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37th PARLIAMENT, 2nd SESSION

Standing Committee on Agriculture and Agri-Food

EVIDENCE

CONTENTS

Tuesday, March 18, 2003

1105

The Chair (Mr. Paul Steckle (Huron—Bruce, Lib.))

Mr. Mark Corey (Assistant Deputy Minister, Market and Industry Services Branch, Department of Agriculture and Agri-Food)

The Chair

Mr. Mark Corey

1110

Mr. Steve Verheul (Acting Chief Agriculture Negotiator, International Trade Policy Directorate, Department of Agriculture and Agri-Food)

Mr. Ian Burney (Director, Trade Remedies Division, Department of Foreign Affairs and International Trade)

1115

The Chair

Mr. Howard Hilstrom (Selkirk—Interlake, Canadian Alliance)

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

1120

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

The Chair

Mr. Howard Hilstrom

The Chair

Mr. Louis Plamondon (Bas-Richelieu—Nicolet—Bécancour, BQ)

1125

Mr. Ian Burney

Mr. Louis Plamondon

Mr. Ian Burney

Mr. Louis Plamondon

Mr. Ian Burney

Mr. Louis Plamondon

Mr. Ian Burney

Mr. Louis Plamondon

Mr. Steve Verheul

Mr. Louis Plamondon

Mr. Steve Verheul

Mr. Louis Plamondon

The Chair

1130

Mr. Mark Eyking (Sydney—Victoria, Lib.)

Mr. Steve Verheul

Mr. Mark Eyking

Mr. Steve Verheul

Mr. Mark Eyking

Mr. Steve Verheul

Mr. Mark Eyking

Mr. Steve Verheul

The Chair

Mr. Dick Proctor (Palliser, NDP)

Mr. Steve Verheul

1135

Mr. Dick Proctor

Mr. Steve Verheul

Mr. Dick Proctor

Mr. Steve Verheul

Mr. Dick Proctor

Mr. Steve Verheul

Mr. Dick Proctor

Mr. Steve Verheul

Mr. Dick Proctor

Mr. Steve Verheul

Mr. Dick Proctor

1140

Mr. Steve Verheul

The Chair

Mr. Rick Borotsik (Brandon—Souris, PC)

Mr. Steve Verheul

Mr. Rick Borotsik

Mr. Steve Verheul

Mr. Rick Borotsik

Mr. Steve Verheul

Mr. Rick Borotsik

Mr. Steve Verheul

Mr. Rick Borotsik

Mr. Steve Verheul

Mr. Rick Borotsik

Mr. Steve Verheul

Mr. Rick Borotsik

1145

Mr. Steve Verheul

Mr. Rick Borotsik

Mr. Ian Burney

Mr. Rick Borotsik

Mr. Ian Burney

Mr. Rick Borotsik

Mr. Ian Burney

Mr. Rick Borotsik

Mr. Ian Burney

Mr. Rick Borotsik

Mr. Ian Burney

Mr. Rick Borotsik

Mr. Ian Burney

The Chair

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.)

Mr. Steve Verheul

Mrs. Rose-Marie Ur

Mr. Steve Verheul

Mrs. Rose-Marie Ur

Mr. Steve Verheul

Mrs. Rose-Marie Ur

Mr. Steve Verheul

Mrs. Rose-Marie Ur

Mr. Steve Verheul

1150

Mrs. Rose-Marie Ur

Mr. Steve Verheul

Mrs. Rose-Marie Ur

Mr. Steve Verheul

Mrs. Rose-Marie Ur

Mr. Steve Verheul

Mrs. Rose-Marie Ur

Mr. Steve Verheul

Mrs. Rose-Marie Ur

The Chair

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

1155

Mr. Steve Verheul

Mr. Howard Hilstrom

Mr. Steve Verheul

Mr. Howard Hilstrom

The Chair

Mr. Marcel Gagnon (Champlain, BQ)

