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, May 26, 1998

• 0908

[English]

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

Pursuant to Standing Order 108(2), examination of a report on dairy subsidies, some time ago the official opposition requested that we look into the amount of subsidies given to Canadian producers in dairy versus American producers in dairy. A motion was put at that time, which was defeated, but the department and the minister volunteered to give the results of the studies anyway.

Today we have received a note from the minister, Lyle Vanclief, that he is giving us reports on subsidies and support in the U.S. dairy industry and the U.S. dairy import restrictions. So we have that with us today.

From the department, we have Mike Gifford, acting assistant deputy minister, market and industry services branch; Ken Ash, director general, economic and policy analysis directorate, policy branch; and Richard Tudor Price, acting director general, industry performance and analysis directorate, policy branch.

Good morning, gentlemen. We will take you testimony, and then we will go to questions.

• 0910

Mr. Mike Gifford (Acting Assistant Deputy Minister, Market and Industry Services Branch, Department of Agriculture and Agri-Food): Thank you very much, Mr. Chairman and honourable members.

First of all, let me apologize on behalf of the department for not getting to you and your colleagues a copy of this report earlier than just this morning. But between the three of us, in terms of at least our opening comments, we can certainly give you the highlights and lead you through some of the more inward stuff that's contained in this report.

What you have before you is really two reports. One is called Subsidies and Support in the U.S. Dairy Industry, and the other is called U.S. Dairy Import Restrictions.

Basically, the department has prepared the two reports in response to the request of the committee when you were looking at the Multilateral Agreement on Investment, and pursuant to the undertaking made by the parliamentary secretary, for an assessment on what kind of support the United States is providing to their dairy sector.

Let me start off by saying the reports focus entirely on the U.S. dairy sector. They have not attempted comparisons with Canada since they were not part of what you asked.

Secondly, I would like to explain and clarify some of the terms we're going to be using in the report and in our presentations. You'll see that we talk a good deal about the so-called producer subsidy equivalent, the PSE. As well, we use a number of terms like “government subsidy transfer” or “support”.

The term “support”, as used in the reports, is taken to mean financial benefits derived from government policies and programs. These financial benefits can vary from direct support, for example, sending each milk producer a government cheque, to indirect support, for example, the kind of border protection a country has, whether it be import tariffs, or tariff rate quotas, or whatever. Basically, this import protection allows domestic producers in the importing country to maintain domestic market prices above the so-called international prices. In these cases it's clearly the dairy industry that benefits, so economists have included them in the so-called definition of dairy support.

In the report Subsidies and Support in the U.S. Dairy Industry, we've chosen to use the methodologies and calculations that have been done by the Organization for Economic Cooperation and Development. The OECD has been measuring agricultural support for about ten years, and the governments of the OECD countries, which are primarily the developed countries of the world, including the U.S., have accepted this methodology as a useful tool to quantify total support provided by very different policies and programs, to compare between countries from year to year.

I would make a comment here that prior to the development of the PSE methodology in the OECD, there was a very noisy squabble across the Atlantic, between North America on the one hand and Europe on the other, where we would say in North America, where most of the support tended to be through treasury payments, well, the Europeans are providing more support than we are, and the Europeans would say, look, our expenditures, our treasury payments, are less than those of Canada and the United States in relative terms. But we would argue that, yes, in those days—10, 15 or 20 years ago—the treasury support was relatively less, but when you take into account the amount of support and protection provided by the import barriers in Europe, you get an entirely different picture. So there was a long-standing squabble, in effect, of comparing apples and oranges.

What the PSE methodology tries to do is to recognize that various countries support various commodities in a lot of different ways and somehow you have to develop a methodology that enables you to compare apples with apples and oranges with oranges. We believe that, although it's not perfect—I don't think any measurement system, when you're measuring the very disparate domestic agricultural policies, can be entirely perfect—nevertheless we feel that, on balance, the OECD methodology is about as good as you can get.

• 0915

What are the components of the so-called producer subsidy equivalent? There are really three components.

First of all, there are direct payments made by governments, either at the federal or subsidiary levels.

The second category is so-called price enhancement mechanisms, which is often called market price support, and this is basically where governments, through administrative fiat by setting administered prices, in effect, keep internal market prices at levels higher than they would otherwise be if you had the border open.

Then, thirdly, there are the so-called indirect measures that have the effect of providing support to the dairy sector. These are the general services that are provided by governments, both at the federal and subsidiary levels, in terms of extension, research, disease control programs, etc. These are the normal kinds of services that governments provide to their agricultural sectors; and usually you just figure out what's dairy as a percentage of all of these expenditures, and you pro-rate them.

Getting back to the United States in particular, in the U.S. a great deal of the support that's now received by dairy producers comes from the second category, so-called price enhancement measures. This element of support is measured by the prices at which milk producers actually sell their product in the domestic market compared to external reference prices, a comparison between domestic market prices and international reference price.

In the OECD, for dairy products, the international reference price is the price for New Zealand dairy products priced at export, including a transportation charge for delivery to North America. So when we make a comparison between, say, the domestic price for milk in the United States, we compare it against the delivered price—I'll say butter and cheese—coming in from New Zealand. You might argue here—and I open parentheses—that the international prices are distorted, they reflect very restrictive access in most developed countries, they reflect the widespread use of export subsidies; and we will acknowledge that the international price for dairy products historically, like that of sugar, has been a very depressed and distorted price. But in the absence of anything better, the reference price we use is the price out of New Zealand, which has very little support provided to their dairy producers.

Mr. Chairman, the report you have before you runs to some 32 pages plus an executive summary, and the report on the U.S. dairy restrictions runs to another 7 pages. I don't intend to go through them in detail, but I think they do speak for themselves. However, what we do propose to do this morning in the next few minutes is to simply outline what are the causes, what are the effects, and what is the magnitude of the results that have been observed.

First, I'll give some general background before I turn the floor over to Ken Ash, who will get into some more of the detail on how you calculate an American PSE for their dairy sector. But, first, some very general background.

Historically the U.S. dairy sector has been relatively isolated from the rest of the world. Starting back as early as 1951, the U.S. put import quotas first on cheese and subsequently on most other dairy product imports. There are a few exceptions to this widespread use of import quotas back in the 1950s. Certain dairy products such as casein and so-called soft cured cheeses such as Camembert and Brie have never been under restriction. But certainly the vast majority of dairy products have been and continue to be subject to tariff rate quotas.

• 0920

In general the United States has not participated particularly actively in world dairy trade. Imports, as I've mentioned, have historically been limited by quotas. And exports by and large were regarded basically as a surplus disposal activity. Historically the United States has not regarded itself as having a comparative advantage in dairy exports and has not been producing for export like it does in many other agricultural products. It's basically a surplus disposal activity.

At the end of the Uruguay Round of Multilateral Trade Negotiations, which concluded in late 1993 and the results of which were implemented in 1995, the U.S., like all other countries, were obligated in effect to convert their import quotas into tariff-rate quotas. This is the fancy name for basically a two-stage tariff where imports up to a certain quantity enter at a relatively low duty. Then once you exceed that quantity, the import duties increase to generally prohibitive levels. Many of the U.S. tariff equivalents on the over-quota tariffs are in the order of, say, 100%.

Basically, all of the details on the current U.S. border regime are detailed in our second report, which you have before you. In general, the U.S. import regime is restrictive, as I said, like most of the dairy sectors of most of the developed countries around the world with relatively small tariff rate quotas relative to the size of the U.S. market. As I said, they have generally prohibitive tariffs against quantities that can be imported over and above the TRQ. To give you some sort of context in this, for example, it means for Canada that we only have regular access for just over 2,000 tonnes of cheese annually, divided between cheddar, Swiss and some miscellaneous cheeses.

It's always very difficult to try to compare relative market access, Mr. Chairman. But to give you a rough order of magnitude, when the United States fully implements its tariff rate quotas as part of its Uruguay Round commitments, it's probably going to be providing access for something in the order of 3% of its consumption. As I say, in the murky world of international dairy trade, it's about the going level of access.

The U.S. border measures mean that U.S. industrial milk prices can and do move independently of world dairy product prices. In addition to the border regime, there are some other factors that influence market prices into the United States. These are the so-called milk marketing orders, which are operated in the main by the federal government and in some cases by individual state governments, particularly in the case of California.

But basically these so-called milk marketing orders have one aim in life and that's to regulate the price of fluid milk. The bottom line is that this is classified milk pricing, in many respects very similar to what we do in Canada. These marketing orders allow U.S. producers to receive a much higher price for fluid milk relative to the price that they receive for milk going into manufacturing.

