketing system in Canada to make sure that the production is, to repeat the words of the minister, orderly marketing of our products, which is not a free-for-all.

What's happening in the U.S. now, as far as I know, is some kind of an orderly marketing of milk from one area, which could be maintained in Canada even if there are tariffs around to stop imports.

What I'm saying is let's not make the decisions for the farmers themselves. Let's not decide that it's not good for them to produce at $30 a hectolitre; let's give those people a choice as businessmen or businesswomen, whatever they are. Give them the opportunity to produce over and above their quota under an optional program whereby they are committed to produce that amount of milk at a price they know of ahead of time. That would help our industry to keep going by getting into new markets. Let's not make the decision for those farmers, as we have been tempted to do—and mainly the farm leaders—in saying we shouldn't be producing under the costs of production.

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Maybe for some people it's interesting, on the margin, to make milk at $20 when they make a profit at $30. I don't know. Let's not decide for them.

What impact is it going to have in the future? Well, what impact is it going to have if we restrict ourselves to the domestic market, with periodically having a quota cut because our domestic consumption might be going down because more ingredients are coming in? I don't know why, but so far.... I believe we're in a rather mature market in Canada, so if we do not find a way to grow, what will the impact be on rural Canada? Will it be better if there's a possibility for some farmers to keep producing a little more at a negotiated price on a committed basis or if we stick to the status quo?

The Chairman: Thank you very much. The final question, Mr. Harvard.

Mr. John Harvard: Mr. Chairman, I really don't have a question. I just want to say, and I think I can say this on behalf of the government members of the committee, that we appreciated Mr. Jacob coming here today. We certainly appreciated your candour. While some of your comments may be somewhat unsettling to those of us who support supply management, nevertheless we appreciate your being here and telling it the way it is, at least from your perspective.

Mr. Calder did say that he found the session enlightening, and I certainly did too. I think it's regrettable, and perhaps even lamentable, that members of the Reform Party, the New Democratic Party and the Conservative Party did not see fit to come here today to hear your statements and your remarks. I think they would have been better off if they had been here, and not only that, I think maybe we would have discovered where their concerns lie and what their positions are. I just wanted to put that on the record.

Again, thank you, Mr. Jacob.

The Chairman: I'll reiterate those remarks.

Thank you very much, gentlemen, for coming this morning. More than likely, we'll be seeing you again.

Mr. Guy Jacob: Thank you for having us. Again, we support supply management, but the fact is that eventually.... And I stand behind that.

The Chairman: Thank you very much.

The meeting is adjourned.