Mr. Steve Verheul

Mr. Marcel Gagnon

Mr. Steve Verheul

Mr. Marcel Gagnon

Mr. Steve Verheul

The Chair

Mr. Louis Plamondon

Mr. Steve Verheul

Mr. Louis Plamondon

Mr. Steve Verheul

1200

Mr. Louis Plamondon

Mr. Steve Verheul

Mr. Louis Plamondon

Mr. Mark Corey

Mr. Louis Plamondon

The Chair

Mr. Steve Verheul

The Chair

Mr. Gordon Coukell (Chairman of the Board, Dairy Farmers of Ontario)

1215

1220

The Chair

Mr. Jean Grégoire (Chair, Fédération des producteurs de lait du Québec)

Mr. André Belzile (Assistant to Director General, "Fédération des producteurs de lait du Québec")

1225

Mr. Jean Grégoire

The Chair

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

1230

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

The Chair

Mr. Louis Plamondon

1235

Mr. Jean Grégoire

Mr. Louis Plamondon

Mr. Jean Grégoire

Mr. Louis Plamondon

Mr. Jean Grégoire

Mr. Louis Plamondon

Mr. Jean Grégoire

Mr. Louis Plamondon

Mr. Jean Grégoire

Mr. Louis Plamondon

Mr. Jean Grégoire

Mr. Louis Plamondon

Mr. Jean Grégoire

1240

Mr. Louis Plamondon

Mr. Jean Grégoire

Mr. Louis Plamondon

Mr. Jean Grégoire

Mr. Louis Plamondon

The Chair

Mr. Gérard Binet (Frontenac—Mégantic, Lib.)

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

Mr. Jean Grégoire

1245

Mr. Gérard Binet

The Chair

Mr. Dick Proctor

Mr. Gordon Coukell

Mr. Dick Proctor

Mr. Gordon Coukell

Mr. Dick Proctor

Mr. Gordon Coukell

Mr. Dick Proctor

Mr. Gordon Coukell

Mr. Dick Proctor

Mr. Gordon Coukell

Mr. Dick Proctor

The Chair

Mr. Howard Hilstrom

Mr. Jean Grégoire

1250

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

Mr. Howard Hilstrom

Mr. Gordon Coukell

The Chair

Mr. Claude Duplain (Portneuf, Lib.)

Mr. Jean Grégoire

1255

Mr. Claude Duplain

Mr. Jean Grégoire

Mr. Claude Duplain

Mr. Jean Grégoire

Mr. Claude Duplain

Mr. Jean Grégoire

Mr. Claude Duplain

Mr. Jean Grégoire

Mr. Claude Duplain

The Chair

Mr. Gérard Binet

Mr. Jean Grégoire

Mr. Gérard Binet

The Chair

Mr. Marcel Gagnon

1300

Mr. Jean Grégoire

The Chair

CANADA

Standing Committee on Agriculture and Agri-Food

NUMBER 019

2nd SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, March 18, 2003

[Recorded by Electronic Apparatus]

Á (1105)

[English]

The Chair (Mr. Paul Steckle (Huron—Bruce, Lib.)): Good morning, ladies and gentlemen.

Pursuant to Standing Order 108(2), we want to consider this morning the World Trade Organization's decision on the Canadian dairy export policy.

We have with us this morning, from the Department of Agriculture and Agri-Food, Mr. Mark Corey, Assistant Deputy Minister, Market and Industry Services Branch, and Steve Verheul, Acting Chief Agriculture Negotiator, International Trade Policy Directorate. Also with us is Mr. Ian Burney, Director, Trade Remedies Division, Department of Foreign Affairs and International Trade.

We must tell you that we want to stick to a fairly stringent guideline on time. If we don't, we simply won't get our questioning done, and that's important. We realize that your presentations are important, but the questions are equally important. We'd like to keep you within that ten-minute timeframe if we can.

Is there just one presenter?

Mr. Mark Corey (Assistant Deputy Minister, Market and Industry Services Branch, Department of Agriculture and Agri-Food): Mr. Chair, I will be opening it, and then I will turn it over to Steve.

The Chair: If we could keep it within that 10- to 12-minute timeframe, it would help me a great deal.

You may begin, Mr. Corey.