Basically these milk marketing orders have been operated—I must add, to some criticism by various producer groups, depending on which region of the country you live in—as basically carving up the U.S. market and ensuring that local producers in effect supply the local fluid milk shed. The imports are in effect limited by a very cumbersome system of relative price differential. But the bottom line is they do have a classified pricing system for milk, whereby the consumer pays a higher price for retail milk, for fluid milk, relative to the price of milk that's sold for manufacturing.

• 0925

That's it in the way of some general background, Mr. Chairman. I'd now like to turn to Mr. Ken Ash and ask him to basically amplify and clarify what exactly are the components to the American producer subsidy equivalent for dairy.

Mr. Ken Ash (Director General, Economic and Policy Analysis Directorate, Policy Branch, Department of Agriculture and Agri-Food): Thank you, Mr. Chairman.

As Michael has pointed out, the key feature of the system of support to the dairy sector in the U.S. is that all of the support programs operate with the benefit of protection in the form of tariffs and tariff rate quotas.

Again, as Michael has referred to in very general terms, support to the dairy sector in the U.S. is principally provided at the federal level. There are three major instruments: the dairy price support program, the federal milk marketing orders—and in the case of California, the California milk marketing order—and the dairy export incentive program. There are also a number of smaller support programs at the federal level, as well as some fairly minor programs at state and local levels.

The producer subsidy equivalent attempts to look at all of these programs, the impacts they have, and the benefits they provide to producers. The longer report you have goes into quite lengthy detail and description, maybe 10 or 12 pages, with respect to these programs, and I'll not go into much more detail at all, but there is a considerable amount of descriptive and explanatory information in that report.

Let's take just a moment or two to look at the total PSE, or producer subsidy equivalent, that the OECD has found U.S. dairy producers benefited from in 1996. I refer you to table 9 on page 31. I think that's the second-last page. It will be page 33 in the French-language version.

I'm going to talk in particular with respect to the data from 1996, as that's the most complete information we have available. You can see that in 1996 the U.S. produced about 700 million hectolitres of milk—about nine times more than production in Canada—and that the net total PSE for the U.S. was about $11 billion U.S.

You will also see information in table 9 referring to 1994, 1995 and 1997. I'm not going to talk about the data for those years other than to point out that it is available to you.

The short conclusion is that there is not a great deal of variability in support levels across those years. There are some fluctuations, but by and large the support level has been in the vicinity of $10 billion to $11 billion U.S.

Again looking at 1996, of the $11 billion in support during this year that's measured by the PSE, over 90% of that, or $10 billion in total, was in the form of market price support. As Michael has indicated, market price support is an attempt to measure, across countries and across years and across a very diverse range and mix of policies and programs, the combined effect and the combined benefits to the industry.

The various support measures that are included in market price support include all of the major U.S. support programs I've earlier mentioned—again, the dairy price support program, the milk marketing orders and the dairy export incentive program. In combination with border protection against lower price imports, these programs are able to maintain milk prices at levels higher than they would otherwise be. They do that in large part without incurring huge government expenditures.

Just as an example, in 1996, expenditures for the dairy price support program were actually negative, as the program unloaded available stocks. In the same year, outlays for the dairy export incentive program were just about $20 million, a relatively very small number. In 1997, expenditures in both of these programs did increase, and were about $100 million in total.

The point I'm trying to be clear about is that the bulk, more than 90% of the support as measured by the producer subsidy equivalent in the U.S., is in the form of market price support, so it's not direct government expenditures. The balance of 8% or 9% of the $11 billion is made up of direct support. This includes numerous expenditure items such as interest concessions, research, disease control, and a number, again, of smaller state expenditures. You'll see, as well, some further detail in table 9.

• 0930

As a final comment on the particular table, the total value of support to the U.S., as estimated by the OECD producer subsidy equivalent, is about $16 per hectolitre of milk produced, which equates to about half of the value of production in the U.S.

Now, there seems to be little reason to expect major changes in this situation in the next little while. A number of changes to these individual instruments of support are ongoing as a part of the Federal Agriculture Improvement and Reform Act, the FAIR Act, but that will not be up for substantive renewal until I think 2002, so in the foreseeable future we do not see a major change in the type and level of support that's currently provided in the U.S.

Mr. Chairman, those are the comments we wish to make at the outset. If there are any questions or comments, my colleagues and I will be glad to try to answer them.

Thank you.

The Chairman: Thank you.

So what you're saying is that the U.S. is indeed being subsidized quite a bit, but it's not out of line in comparison to what's done in Canada.

Mr. Ken Ash: The report deals only with the U.S. We have not attempted in any of the material that has been made available to you to do a Canada-U.S. comparison.

But your conclusion is correct. As measured by producer subsidy equivalents, the level of support is very similar. There are different instruments, but the type of support, i.e. market price support versus direct expenditures, is very similar. The producer subsidy equivalent estimate for Canada would be about $20 per hectolitre, whereas in the U.S. it would be about $16 per hectolitre. So the OECD would estimate support in Canada to be slightly higher than that of the U.S., but in general terms it's fairly equivalent.

The Chairman: So is the information you compiled for us readily available through publications in the United States?

Mr. Ken Ash: Yes. The particular organization of this information is unique in that we looked at the U.S. in quite some detail, but all of the sources are public sources. The OECD produces reports every year on all member countries, and that's the principal source we relied upon.

The Chairman: Thank you.

Mr. Hoeppner.

Mr. Jake E. Hoeppner (Portage—Lisgar, Ref.): Thank you, Mr. Chairman.

Good morning, gentlemen.

Let's go back to subsidies. Just for my own clarification, when you say you are gauging price support according to the New Zealand milk industry, are you trying to tell us by this that New Zealand farmers get about half the price for their milk when they export it compared to farmers in the United States?

Mr. Mike Gifford: Basically, today New Zealand farmers would be getting, in Canadian terms, about $19 a hectolitre as compared to, say, an average price in Canada of roughly $54.

Now, that's on volume bulk commodities like butter. If they're producing more specialized dairy products for niche markets, then obviously they would get better prices for those products, which are basically value-added dairy products. But if you're talking about butter and skim milk powder, on average today, given today's world prices, you're talking about roughly $20 Canadian per hectolitre on the international market, which is what a New Zealand dairy farmer would get.

Mr. Jake Hoeppner: What's different in New Zealand such that they can survive on that? That seems almost impossible. Is it their tax structure? Is it their input costs? I find that hard to believe, but then you have the facts and figures.

• 0935

Mr. Mike Gifford: New Zealand does have a very strong comparative advantage in the production of milk. They have a very temperate climate, so they don't have to invest in a lot of expensive buildings. In many cases the milking parlours are virtually outside. And they're very large farms. They've developed over the years a very large scale.

I found an interesting number the other day. In comparing land prices in various countries around the world, I was amazed to see that the average land price in New Zealand—this isn't for arable land; this is for pasture land—was something in the order of about $7,000 an acre. This reflects the fact that land is expensive and has been bid up in New Zealand, but the reality is they're very efficient and their costs of production are low, given a temperate climate that enables them to keep the cows out on pasture year-round.

Mr. Jake Hoeppner: The dairy producer over there must also be very productive to produce a lot of milk per cow. How do they do that? Not just on grass. They must surely use some proteins and grains and products that are costly.

Mr. Mike Gifford: I'll let my colleague, Mr. Tudor Price, elaborate on this one.

Mr. Richard Tudor Price (Acting Director General, Industry Performance and Analysis Directorate, Policy Branch, Department of Agriculture and Agri-Food): The principal reason their costs are so low is they basically rely on pasture and grass. In New Zealand it grows 11 months out of 12.

By using herds of relatively low-yield animals, the limiting factor in fact is the amount of grass on the pasture. By operating in that way, they are able to keep their costs very low. If you look at the yield per animal, it's well below the typical northern hemisphere results, because basically the number of animals is not the limiting factor on their production; it's the amount of pasture.

Mr. Jake Hoeppner: That brings me to the next question. Our land costs are probably $300 to $500 an acre, as compared to $7,000. We have unique systems of producing tremendous quantities of silage per acre with that low-cost land. Somewhere we must be going awry if we have to have those types of prices to compete.

Competition is the name of the game, as you know. That's what the Americans are talking about. As you point out, their subsidies are probably hidden and are hindering us from competing. So where is the answer in this whole thing? Just trade negotiations won't do it, will they?

