TPP deal could reduce dairy prices if processors pass along cost savings

MONTREAL – Some Canadian consumers could see modestly lower prices for milk and cheese thanks to a massive new trade deal if dairy companies pass along cost savings, says an industry observer.

Sylvain Charlebois, professor of distribution and food policy at the University of Guelph’s Food Institute, says there’s a chance that retail prices could fall mainly outside Quebec as dairy processors like Saputo (TSX:SAP) benefit from lower imported milk costs.

“When you look at prices dropping at farm gate, usually consumers do win over the long-term; that’s what we’ve seen over the last five to 10 years,” he said in an interview. “There are no guarantees, but you actually do increase that possibility.”

In Quebec, dairy is regulated with minimum retail prices that are higher than elsewhere in Canada and the United States. Nova Scotia and Manitoba also have minimum prices on some milk products. However, retailers elsewhere could take advantage of lower prices to attract consumers to their stores.

Canada’s protected dairy sector remains mostly intact under the Trans-Pacific Partnership deal announced Monday. However, another 3.25 per cent share of imports will be allowed over five years, displacing about 250 million litres of Canadian milk.

That’s in addition to 17,700 tonnes of cheese permitted under a separate trade deal with Europe. Still, 86.75 per cent of dairy products sold in Canada will remain domestically sourced and protected by production, price and import controls, said Saputo analyst Irene Nattel.

In exchange for lost income, Ottawa will compensate Canadian dairy farmers and processors $4.3 billion over 15 years.

Martha Hall Findlay, a former Liberal MP who’s now a fellow at the University of Calgary School of Public Policy, called the package that helps just six per cent of Canadian farmers strangely generous.

“(It) seems like an extraordinarily high price for Canadian taxpayers to pay for opening a mere 3.25 per cent of the market,” she said from Toronto.

Findlay added she doesn’t think the “tiny” increase in imports will move the needle much on prices. She expects food processors will continue to set up plants outside of Canada — as Saputo has done in the U.S., Argentina and Australia — if they don’t see cost reductions.

Ralph Dietrich, chairman of the Dairy Farmers of Ontario, says retail price cuts are theoretical but unlikely.

He said Canadian consumers didn’t get a break earlier this year when processors refused to pass along savings from paying less to buy milk from domestic farmers.

Groups representing dairy farmers in Quebec and Ontario said they’re disappointed that more imports will be allowed into Canada, saying it will reduce farmer revenues and hurt the Canadian economy.

“Canada’s farmers just got creamed,” said Benoit Girouard, president of l’Union paysanne, a group that advocates for the country’s supply management system, which sets the price and quantity of products such as dairy and poultry.

“This opening of the market quietly sounds the death knell for supply management,” he said.

Marcel Groleau, president of a union representing 42,000 Quebec farmers, said the TPP deal coupled with the recently reached agreement with the European Union means the country’s milk sector will have to open a “very important” extra five per cent to foreign competition.

Dietrich said Ontario farmers knew they would be targeted in the deal, but are relieved the increased imports aren’t higher.

“I think it’s a figure we can work with,” he said in an interview. “This lends a lot of stability to the (supply management) system long-term and I think that’s the key for us.”

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