Mr. Mark Corey: Thank you, Mr. Chairman.

Just to let you know who the people are, I'm joined by Steve Verheul, who is Canada's chief agriculture trade negotiator. Steve is here because he has been working on this file for a number of years. He is very much involved in managing our WTO negotiations and was deeply involved in this case. Also with me is Ian Burney, director of the trade remedies division at DFAIT, who has been involved in the case.

[Translation]

The objective of our presentation today is to provide you with background information on the WTO Appellate Body ruling in the diary dispute and its possible implications, to outline the actions Canada has taken to move towards compliance with this ruling, and to set out the next steps in this process.

[English]

Let me start by saying that we do not agree with the outcome of the WTO dairy dispute panel. We're very disappointed by it, but Canada will comply with it.

Canada has been involved in WTO dispute settlement proceedings regarding its dairy export practices with the U.S. and New Zealand since 1998. The last of these proceedings ended on December 20, 2002, when the WTO appellate body upheld a second WTO compliance panel decision against Canada. This ruling came into effect on January 17.

The WTO concluded that Canada's approach to the export of products made from commercial export milk, CEM, constitutes an export subsidy. Combined with Canada's other subsidized dairy product exports, Canada's export subsidies for dairy products are above its WTO commitment levels. Specifically, the appellate body ruled that producers are selling CEM to processors at prices below their cost of production. In the language of the WTO, this means that they are providing payments to processors. According to the appellate body, these payments are financed by virtue of government action, because returns in the government-regulated domestic market cover the fixed costs of the producers, thereby allowing them to cover their losses from lower-priced CEM sales. That's what the ruling said.

It's important to note that in its ruling the appellate body emphasized that supply management was not at issue in the proceedings.

[Translation]

We are obviously very disappointed with this ruling. Together with the provinces and industry, the federal government fought hard to defend Canada's dairy sector. Furthermore, we believe that the Appellate Body ruling has systemic implications. The ruling may have established a new standard for determining the existence of an export subsidy, and blurred the distinction between domestic support measures and export subsidies.

However, Canada will respect its international obligations and will comply with the Appellate Body ruling. Respecting our WTO obligations is best for Canada. Both the United States and New Zealand now have the right to pursue retaliatory action against us. However, retaliation can occur only after WTO authorization is obtained on the level of retaliation through the arbitration process. This authorization could be granted as early as June 2003. If Canada delays compliance, we increase the risk of retaliation. In 2001, both the U.S. and New Zealand claimed that they each would be entitled to $35 million (U.S.) in retaliation. This penalty could be targeted at any Canadian export.

I'll now turn the presentation over to Steve Verheul, Canada's chief agriculture negotiator. Steve will explain the actions Canada has taken to move towards compliance with this ruling and set out the next steps in this process.

Steve.

Á (1110)

[English]

Mr. Steve Verheul (Acting Chief Agriculture Negotiator, International Trade Policy Directorate, Department of Agriculture and Agri-Food): Thank you, Mark.

To comply with the WTO appellate body ruling, Canada is eliminating commercial export milk and bringing our supply-managed exports to within our WTO commitment levels. This is the best approach, because it allows us to comply with the ruling without fundamentally changing supply management.

The provinces are currently in the process of taking those first steps toward re-regulating commercial export milk. The formation of any new commercial export milk contracts ceased as of the end of December last year. Steps are now being taken to shut down commercial export milk shipments from pre-existing contracts.

Eliminating commercial export milk will require substantial adjustments. Eliminating commercial export milk means about a 5% reduction in Canada's milk production overall. This is a proportion of Canada's total milk production that has been represented by commercial export milk. It would also mean a 60% reduction in dairy product exports, including an almost complete loss of the U.S. market, given that we have a NAFTA prohibition on the use of export subsidies in bilateral trade.

The elimination of export subsidies in the current WTO negotiations, an objective that Canada fully supports, would also limit opportunities for Canada's dairy sector to participate in international markets.