Mr. Mike Gifford: The bottom line is that although New Zealand is an extremely efficient producer of milk, it can't supply the world.

A number of economic studies have tried to forecast or anticipate what world prices would be if basically all import barriers and all export subsidies were removed. The bottom line in trying to summarize these various studies would seem to be that if the world did in fact eliminate or phase out these export subsidies and import barriers, the so-called equilibrium price—the resulting world price, which would then not be distorted—would be something probably at or around the current market price in the United States. In other words, the U.S. is at the borderline of having to have export subsidies to compete in international markets now or not.

But certainly every study that's been done suggests that current dairy product prices are substantially below what they would have been in the absence of all the government intervention that occurs through very restrictive import access and the wide-scale use of export subsidies. If these interventionist measures were phased out, then there would be a positive impact on international dairy prices.

Mr. Jake Hoeppner: So how do we do it?

Mr. Mike Gifford: Well, as you're well aware, we made a start in the Uruguay Round, a very substantial start, in beginning to reduce export subsidies. Obviously we still have a long way to go.

In the case of market access, the bottom line is that in the Uruguay Round most countries were emphasizing the need to convert or to get rid of non-tariff barriers, such as import quotas and variable import levies, and shift into tariff-only protection. But although that did occur, the amount of real access that's provided for dairy product trade around the world is still relatively limited.

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For example, in North America and in western Europe, the amount of effective access provided for dairy imports is well less than 5% of consumption, and in the case of the U.S. and Canada it's probably something in the order of 3% to 4%. Clearly, if there were more access provided—North America, Japan and Europe—a country like New Zealand, even though it has an absolute advantage, in effect, in the production of milk, couldn't supply the rest of the world—you just can't expand indefinitely—and therefore you could expect a general increase in international dairy prices.

Mr. Jake Hoeppner: Where does the supply management system fit in this whole idea of subsidies? I can see that you probably need to have some control over overproduction if somebody has a huge cost advantage in producing the product. How does supply management more or less tie into support programs? Doesn't it also create a certain level of support in the industry?

Mr. Mike Gifford: Both Canada and the European Union have supply management systems for their dairy industries. They're very similar.

The United States doesn't have supply management as such, but it does have a lot of intervention by government. In particular, they do have offer-to-purchase programs for butter, skim milk powder and cheese. They do in effect manipulate dairy prices for fluid milk through the marketing order system.

Historically, sugar and dairy have been the two most distorted sectors in world agricultural trade. Basically, the major potential import markets in North America, western Europe and Japan have historically had extremely restrictive terms of access.

As I said, the effects of the various measures that governments use to support the dairy producers are sort of summarized by the so-called producer subsidy equivalent, which basically says that if you could convert into dollars all of the effects of government intervention, whether that be at the border, through administered prices or through supply management, and you added it all together, what do these government supports provide in the way of assistance, as a percentage of the value of milk production?

Using the U.S. example, it works out that around 50% of the value of milk production can be attributed to government intervention, either at the frontier or through government expenditures.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): Good day, gentlemen. You're talking about equivalence between government aid in Canada and in the United States for dairy products. Could you be more specific?

[English]

Mr. Mike Gifford: Mr. Chairman, as Mr. Ash indicated, if you look at the PSEs on a U.S. dollar per hectolitre basis, and you compare 1996 to 1996, what you have is a PSE in the United States of roughly $16 U.S. dollars per hectolitre and a PSE in Canada of roughly $20 a hectolitre.

Rather than trying to compare percentages, I think it's probably better to compare the absolute level, because obviously the percentage depends on the value. In terms of comparing apples with apples, the bottom line, roughly, is that the American dairy producers in 1966 got $16 a hectolitre as a result of government measures, and in Canada the figure was roughly $20 U.S. per hectolitre.

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[Translation]

Mr. Odina Desrochers: Does this allow our market to be competitive?

[English]

Mr. Mike Gifford: Historically, both Canada and the United States have not been competitive in offshore markets. Because of their domestic measures, they've kept their internal market prices, on average, above that of the international market, and therefore when we sell into the international market, basically producers—in the case of Canada, now—receive a lower price for the milk that goes into products that are exported as compared to the milk that goes into product that's used for domestic consumption.

In the case of the United States, there's a government export subsidy provided that's sufficient to enable a U.S. dairy exporter to be competitive in international markets. So the bottom line is that in most years both the U.S. and Canada, if they're going to export, are exporting at a price that is often substantially less than the respective domestic prices. That's certainly not unique to North America; it's basically the situation around the world for developed countries.

[Translation]

Mr. Odina Desrochers: Your study deals with the years 1996 and 1997. However, you know that this is 1998, and that the Americans are getting ready for an unprecedented offensive to increase their exports. What do you intend to do to offset this new wave of increases in export subsidies?

[English]

Mr. Mike Gifford: The position of the U.S. dairy industry has really changed very radically in the last 10 years. When we were negotiating the Canada-United States Free Trade Agreement, I think it's fair to say the U.S. dairy industry was more preoccupied and more import sensitive than that in Canada. Historically they had been a very protected industry. They did not regard exports as a vocation but, as I said, basically a means to dispose of surpluses.

But over the last ten years there has been a very radical change amongst the leadership of the U.S. dairy farmers. Now it's the policy position of the U.S. dairy producers that they believe they can be competitive on an international basis and that the future of the U.S. dairy industry is very much tied to the future liberalization of world agricultural trade. They believe if import barriers are reduced around the world, if export subsidies are phased out, U.S. dairy producers can compete. They don't have costs as low in absolute terms as that of New Zealand, but as I said, New Zealand can't supply the world.

So certainly there's a strong majority of U.S. dairy producers who believe it's in their long-term interests for basically all these trade distortions to be brought down, which would then allow the United States to produce milk for export like they produce wheat or corn or beef or hogs, rather than just regarding it as a surplus disposal mechanism.

So I think it's certainly the expectation that over time we can expect the United States to become more of a player in the international dairy market, not so much because of government programs but because of the U.S. dairy industry feeling that in the long term, providing some of these trade distortions can be reduced substantially, they can compete in a relatively less distorted world. I think that's a very major change in the policy position of the leadership of the U.S. dairy industry.

I would hasten to add that there's certainly a vocal minority of dairy producers in the United States who are very skeptical about this, and in fact, I'm sure many producers in the northern tier of the United States in particular, and particularly in Vermont and New York, sort of look with longing eyes north of the border to the system we have here in Canada.

• 0950

[Translation]

Mr. Odina Desrochers: You mentioned the new mentality and behaviour of the American milk producers. We are aware of this. What does Canada intend to do to adjust to this new American mentality?

[English]

Mr. Mike Gifford: I think Canada has also adjusted, as well as the United States.

It used to be that we, in effect, operated like the Americans did. We regarded exports simply as an opportunity to get rid of structural surpluses that might be generated by the system from time to time. After being sort of battered around back in the late 1960s and early 1970s, producers in Canada, in effect, gave up on the international dairy market. We lost our market for cheddar cheese in the U.K. when Britain joined the Common Market.

Producers in Canada saw the distortions in international dairy markets, a massive use of government export subsidies, and very restrictive import access. Basically they circled the wagons and came back to Canada and concentrated on supplying the Canadian market. It was only when we had a surplus that we got into the export business.

Today the situation is a lot different. Dairy producers, as a generality, recognize that just concentrating on the domestic market is a recipe for a stagnant or declining industry, and that if they want to grow the industry, they have to look at the export market.

In the last several years, there have been a number of initiatives taken by the dairy industry in Canada to position themselves to compete in the international market. That has involved, for example, classified pricing whereby, depending on the product and the market, milk is priced in Canada depending on the market returns for alternative markets.

Therefore, today more and more producers are asking themselves, if I have a domestic price of x dollars, what am I prepared to produce milk at for export at less than x dollars? The answer is that some of them, at least, are willing to produce milk at prices less than the domestic price. That milk is going for export, but it's for planned exports. I guess this is the main point.

Rather than producing milk and hoping you can get rid of it, I think milk producers are taking the position that if they are going to start producing again for the export market as they did 30 years ago, they want to make sure they have assured markets and that processors are basically willing to give them a decent price for those export markets.

That's the kind of change that's occurring.

The Chairman: Thank you.

We'll go now to Mr. Harvard.

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

First of all, Mr. Gifford, I want to thank you and others for preparing this report. I'm sure it will be helpful to the committee.

