Cows stand in a barn at the Mount Kolb dairy farm in Caledon, Ontario.James MacDonald/Bloomberg
Canada's dairy industry has long been the elephant – or rather, the cow – in the room when it comes to making the country a food export superpower.
And so it's notable that a report released Monday by a panel of advisers to Finance Minister Bill Morneau gently prods the federal government to remove obstacles to growth in the agricultural and food industries, including in the highly protected supply-managed dairy sector.
The panel's language is uber-cautious, and the report stops short of explicitly calling for an end to the supply management regime.
Nonetheless, the council urges the industry to boost milk production by six billion litres a year, or nearly 6 per cent, to meet burgeoning global demand for dairy products. Among other things, it recommends easing "rigid provincial quotas." The report points to tiny New Zealand, which controls nearly 30 per cent of the world's dairy trade, as a model for what Canada could become.
But therein lies the paradox of supply management – a system set up in the 1970s to ease price fluctuations and guarantee a steady income for farmers.
Structured as it is now, the industry can't export, even if it wanted to. Large-scale exports of milk and other dairy products are prohibited by the World Trade Organization, which has determined that the high regulated prices paid to Canadian dairy farmers are a subsidy.
The consequences are unfortunate. Instead of converting growing surpluses of skim milk into such products as formula for Chinese infants, Canadian farmers instead sell them as cheap animal feed or, at times, throw them out.
Consumers are paying a steep premium for the subsidy at the grocery store – an average of $2.6-billion per year from 2001 to 2011, or $276 per family, according to a 2014 Conference Board of Canada report, Reforming Dairy Supply Management: The Case for Growth.
Dairy farmers, with the backing of successive Liberal and Conservative governments, have made the calculation that they are better off in a closed domestic market than exposed to the vagaries of global trade.
But the broader food industry suffers. Guaranteed prices reward small inefficient farms. Strict provincial quotas calibrate supply and demand, but also lead to chronic inefficiencies in production and processing. And the export market is a no-go zone.
Canadian dairy farmers aren't overly concerned about the growth panel's call to boost exports, and deregulate. Dairy Farmers of Canada spokeswoman Isabelle Bouchard characterized the recommendations as "aspirational." She also pointed out that under the current regime, Canadian milk production still managed to grow 5 per cent between 2013 and 2015.
"It is clear that the industry continues to grow under supply management, due to on-going innovation and investments," she said in an e-mailed statement.
And in the House of Commons, federal Agriculture Minister Lawrence MacAulay reaffirmed the government's staunch support for the supply management regime, which also covers the poultry and egg sectors.
Growth council chair Dominic Barton said that while he personally supports an end to supply management, other members of the growth council argued against such a recommendation. Opposing supply management could trigger controversy and protests that would create a distraction, he said.
The growth council's report comes at a critical juncture for Canada's dairy industry. Canada is poised to give up an extra two per cent of its dairy market under the pending free-trade deal with Europe. Meanwhile, surging imports of dairy ingredients from the United States, including concentrated milk protein used for making cheese and yogurt, are destabilizing the carefully crafted domestic balance between supply and demand.
Then there is Donald Trump. The U.S. President is determined to renegotiate the North American free-trade agreement to get a better deal for U.S. workers. Dairy producers in states such as Wisconsin, which Mr. Trump won in the November election, see the looming talks as a golden opportunity to secure a much larger piece of the Canadian market.
The growth council report highlights an obvious disconnect in federal economic policy.
The Liberal government's continued support for supply management flies in the face of its guiding economic principles – namely, removing barriers to growth, promoting innovation and pursuing free trade, particularly in China and other emerging markets.
The Liberals are trapped in a policy maze. They can't embrace these principles, but then pretend they don't apply to a large swath of a vital industry.
With files from Bill Curry