The impacts on producers will not be evenly distributed. Close to 60% of dairy farmers do not produce any commercial export milk and will be unaffected by its elimination. However, those that do or have, and there are about 8,000 of them across the country, could lose about $100 million in sales, or an average of about $12,500 each. Of all commercial export milk producers, about 90% are located in Quebec and Ontario.

In addition, there are also about 100 dairy farmers who produce only for commercial export milk. They're commonly referred to as “non-quota producers”. These producers will likely be out of the dairy business unless they now turn and buy domestic quota. Over 90% of these commercial-export-milk-only producers are in Quebec and Ontario. The future status of these non-quota producers is currently under discussion in the various provinces.

The appellate body stated that it was not necessary for them to make any findings with respect to non-quota producers. In Canada's view, this ruling clearly does not apply to these producers.

Dairy processors and exporters would like a way to be found to allow non-quota producers to continue to operate, while dairy producers fear that continued exports by non-quota producers will be seen by the U.S. and New Zealand as non-compliance with the appellate body ruling.

Most provinces have already removed the exemption allowing non-quota producers to produce milk for export products. All provinces are expected to have determined what to do about non-quota producers by early April.

In the meantime, we have been discussing Canada's compliance with the U.S. and with New Zealand. In our discussions with the U.S. and New Zealand, our objective is to seek some flexibility in the timing of our compliance with the ruling and to convince those countries not to pursue any retaliatory action against us.

The three countries have agreed to suspend the arbitration process that would decide on the level of retaliation. We decided to suspend that process until April 10. In the meantime, we are discussing with the U.S. and New Zealand the steps we're taking to comply with the ruling.

During our discussions, the U.S. and New Zealand have also expressed concern about the future status of non-quota producers. They fear that Canada may attempt to find yet another way to get around its WTO export subsidy commitments. So as we look toward the next steps, in the coming weeks we will continue to monitor the provinces' compliance measures. They vary somewhat from province to province.

We will also continue our discussions with the U.S. and New Zealand to avoid any possible retaliation. At the same time, we'll be analyzing and discussing with other countries the broader systemic implications of the ruling for the WTO and as a potential issue for negotiation at the WTO.

I think I'll close at this point.

Mr. Ian Burney (Director, Trade Remedies Division, Department of Foreign Affairs and International Trade): Mr. Chairman, with your indulgence, can I add a few points on the consultation process that we've had with the United States and New Zealand?

In those consultations, and in an effort to provide some time to the Canadian industry to adjust to the WTO rulings, Canada has proposed a transition period to address both milk shipments under CEM contracts that were in existence prior to the end of December and the export of the processed products made from that milk.

Á (1115)

[Translation]

Specifically, we have proposed that milk shipments under existing CEM contracts be permitted until the end of April 2003, and that processed goods made from that milk be permitted to be exported until July 31, which is the end of the Canadian dairy year.

I should emphasize that the WTO does not provide for a "reasonable period of time" for implementing an Appellate Body decision that concerns a Compliance Panel report. Therefore, neither the United States nor New Zealand is under any obligation to agree to our transition proposal.

[English]

That said, we view our proposal as a fair approach that would provide for a relatively brief period of time for Canada to complete the process of implementing the decision of the appellate body, and at the same time provide some flexibility for our industry to adjust.

To date, neither the U.S. nor New Zealand has rejected Canada's proposal. While they haven't explicitly accepted it, they've twice agreed to put off resuming the retaliation process; that is, they've agreed to extend the suspension agreement we have with them under article 22.6 of the dispute settlement understanding. That's in place now until April 10. Since the arbitration process itself, even if it were restarted, take 60 days, this means no retaliation can be imposed on Canada until around mid-June at the earliest.

The U.S. and New Zealand have not balked at our transition proposal and they have suspended taking action on retaliation because their primary concern is with Canada's compliance, and because they've been encouraged by the process to date, as was outlined earlier. And as Steve has also mentioned, their primary concern at this stage remains the issue of those who do not hold quota and how this gets resolved in the provinces that have not yet re-regulated.