I realize the thrust of your report was not intended to get into the business of comparing supports in the United States with what exists here in Canada, but of course comparisons are inevitable. Let's talk about that for a couple of minutes.

You were mentioning support in terms of hectolitre. Is there another way of expressing it, as measured by the PSE? My understanding of the report is that it's about 48% in the U.S. and about 55% in Canada. Is that true?

Mr. Ken Ash: In the case of the U.S., in percentage terms, the OECD expresses the producer subsidy equivalent in a number of ways. One of them is as a percent of the total value of production. Expressed as such a percent, in the U.S. the level of support is exactly 48% of the value of production, whereas in Canada it's estimated by the OECD to be 55% of the value of production.

The composition of the support is slightly different but still very similar. Market price support in the U.S. is about 90% of the total producer subsidy equivalent amount. In Canada, market price support is about 75% of the total producer subsidy equivalent amount. At the balance, in both countries, are direct expenditures. In Canada, perhaps the two biggest differences are the dairy subsidy that we have, and as well, a number of smaller provincial expenditures, which, taken together, add up to a more significant amount than is the case in the U.S.

• 0955

So the short version is that overall levels of support are very close or slightly higher, whether as expressed in percentage or per hectolitre terms, and the make-up of that support is similar, with slightly more emphasis on market price support in the U.S., and slightly more emphasis on direct expenditures in Canada.

Mr. John Harvard: There's another inevitable comparison, because very recently the Dairy Farmers of Canada produced a commissioned report, the findings of which showed results quite different from yours. Their study concludes that the level of subsidy in the United States is much higher than that in Canada, and that puts Canadian dairy farmers at a disadvantage. Why would there be this startling difference in findings between your report and the report prepared for the DFC?

Mr. Ken Ash: Mr. Chairman, we have seen certain parts of this study on which the Dairy Farmers of Canada has based its findings, but we've not yet seen the whole study. We have advised representatives of the Dairy Farmers of Canada that we officials would be more than happy to meet with them and discuss the contents of our own report, and to look at theirs as well, but we obviously wanted to wait until after we had a chance to present the report to this committee, which in fact had requested it. We have indicated to representatives of the Dairy Farmers of Canada that we will sit down and look at that question in a little more detail.

Having said that, there looked to be two key differences between the way support is measured—

Mr. John Harvard: In other words, they use different methodologies?

Mr. Ken Ash: Yes. We've tried to be really clear that our report focuses on producer subsidy equivalents and the OECD methodology and the OECD calculations. The Dairy Farmers of Canada report does not. My understanding is that it looks only at direct expenditures, so it would exclude measurement of market price support, which in the OECD material we've presented to you is the bulk or the vast majority of support in the U.S., as well as in Canada. That would explain a significant degree of the difference.

As for the second difference, our understanding is that the work done for the Dairy Farmers of Canada identifies a number of very large U.S. government expenditure programs—for example, food and nutrition programs, the food stamp program and so on—and allocates a proportion of those very large expenditures to the dairy industry and to support to dairy producers, and that increases the level of support quite dramatically in the U.S.

I want to reiterate that we have not yet had an opportunity to talk to the Dairy Farmers of Canada about our report to you. We will do that, but at this point in time, we believe those are the two major areas of difference.

Mr. John Harvard: It's my understanding, Mr. Ash, that in the methodology employed by the consultant hired by the Dairy Farmers, the value to the dairy industry in the U.S. of such things as the food stamp program was included, and it also included even crop insurance. Is that true?

Mr. Ken Ash: Yes, that's our understanding as well, that there's a wider range of programs that are included, whereas the OECD methodology for PSE, just to use your example with respect to crop insurance, would identify benefits to the feed grains industry in that country as opposed to direct benefits to dairy producers. So there are methodological differences that we believe explain the difference in findings.

• 1000

I guess the key point we would like to make is that the OECD producer subsidy equivalents, the methodology and the calculations, have been undertaken for quite some time—about ten years now. They are an attempt to bring a common denominator to very different kinds of interventions in many different countries, and are relatively comprehensive.

Just as an example, I believe the report done for the Dairy Farmers of Canada identifies a total support level in the U.S. of about $13 or $14 per hectolitre. The OECD producer subsidy equivalent actually indicates a higher support level of about $16 per hectolitre. In Canada the support level identified by the OECD PSEs is a little higher still—about $20 per hectolitre.

Mr. John Harvard: If I have a couple of minutes left, Mr. Chairman, I'll cede my time to Mr. Bonwick, who is busting to ask one or two questions, because he's being called away.

The Chairman: Mr. Borotsik wants to...

Mr. Rick Borotsik (Brandon—Souris, PC): I have ten minutes, Mr. Chairman. I'd love to see Mr. Bonwick—

Mr. John Harvard: He has to go to another meeting.

The Chairman: I knew you'd be so cooperative.

Go ahead, Mr. Bonwick.

Mr. Paul Bonwick (Simcoe—Grey, Lib.): Thank you very much, Mr. Chair, and certainly Mr. Borotsik.

This is just so I can get clarification on a couple of things you said, Mr. Gifford. Without redefining or re-explaining, perhaps it could be simple yes or no answers, because I have two or three points here I want to cover.

You touched on production in Canada versus production in New Zealand. Are dairy producers in Canada as good or better than any in the world, from a production standpoint?

Mr. Mike Gifford: I think, Mr. Chairman, that the genetic material we have in Canada and the level of management expertise is second to none in terms of—

Mr. Paul Bonwick: That answered the question. Perfect.

I'm interested in your viewpoint, as Government of Canada agriculture officials, on a fairly basic or broad question, and that is, do Canadians want a safe and strong dairy industry in Canada? It's a fairly simple yes or no question.

Mr. Mike Gifford: I would hazard a guess yes, Mr. Chairman!

Mr. Paul Bonwick: I was just going to cut you off, too, because the explanations sometimes get a little lengthy. I'm leading up to something, obviously.

Some hon. members: Oh, oh!

A voice: Surprise, surprise.

Mr. Paul Bonwick: I was very pleased to hear Mr. Gifford speak about some of the costings as well as some of the subsidies. When we do a comparative analysis on how our industry is subsidized versus how the U.S. or New Zealand are, and so on and so forth, I think one of the other very important parts of the equation is what their inherent cost of doing business is.

You touched briefly on certain things like pasture land, but we didn't touch on things like feed, for example. Is the feed industry subsidized in different countries in different ways? Is fuel subsidized? I made a whole list: land, equipment, levels of taxation, buildings. It has to be more expensive to build a dairy barn in central Ontario than even in Vermont, let alone New Zealand.

If we come back to accepting that Canadians demand the Government of Canada have a safe and strong dairy industry, then there are certain things that come along with that demand. I come back to my point on that demand.

I'll ask for your opinion on another thing that's often accepted. If an industry is not able to generate adequate profitability and meet the demands the government has in place, then in effect that industry would no longer exist, I would assume.

Mr. Mike Gifford: Industries all the time, Mr. Chairman, are under pressures to adjust, particularly today as, say, compared to 20 or 30 years ago.

Mr. Paul Bonwick: That wasn't what I asked. What I asked was, if an industry is not able to generate a certain amount of profitability based on the standards we as a government put in place based on its being safe and strong, then that industry would not exist.

Mr. Mike Gifford: Certainly people will exit the industry if they can't make a dollar.

• 1005

Mr. Paul Bonwick: I guess that's where my last point on it is. If we are to maintain, based on the information you provided me, a safe, strong dairy industry in Canada, and comparing all the different parts of the equation, including costs and not simply subsidies, I think there's an inherent responsibility for government to support the dairy industry based on the levels of demand that we, as consumers, place on that. I would ask for your final opinion on that.

Thank you.

Mr. Mike Gifford: Well, I would suggest that all countries around the world, whether it's Canada or in North America or wherever, basically have one thing in common, and that's the desire to support their rural sectors. They're trying to basically relate that objective to a world that is now characterized by reducing trade barriers rather than increasing them.

I guess I was trying to make the—

Mr. Paul Bonwick: That's not what I asked.

Mr. Mike Gifford: But that's the answer I'm giving you.

The Chairman: He can give the answer he wants, Mr. Bonwick.

Mr. Paul Bonwick: What I wanted was an answer to the question.

Say we, as a government and as a Canadian people, insist on a safe and strong dairy industry. Say we have certain expectations out of that industry. Say we do a comparative analysis on international markets and find that the playing field is not level in terms of the costs of buildings and land, amount of pasture, climate, geology, and all those kinds of things. Is it not the inherent responsibility of government to try to balance that and make it so that it can be profitable? Otherwise, you cannot produce a safe, strong dairy industry.