So looking ahead, we'll obviously need to resume our consultations with the U.S. and New Zealand. We'll need to give them an update on where we are on compliance. We hope this will be done by the end of March or early April. On that basis, we'll be seeking to have the retaliation process terminated outright. Our success will obviously depend on the assessment of both the U.S. and New Zealand in regard to our compliance efforts.

Thank you, Mr. Chairman and committee members.

The Chair: Thank you very much, gentlemen.

We're very much within our timeframe, and we will now move on to questioning with Mr. Hilstrom, for seven minutes, please.

Mr. Howard Hilstrom (Selkirk—Interlake, Canadian Alliance): Thank you very much, Mr. Chairman.

I want to look into this issue of monitoring compliance measures with the provinces, which you mentioned, Mr. Verheul. I want to make sure I understand who represents Canada in international trade disputes before the WTO. I understand the Government of Canada is responsible for representing us in WTO disputes. Is that correct?

Mr. Steve Verheul: That's correct.

Mr. Howard Hilstrom: Okay. When Canada loses a WTO case involving provincial measures, who decides whether any new provincial measures are WTO compliant--the provinces or the Government of Canada?

Mr. Steve Verheul: We traditionally have a process of consultation where we seek agreement among all parties at the provincial level and at the industry level before we go forward with a position at the WTO.

Mr. Howard Hilstrom: But Canada is the final decision-maker, is it not?

Mr. Steve Verheul: Canada is the final decision-maker.

Mr. Howard Hilstrom: And within the Government of Canada, which department is responsible for ensuring Canadian provinces are in compliance with WTO?

Mr. Steve Verheul: It's a joint responsibility of the Departments of Agriculture and Agri-Food and Foreign Affairs and International Trade.

Mr. Howard Hilstrom: Okay. I'd like to talk about the December 20 decision that ruled against subsidized Canadian dairy exports. I have a copy of the letter, dated February 21, from the Minister of Agriculture to the Georgian Bay Milk Company. This letter states that the Government of Canada has noted in discussions with dairy industry stakeholders and provincial government officials that the appellate body did not make any finding with respect to those who do not hold quota. Could you tell me, either Mark or Steve, if you were part of those discussions?

Mr. Steve Verheul: Yes, I was part of those discussions.

Mr. Howard Hilstrom: You were, okay.

In paragraph 152 of the WTO decision, the appellate body mentioned that out of Canada's 19,000 dairy producers, 8,000 sold CEM, and out of these 8,000 Canadian dairy producers who exported milk, about 100 are non-quota. I think those are the correct figures, the ones you've already mentioned.

Now, if non-quota producers like Georgian Bay do not have any domestic quota, they cannot use domestic revenues to cross-subsidize their exports. Is that correct?

Mr. Steve Verheul: Yes, that's correct.

Mr. Howard Hilstrom: The United States and New Zealand raised the issue of non-quota exporters at the WTO. Was this part of the ruling, and was it raised at the WTO?

Mr. Steve Verheul: Yes, it formed part of our legal arguments before the WTO.

Mr. Howard Hilstrom: Okay.

But the WTO did not rule in favour of the non-quota exporter claims of the United States and New Zealand. On the contrary, in paragraph 152 of the WTO decision, the appellate body specifically stated that they did not make any findings regarding these non-quota producers. Is that true?

Á (1120)

Mr. Steve Verheul: That's right.

Mr. Howard Hilstrom: So these non-quota exporters fall outside the scope of the WTO decision. You've confirmed that. And Canada does not have to eliminate non-quota-producer exports in order to comply with the WTO decision, then, do we?

Mr. Steve Verheul: That's our view, yes.

Mr. Howard Hilstrom: Okay. Now I'm referring to Minister Vanclief's letter to the Georgian Bay Milk Company on February 21. He states that:

“Industry stakeholders and provincial governments are currently considering whether or how non-quota-holder milk can continue. The Government has advised industry representatives and provinces that it will assist them in implementing a non-quota-holder system, if they so choose.”

The letter from Minister Vanclief concludes by noting that “...as the WTO dispute process bears uncertainties, the Government is prepared to defend such a system as long as it is credible and WTO-compliant.”