Mr. Mike Gifford: I would agree that one of the responsibilities of government should be to try to level the playing field. Governments in other countries basically distort world production and trade in dairy products.

The Chairman: Just before we leave the subject Mr. Harvard was on, are you saying that the methodology of the Dairy Farmers of Canada is wrong? They shouldn't be including—

Mr. Ken Ash: No, I'm not saying that at all. I think our point is twofold. One, we have not yet had an opportunity to look at the methodology, contextual information, and explanation of what is implied by the findings that were done by a consultant for the Dairy Farmers of Canada. So there are spots where we don't know about the details of their study.

The second point we're making is that what we have given you are the findings of a methodology used by the OECD. It's a methodology that has been developed over the course of about ten years. That's a very comprehensive and widely used methodology. We don't want to make any comments or judgments about the Dairy Farmers of Canada study until we've had a chance to talk to them.

It does include different things. It does have a different methodology, but we would like to explore that before—

The Chairman: Is there something wrong with including the food stamp program? That would have an impact.

Mr. Ken Ash: The way the measurement methodology is applied in the OECD is simply different.

What happens is that the domestic price is compared to a reference price or a border or international price. That difference is identified as a measure of support that would not exist in the absence of a very wide range of policy support measures. So it's measured in an indirect way by measuring a price cap.

What the Dairy Farmers of Canada study did was to not use that approach. It identified direct expenditures on programs that are essentially social assistance programs where there are aids to allow people to purchase food. That's one approach.

There was, to the best of our knowledge, no counterpart methodology applied in Canada. In the Canadian measures, as we understand it, with the Dairy Farmers of Canada study, it looked at direct expenditures, and there was not value assigned, again to the best of our knowledge, for market price support or benefits that might exist from Canadian border measures or other Canadian interventions.

So we don't want to be at all critical, we want to take the time to sit down with representatives from the Dairy Farmers of Canada and understand a little better their methodology relative to that of the OECD.

The Chairman: Mr. Borotsik.

Mr. Rick Borotsik: First of all, I congratulate you, Mr. Gifford, for not allowing Mr. Bonwick to put his words in your mouth. I do appreciate that immensely.

Mr. Paul Bonwick: I have a point of order, Mr. Chair.

Mr. Rick Borotsik: There's no point of order; I thought you were leaving.

• 1010

An hon. member: He's a nice guy, but don't touch the guidelines.

Mr. Rick Borotsik: It's obviously very blatant, Mr. Chairman, that—

The Chairman: Mr. Bonwick has a point of order.

Mr. Rick Borotsik: Oh, what's his point of order?

Mr. Paul Bonwick: The point of order is that Mr. Borotsik is making statements on my behalf, statements that I did not make.

Mr. Rick Borotsik: No. You were making the statements. I don't think that's a legitimate point of order, but that's not unusual. It's not that unusual either, I might admit. I would suspect, Mr. Gifford—and I won't get into the political banter back and forth—there are a lot of industries in Canada that have some negatives associated with them.

Mr. Bonwick talks about all these additional costs because of weather and taxation. If the taxation regime we have in this country could be fixed by government, perhaps then we could become much more competitive, obviously, in world trade.

But I have two legitimate questions after Mr. Bonwick's.

First of all, the thing you said, Mr. Gifford, that I thought explains your presentation best was “the murky world of international dairy trade” and it is terribly murky. There is no question about that. In talking about the market price support, the producer subsidy equivalents that we have, you said there's about $10 billion U.S. in producer subsidy equivalent in the United States at the present time, at virtually no cost to the federal government, as I understand it. That cost obviously, as the market support, is then funded by whom? Is it the consumer, Mr. Gifford? Is that where the market subsidy comes from?

Mr. Ken Ash: Yes. The market price support, because it occurs in the form of higher prices than would have been in place in that domestic market in the absence of those government programs, essentially is a consumer transfer as opposed to a tax transfer.

Mr. Rick Borotsik: So supply management has a producer subsidy equivalent calculation there, and then the consumer obviously is paying those higher domestic prices than what would be achieved if you didn't have those rules and regulations that Mr. Bonwick talks about, the government rules and regulations. Is that correct?

Mr. Ken Ash: Again, the OECD producer subsidy equivalent would have a significant component of market price support, which essentially would be considered a consumer transfer in Canada as well.

Mr. Rick Borotsik: Okay, it's $10 billion that was identified in the U.S.

Mr. Ken Ash: Yes.

Mr. Rick Borotsik: Do you have the comparable equivalents in Canada as to what that would be?

Mr. Ken Ash: It's about $1.5 billion in total, 75% of which would be identified as a market price support.

Mr. Rick Borotsik: Fine. Thank you very much.

In saying that, I go back to what Mr. Hoeppner had said with respect to the New Zealand market right now, which we consider about 2%, I guess. In fact, I think that was the number you said; about 2% is what it was going to have as a market price support. If that is the case, then the domestic price in New Zealand should be substantially less, I suspect, for industrial products as well as fluid milk than what it would be in the other two markets we're comparing right now, Canada and the United States. Is that correct?

Mr. Mike Gifford: Yes. As in most countries, there is a price premium paid by New Zealand consumers for fluid milk relative to the price of milk going into manufacturing. But that being said, certainly New Zealand consumers would be paying substantially less than their counterparts in North America or Europe.

Mr. Rick Borotsik: Okay, thank you.

I have one last question, Mr. Chairman. I agree, the mentality and the mindset of dairy producers in Canada right now is to get into the international market. We talk about the 301 that's being filed right now by the United States—

An hon. member: That's all been said.

Mr. Rick Borotsik: No. I think I heard Mr. Gifford say that certainly from the leadership of the dairy industry this mindset now is to get into the international markets. Is that not what I heard, Mr. Gifford?

Mr. Mike Gifford: Yes.

Mr. Rick Borotsik: Okay, so maybe Mr. Bonwick would like to listen when these things are being said, because the leadership in fact is going this way—which, by the way, I don't necessarily approve or disapprove of. It's the way the industry has to grow and deal if it in fact is going to improve.

Mr. Paul Bonwick: That's certainly not what our producers are telling me.

Mr. Rick Borotsik: But does that same leadership have the same mindset to understand that you can't have it both ways, that there can't be a protected domestic market where in fact you would like to access international markets? That probably is in fact the same with other international traders right now who would like to have access to our domestic market. Is that part of that mindset?

Mr. Mike Gifford: I think today they probably recognize that you can't have it both ways. If the United States wants to reduce import barriers to their exports, they're going to have to free up their domestic market as well.

• 1015

But at the end of the Uruguay Round when Mr. Dunkel, the director general of the GATT, was proposing that countries as a modality at the end of the transition period offer up access equivalent to roughly 5% of consumption, Canada did table initially an offer that was equivalent to exactly what Mr. Dunkel proposed—5% of domestic consumption. The United States tabled an offer that was roughly equivalent to 3%, and therefore we scaled back our offer down to the Americans' to make sure that we maintained a comparability of access.

Going back to a theme that has emerged throughout these discussions, it seems to me that what producers in most countries are looking for is basically a level playing field, particularly when it comes to market access, that the major import markets in North America, western Europe and Japan basically need to provide comparable terms of access.

Mr. Rick Borotsik: I have a quick question about something that I would just like to understand better. We talk about provincial supports and state supports, and all the rest of it. In your opinion, in 30 seconds or less, are there differentials in provincial support throughout Canada, in the 10 provinces we have, with respect to dairy products?

Mr. Mike Gifford: No. Basically, you have a national program for milk production in this country.

Mr. Rick Borotsik: Are you saying that there are no differentials in provinces, that some provinces do not have support systems?

Mr. Mike Gifford: Not to any significant degree. It's right down at the point percentage of something. It's very small.

Mr. Rick Borotsik: Good. Thank you for the answers.

The Chairman: Mr. Calder.

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

Rick, I have to tell you, if I was a dairy farmer in your riding, I would be a little bit nervous with some of the questions.

Mr. Rick Borotsik: I think we have to ask the right questions, Mr. Chairman. That's the difference. It's not necessarily nervousness. It's just that you have to ask the right questions.

Mr. Murray Calder: I would be, anyway.

Mr. Rick Borotsik: You're not in my riding.

Mr. Murray Calder: Mr. Gifford, you made a blanket statement a little while ago to Jake over here that the United States does not have supply management and Canada and Europe do.

Seeing that we're talking about dairy subsidies, I won't bother talking about sugar beets, peanuts or cotton, but I will talk about the Northeast Dairy Compact in the New England states. And there is Wisconsin, for instance, which has planned production within the parameters of that state, and also has restricted flow going into the state. How is that different from supply management?

Mr. Mike Gifford: When I was saying supply management, I was using the Canadian version of supply management, which is basically farm-level production quotas.

In the U.S. there's an awful lot of government intervention, but rather than limiting individual producers to a certain amount that they can produce for, say, primarily the domestic market, in the U.S. it's done through price-fixing in effect. Basically, under the U.S. marketing order system, the federal and the state governments, between the two of them, fix prices for dairy products so that producers can get a return. Basically, it's the government's capacity to set administered prices that provide most of the support.

You're quite right, in the case of the Northeast Dairy Compact, dairy producers in the northeast convinced their members of Congress basically to allow them to band together to be able to jack up prices in that particular geographic part of the United States higher than they would otherwise be. So it's the ability of governments, state and federal, to set prices that provide most of the support to U.S. dairy producers.

Mr. Murray Calder: So in essence what you're saying is there are examples of supply management within the United States.

Mr. Mike Gifford: I was only talking about dairy. Certainly, when you get outside of dairy, there are many examples of supply management. It is very similar to the Canadian system.

Mr. Murray Calder: I just wanted to clarify that position right off the bat.

The other thing is that the United States has basically made the statement that by the year 2002 they're going to be subsidy free. Yet when Rose-Marie Ur and I were down in the last session of Parliament we had a chance to debate the chair of the standing committee down there, Pat Roberts, and I had that debate I just had with you right now about supply management. And then we were down there and we were debating the Farm Bill, and basically what I see right now with the Farm Bill is... I think in 1995-96 when we were down there, I had asked Mr. Roberts about EEP, and he stated to me, “Mr. Calder, you don't have to worry about EEP, that's on the shelf and it's going to collect dust there.”

• 1020

Well, guess what? We see the European Economic Community and the United States going toe to toe in another wheat war again, and we've been down this road. So they've just dusted off EEP, and it's back out, alive and healthy all over again. I wonder, right now, if the reason the U.S. Farm Bill has been put into place is basically to help the farmers down there to recapitalize.

Say, for instance, returns on the dairy farms were a little bit low and the U.S. government, in it's wisdom, decided to use the U.S. Farm Bill to help dairy farmers recapitalize. How is that different?

Mr. Mike Gifford: There are big differences in the way dairy is treated in the Farm Bill and the way grain has been treated. Basically, if you're a grain or oilseed producer in the United States, you are subject to a set of agricultural programs dating back to the 1930s that were basically price supports to individual commodities. Under the current U.S. farm legislation, support to these farmers has been converted from commodity price support, basically, into direct income payments that are unrelated to current production.

If memory serves me right, the order of magnitude is, roughly, at the beginning of the seven-year period, $7 billion goes into the U.S. grain and oilseed sector; and at the end of the seven-year period, it's still going to be about $4 billion. It's a big question mark of what replaces this Farm Bill once the current Farm Bill expires.

But when it comes to dairy, there was one significant development. In fact, support to the U.S. dairy industry was not increased; it was reduced under the Farm Bill. Under the Farm Bill, the United States will phase out the offer-to-purchase program that historically has propped up the domestic price of butter, skim milk powder, and cheese. If memory serves me right, I think it's within certainly sooner than the seven years; it's by 2000.

By 2000, the U.S. government will be out of the business of offering to purchase U.S. dairy products. Obviously they will still have an export subsidy. They want to use an export subsidy consistent with the WTO undertakings, but their offer-to-purchase program will have been phased out.

Currently, when you look at the study Mr. Ash and his colleagues have prepared, you see that market prices have been substantially above U.S. support prices for much of the last four or five years.

If I could add, Mr. Chairman, at this point, you were asking yourself about this PSE and differences between the methodology used there and what has been used by the Dairy Farmers of Canada. I should stress the fact that measuring relative support levels between countries and between commodities is an art rather than a science. There's no black and white; there's no absolute rights and wrongs.

But I would say, in response to your question about the effect of U.S. welfare programs, like food stamp and school lunch, on U.S. dairy producers, the methodology the OECD uses does capture the effect of that, because if in fact those consumer programs are causing U.S. consumers to spend more on dairy products than they otherwise would, that will increase the domestic price of U.S. milk. If they do that, then the price gap between the domestic price of milk and international prices will decline. So you do capture the effect of that support on the U.S. dairy producer, but that's it.

Mr. Murray Calder: I have one last question, and it actually follows up on what Mr. Bonwick was talking about.

It is obvious to me that each country is going to try to protect its rural community. Canada is; the United States is. If you take a look at the PSE, in Canada we're sitting at around 56% to 57%. The average dairy herd is around 58 cows. In the United States it's about 47%, and the average dairy herd is about 109 cows. In New Zealand it's 2%, and the average dairy herd is about 210 cows. Okay? Can you see the progression here? That says that the larger the average size of the herd, the fewer the farmers and people contributing to the rural community and small businesses that are around them taking and supporting that industry.

• 1025

The point is that if the United States is going to be doing away with subsidies for their dairy herds over there, then one of the things I see right off the bat is that if they're closing one door, then it's obvious to me that if they're going to protect the rural communities they'll be opening another door someplace else. That could be the Farm Bill. It could be something else they've got in the works.

Are you watching for that? What have you found?

Mr. Mike Gifford: As these international agreements become more effective, I think all the participants to these international agreements become paranoid with making sure the other guys aren't cheating. Certainly everybody's under a microscope. I think that's why, understandably, producers in one country say that, other things being equal, as producers they have the management skills and the genetic material and they can compete with anybody in the world. But what they can't do is compete against somebody else's treasury or some other government's intervention.

I think basically what we're trying to do in the WTO is level the playing field between producers around the world, particularly in the dairy and sugar industries, where government interventions either at the border or through the use of export subsidies have so distorted international prices that it's no wonder dairy producers, for example, decided 30 years ago to say to hell with the international dairy market. If that's what it takes to survive, they might as well concentrate on the domestic market and forget about...

I think the difference between 30 years ago and today is that slowly but surely the distortions that have permeated the international dairy market are beginning to be reduced as a result of, first of all, the Uruguay Round and hopefully subsequent WTO rounds.

The Chairman: Mr. Hoeppner.

Mr. Jake Hoeppner: Mr. Chairman, I'm sure you've realized why it's so important to have that gentler, kinder Reform Party here to manage affairs when they get out of hand. It's to protect the witnesses.

I liked what Mr. Gifford told us today. I think he's been very honest. I think that's what has been lacking when we've looked at subsidies and tried to get the edge in other countries.

I want to go back to what Mr. Harvard said about studies. You know, we need studies, but we need accurate studies. I think from what you've told us this morning, the OECD has done a fairly good job in picking New Zealand as a base and then working from there.

But the thing I want to come forward with is this. I've seen a study done for the Royal Bank and for some investor on hog processing. They compared the U.S. input costs to the Canadian input costs. The only difference there between the two countries was the cost of the feed, which was quite significant. The feed grains were about $15 per hog less in western Canada than in the U.S.

If you've been through western Canada, you know what's happening. Every farmer is building a big hog barn. The grain companies are building huge inland terminals. That price advantage may just evaporate overnight and then we're in bigger trouble.

Now, how do we control some of these input costs, or put some balance into it? It sees that every time we have something that's in a position to be effective, it gets distorted by either the demand or government politicians interfering. I think that has to happen if we want to get a world trade organization that really works.

Mr. Mike Gifford: I think you will see changes. For example, the elimination of the Western Grain Transportation Act made it relatively more attractive for a grain producer in western Canada to get into livestock production. There's a terrific amount of expansion going on currently.

• 1030

But what you will see is that as more and more producers in effect feed their barley and wheat through animals in order to get value added that way, rather than exporting the raw grain, the trade flows will start to shift. You will start to get barley being imported into Alberta from Montana. That's something already starting in Alberta. Because of the feedlots in Alberta, basically they're going to be drawing in not only barley from other parts of western Canada but imports of feed barley from Montana.

I've also been told by livestock producers in Manitoba that if the hog expansion in Manitoba occurs to the extent they think it will, they're going to be relatively short of feed wheat. They could well be drawing in feed wheat from, say, North Dakota.

So basically the bottom line is that although it's fair to say that most people would argue that Manitoba today has the lowest-cost feed grains in North America, over time, as the livestock industry expands, it will bid up the price of grains. Grains will flow into Manitoba. It just won't all be self-sufficient.

Mr. Jake Hoeppner: There is a problem there, and you're probably hearing about it just as well as I am. The American livestock producers, especially in the north or northwest, are pushing government very hard to put an import tax on beef processing. This is on beef coming into their area, because it's affecting their cow/calf operators and their hog production.

Mr. Mike Gifford: Mr. Chairman, the U.S. cattlemen's association, and certainly the people who understand the North American livestock economy freely, acknowledge that the effect of the Canada-U.S. Free Trade Agreement has been to shift cattle movement from the west-east to a north-south axis. Today we export slaughter cattle and feeder cattle, as well as beef, out of western Canada into the United States.

But if you're eating a steak in a restaurant or a hotel in eastern Canada, the high probability is that all those portion control cuts are coming in from the U.S. midwest. In other words, we're importing a lot of fed beef into eastern Canada while we're exporting beef, live cattle and feeder cattle out of western Canada into the U.S.A.

Mr. Jake Hoeppner: But politicians don't realize it. You see the west now having this problem, and the east probably has a separate problem, but Mother Nature can change this flow so quickly. If we should have a crop failure in western Canada, you will just see the livestock industry being devastated, because, hey, you can't import high-price feed and get low prices for your livestock industry.

The Chairman: Thank you.

Mr. McCormick.

Mr. Larry McCormick (Hastings—Frontenac—Lennox and Addington, Lib.): Thank you very much, Mr. Chairman.

Thank you, gentlemen, for being here and for the work you've done to put this together. It certainly will be valuable, useful and interesting as we also listen to the DFC.

Now, Mr. Gifford, I certainly realize there are large producers today asking for access to the world market in milk. They're saying, “Let me at it.” We're going to hear more of that.

My concern is also for the family farm, that it can remain viable. The United States may not quite be able to equal the cost of production in New Zealand, but I'm not convinced that they can't do so in the future with their southern climate.

Of course, in North America the map is not divided north and south, so we have different constraints with respect to Mother Nature. Where does that leave our Canadian producer as we increasingly enter the world market? Where does that leave our family farms in looking at future prices?

Mr. Mike Gifford: Mr. Chairman, it seems to me that this is the classic small farm income problem that Europe still has. Basically it doesn't exist in North America today.

What we have is a large number of very successful family farm businesses. Not all milk in the United States is produced in sunny California and Arizona. A substantial amount of U.S. dairy production is still produced in Wisconsin, Michigan and New York.

• 1035

It seems to me it's just like the fruit and vegetable industry in the free trade agreement. The bottom line is you have to be able to be competitive with the guy who's 50 miles away or 100 miles away. There's no reason whatsoever to prevent the Canadian dairy industry from being competitive with U.S. dairy producers in Wisconsin, New York, Vermont, or wherever.

The scale of the operation, though, probably is going to have to get bigger, because if we stay at 40 cows and the Americans are at 80, as an example, their average costs are going to be reduced, because they can spread the fixed costs over more cows. That's a decision for the individual farm businessman or businesswoman to make, whether or not they wish to expand their operation so as to continue to be competitive. But as I said, I have every confidence that we can compete with the U.S. industry.

Mr. Larry McCormick: Thank you, Mr. Chair.

In regard to New Zealand, it makes me think of my good friend Mr. White, who sits on the opposite side of the table, who compares everything to New Zealand. Of course the country is just a few miles wide. It's a small, wonderful country, and things aren't quite the same. It's a bargain that you can mail a letter anywhere in Canada for 50¢ or whatever. I certainly hope my friends in the Reform Party don't deny their families access to our wonderful product called milk just because we support our family farms.

But if the United States did, and I'm sure they've done, many similar studies as they look at our dairy subsidies here in Canada, and if we saw the result of that study, or when we do, would we see it as complex? Would the same type of study done for Canada turn up any surprises? Would it be somewhat similar, or as transparent as you believe this is? What would your thoughts be on that, Mr. Gifford?

Mr. Mike Gifford: Well, yes, in fact the Canadian situation has been examined by the OECD. The figure for Canada's PSE, which Mr. Ash was referring to, was not calculated by Canadian officials; this was done by the OECD Secretariat.

As I was trying to say earlier, no methodology trying to measure very different support systems is going to be perfect, but basically the OECD methodology is the best available and probably is a fairly good approximation of measuring support between countries. Our system is a lot different from the Americans', but the numbers that have come out from the OECD methodology do provide a reasonable approximation or guesstimate of the relative differences in support between Canada and the U.S.

Mr. Larry McCormick: Thank you.

Mr. Gifford, with the difference between the United States and Canada in regard to the dairy subsidies, looking forward to the next round of the WTO, which starts almost tomorrow, will our Canadian producers be at a disadvantage as we enter those negotiations, and what will be the end result?

Mr. Mike Gifford: The difference between the negotiations of the Uruguay Round and the negotiations of the next round is that when we started the last round, article XI of the GATT allowed import quotas in support of supply management. We developed a very credible negotiating position that said if a country is prepared to accept disciplines on production, we should have some degree of import protection, but we're prepared to increase access and we're prepared even to accept limits on dairy exports on supply-managed exports.

But ultimately the majority of countries decided they would prefer on balance to get rid of import quotas, variable import levies, and all these other non-tariff barriers and convert everything to the so-called tariff rate quotas.

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In the next round, I think what Canadian dairy farmers will want is some assurance that at the end of the day, if they're going to provide access to international dairy products, they're not providing any more access than the United States or western Europe or Japan are providing in relative terms. In other words, they'll want to make sure that the playing field is level.

They'll also want to see export subsidies finally eliminated. Hopefully that will be achieved in the next round, because again, it's difficult at the best of times to produce milk 365 days a year, but when you're having to compete against somebody's treasury, that's just more than the traffic will bear.

So I think dairy farmers will be looking for, in effect, a levelling of the playing field, whether it be in terms of phasing down and hopefully reducing and eliminating export subsidies across the board, and particularly in dairy...and also, if dairy access is going to be improved, that it be done in such a way that in relative terms, access in North America, western Europe and Japan are roughly the same, so that there is a level playing field.

The Chairman: Thank you very much.

I wonder, Mr. Gifford, why the northwest states formed a compact if they could compete with their southern neighbours. Isn't that a protective—

Mr. Mike Gifford: I'll let Mr. Tudor Price elaborate, but I would suggest, primarily in the northeastern United States, they wanted to get a higher price for their milk. Basically, in order to achieve that, they needed a special dispensation from Congress, and that's the practical effect of this compact.

The Chairman: But it's a protective measure, though, isn't it, to keep their small firms going?

Mr. Richard Tudor Price: Yes, Mr. Chairman. As Mr. Gifford says, it's basically an extension of the federal marketing order programme but done by compact amongst the states rather than by Congress itself, whereas the federal orders are set up by Congress.

I think the other point that's worth making is that it's specific to fluid milk. It doesn't directly affect the amount of industrial milk that could be produced in participating states, but it does increase their returns for the fluid milk that is produced within that group of states.

The Chairman: Ms. Ur.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): In continuation of Mr. Chair's question, how is that accepted by the other dairy farmers in the United States, then?

Mr. Richard Tudor Price: It's accepted with some difficulty, as I understand it. There are some other states that are also interested in forming compacts, but obviously in those states where there has been rapid growth in milk production—and as you know, there has been a tendency for milk production in the United States to migrate west and south, particularly into desert states like Arizona and into parts of California and New Mexico, and so on—they see the introduction of regional compacts as a distortion of their internal market, though of course it is substantially distorted already, as far as fluid milk is concerned, by the existence of 31 federal marketing orders.

Mrs. Rose-Marie Ur: But I do think that's why they're certainly looking at a marketing system, because of their northeastern colleagues having that in place.

Mr. Richard Tudor Price: Under the provisions of the FAIR Act of 1996, there is a time scale on which the federal marketing order system has to be reformed.

Mrs. Rose-Marie Ur: April 1999.

Mr. Richard Tudor Price: In April 1999 they have to go down to between 10 and 14 orders. According to the act, as I understand it, that would eliminate the compacts at that point.

Mrs. Rose-Marie Ur: The northeastern compact?

Mr. Richard Tudor Price: They would be overtaken by these new proposed 11 regional orders, but the reform process has a lot of stages to go through before it gets to that point.

Mrs. Rose-Marie Ur: On page 32 of this report, on 1996 and 1997 numbers, it says the dairy price support program in 1996 was minus $98 million and in 1997 was $109 million, and the dairy export incentive program was $20 million in 1996 and $121 million in 1997. Why the substantial difference in numbers?

Mr. Ken Ash: If you're referring to the variability across years, the dairy price support program has, over a long period of time, declined in the amount of spending. Essentially this is because the support price has been set much lower, on average, than the market price. So that's why, within the dairy price support, it trends down over time.

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In 1996, what happened was that there was $98 million more in sales than in purchases in the dairy support program. So that's why it's reflected like this.

With respect to the dairy export incentive program, it has been increasing. I understand that under the FAIR Act, the USDA is using the dairy export incentive program much more aggressively than in previous years. There are still limits, but within those limits they are using that particular export incentive program. So there will be fluctuations from year to year, but you can see that between 1989-97, for example, there was an increasing trend in that particular program.

Mrs. Rose-Marie Ur: Also in the report you stated that state and local programs in the United States provide little identifiable support that's specific to the dairy industry. Is that creative bookkeeping? Why isn't it identifiable?

Mr. Ken Ash: That's because there seems to be very little of it. There was a study done in 1989 by a consulting firm that attempted to look at state and local expenditures. There is no more recent information that I'm aware of. The numbers at the time were very low in both absolute and relative terms. The conclusion reached—again, I think this is an 1989 study—suggested that they were basically insignificant.

We've identified in the table a little more detail on the value of that. That's in table 9 on page 31. The estimated value of some of those programs was $303 million. That may or may not be considered insignificant, but relative to $11 billion it's quite small. There are measures, but considered in particular relative to the big instruments and the effect of market price support, it's pretty tiny.

Mrs. Rose-Marie Ur: Okay. Also, as for the FAIR Act mandated by USDA to reform the federal milk marketing program, which is due in April 1999, will the new order be similar to the compact structure? Do you have any feelings on that?

Mr. Ken Ash: I think that remains to be seen. I don't know, Richard, if you know more than I, but I think it's fairly early in the reform process.

Mr. Richard Tudor Price: There's a specific proposal that has been put forward by the U.S. Department of Agriculture for the reform. They have proposed specifically the 11 regions that they would see as being the new-order regions, but in order to enact that, there is a great deal of consultation. Finally, I think referendums among milk producers in each of the affected orders will be done. So I think it's too early to determine exactly what the final result will be, but there are some indications that it will likely be, in an overall sense, revenue neutral.

Mrs. Rose-Marie Ur: I have one last question, Mr. Chair.

Earlier, my colleague Mr. McCormick was speaking about the 40 cows versus the 80 cows in the United States. I hope we, as a government, certainly continue to support the family farm. We can look down south and see how a lot of the farms have gone into managerial positions, and how after x number of years there are many disgruntled people in terms of how those operations are turning about. We don't have to reinvent the wheel up here in Canada. Surely to God, we can see what kind of conditions exist with that kind of approach.

So this is my last question. I'll give this to you, Mr. Gifford, with all the vast knowledge you have as a departmental official. Turn your hat sideways and put on a farmer's hat, and then tell me, with all the knowledge you have, in which country you would like to be a dairy farmer.

Mr. Mike Gifford: If I could see a world where all the distortions that had been created by government regarding international dairy trade could be removed, I think I could make a good dollar producing milk in Canada.

Mrs. Rose-Marie Ur: Okay. This is good information, but what I would like to see put together is a chart: Canada, U.S., Europe; subject A, subject B.

We did ask for this and I thought we made it clear that we wanted to know how Canada related to the U.S. and to Europe. So this is well done, but only half-baked. I'd like to see it so we can have comparisons with the other countries, please, for the committee.

Thank you.

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The Chairman: Thank you.

Mr. Gifford, on the U.S. fact sheet that was handed out at the Canada-U.S. Parliamentary Association in Nantucket last week, they describe their policy as continuing to press Canada for lower tariffs and improved market access for dairy, poultry and egg products. How is the U.S. making our products more accessible to their markets? Is there a reciprocal move here?

Mr. Mike Gifford: Mr. Chairman, as the second report indicates, access to the U.S. dairy market is extremely limited, and the tariff rate quotas don't tell half the story. If we wanted to move fluid milk into the United States, it's not so much the tariff that's the problem—there is no tariff on fluid milk entering the United States—it's the technical barriers to trade we would have to overcome in order to service the milk sheds in New York, Boston and Philadelphia, many of which, I would add, are a hell of a lot closer to Quebec and Ontario than they are to Wisconsin.

In order to get into the United States for fluid milk, we would have to reach some kind of an equivalence agreement with the United States. One of the problems is that these technical barriers would require an agreement between the governments of Canada and the United States that says our production, health and inspection systems for milk in Canada and the U.S. are equivalent, just like our meat systems are deemed to be equivalent.

Right now we can't ship milk into the United States without first getting a bilateral agreement. Moreover, as you will have noticed from the explanation, there's a cozy arrangement down there between the states. These milk marketing orders are a means of divvying up the U.S. market among the various producing regions, and somehow we would have to become a member or reach some kind of agreement with this interstate compact.

So a lot more needs to be done before we are in a position to access the U.S. market in any substantial way. Right now our access is limited to a few thousand tonnes of cheese and bits and pieces of evaporated milk and a few other odds and sods. I'm just going by memory now, Mr. Chairman, but the bilateral dairy trade is roughly equivalent but very limited on both sides.

Mr. John Harvard: In other words, the non-tariff barriers are alive and well.

Mr. Mike Gifford: Yes, indeed.

The Chairman: Mr. Hoeppner.

Mr. Jake Hoeppner: Just for clarification, Mr. Chairman, I'm still astounded at the land costs to the dairy farmers in New Zealand.

Mr. Mike Gifford: So am I.

Mr. Jake Hoeppner: Has the OECD studied the input costs? Is there some kind of chart to show us what would be the land costs, housing costs and labour costs per litre of milk? It would give us a lot better idea about why certain countries want to throw up trade barriers or why we are not competitive, because the input costs are really the crux of the problem.

Mr. Mike Gifford: Mr. Chairman, I can only hypothesize on the very substantial land cost in New Zealand. I know that New Zealand dairy production has expanded significantly over the last decade. In part that's because of the growing international markets for dairy products. In part it's because of limitations on export subsidies, and some improved access as a result of the Uruguay Round. Also, because the New Zealand dairy producer is extremely efficient—they don't have high yields, but they do have low costs—it is still very profitable. As a consequence, family farm businesses—these aren't corporate farms but individual family farms—have bid up the price of land in order to expand further.

Mr. Jake Hoeppner: But if they have money to do that, the investment world would probably give them better returns than selling milk in the world market. That's what I can't figure. You take 7,000 a hectare or acre and multiply that by 5% interest, and that's a tremendous cost per acre.

• 1055

Mr. Mike Gifford: That's what I was getting at earlier. New Zealand is a very small country, they have limited resources, and one of the limited resources is land. If you're making money with a 200-cow operation and you want to expand further, you have to bid up the price of the fixed inputs, which is land, and if farmers are making money, land prices will go up. I know that New Zealand dairy producers are making money and are expanding, and as a consequence, they're bidding up the price of land.

Mr. Jake Hoeppner: It's hard to figure out.

Mr. Richard Tudor Price: Mr. Chairman, I would point out that the New Zealand dairy industry has been very successful, and not just at the production level but also in terms of marketing. It has acquired a large number of foreign subsidiaries overseas, to the point that I think the New Zealand Dairy Board now has many more foreign employees than it does New Zealand home-based ones, and it is reaping the benefits of marketing branded products in foreign markets. It's had an extremely successful investment program in developing its exports, which is beginning to benefit producers. I think that's another reason why it's so attractive to enter the New Zealand dairy industry at this point.

The Chairman: Thank you very much, and thank you for coming in this morning. As Mrs. Ur says, we're still not at the end of the tunnel yet. We understand that you're going to meet with the dairy farmers to compare their study to yours whenever they're ready, and in addition, the amount of subsidies on the European Community. If we eventually have this, perhaps in the fall, we can revisit it and see what position we'll be in before the next WTO round starts.

Thank you all. We'll meet again on Thursday with the pesticide regulations.

This meeting is adjourned.