Could you tell this committee whether anyone has transmitted a proposal to the Government of Canada on a non-quota-holder system and asked whether it is WTO-compliant? Has such a proposal been put forward to the government in any place?

Mr. Steve Verheul: There have been a number of proposals put forward to us and to provincial governments for non-quota-holder systems.

Mr. Howard Hilstrom: I have a question in regard to this then. My staff have been talking today about a document. I wonder if you've seen it. It's a two-page document, dated February 6, entitled “Program for Unsubsidized Export Milk”, which Georgian Bay Milk Company and others presented to the Dairy Farmers of Ontario on February 7. Have you ever seen that document?

Mr. Steve Verheul: No, I don't think I have seen it.

Mr. Howard Hilstrom: I intend to have a translated copy of that provided to you and to the department.

Will the department and yourself or others be prepared to advise this committee whether that proposal is WTO-compliant?

Mr. Steve Verheul: The approach we have been taking so far is to indicate that if the provinces and particular industry groups within the provinces decide they want to pursue an approach that includes a non-quota-holder system, then we would work with them to ensure that such a system is made as WTO defensible as possible. We continue to be open to doing this.

We have not responded to individual proposals put directly to us because any steps taken to putting that kind of system in place would require action on the provincial level, as well as at the producer level, within each province. We can't implement those systems on our own.

Mr. Howard Hilstrom: It just seems mighty strange to me that the provinces run Canada's international trade policy and agreements in this regard.

You've already confirmed that in fact the non-subsidized milk exporters weren't included in this WTO ruling, and yet you're saying that the provinces can shut down their milk exporting, and they have the legal authority in Canada to do so.

Mr. Steve Verheul: The provinces have the legal authority to regulate the production of milk within their boundaries.

Mr. Howard Hilstrom: So no matter what they do, the federal government then can't do anything to stop the provinces from taking actions like that.

Mr. Steve Verheul: The federal government can't do anything in respect to regulatory actions within a province.

Mr. Howard Hilstrom: So all the credit Minister Vanclief and former Minister Whelan took for creating supply management really isn't true, is it?

Mr. Steve Verheul: A number of those powers have been delegated over the years. For example, in the province of Ontario much of the regulatory control over milk within the province rests with the Dairy Farmers of Ontario.

Mr. Howard Hilstrom: Do you not see massive problems for Canada if each province is running its own version of what's supposed to be a national program of supply management?

Mr. Steve Verheul: My experience is that the system seems to be functioning fairly well.

The Chair: That's the end of your time, Mr. Hilstrom.

Mr. Howard Hilstrom: Well, it's not the end of my questioning, but I'll have to stop now and defer to the other members.

The Chair: We'll move to Mr. Plamondon, please. You have seven minutes, sir.

[Translation]

Mr. Louis Plamondon (Bas-Richelieu—Nicolet—Bécancour, BQ): Thank you, Mr. Chairman.

If I understand correctly, a ruling is applicable on the very same day it is rendered. Moreover, all timetables are subject to negotiation. Is this correct? Is this why you are proposing such short deadlines to the United States?

Á (1125)

Mr. Ian Burney: Yes, that is correct.

Mr. Louis Plamondon: I see.

Mr. Ian Burney: The ruling has to be implemented.

Mr. Louis Plamondon: Does it have to be implemented immediately?

Mr. Ian Burney: As of January 17, when agreed by the Dispute Settlement Body.

Mr. Louis Plamondon: In the January 17 ruling.

Mr. Ian Burney: That's right.

Mr. Louis Plamondon: I'm going to diverge from the subject a little and tell you about a meeting we attended in February in Tokyo. At the meeting, we discussed the Harbinson proposal. I am sure you have heard of it. In the proposal, it is suggested that the tariffs protecting our market be cut by half. We would go from 299 per cent to 164 per cent over five years, and this might entail a 30 per cent drop in the price of milk.

As part of the Uruguay Round in 1991, the Dunkel Report suggested a similar measure, which was fairly radical. At the end of the discussions, we ended up with more reasonable proposals.

However, last year, the price of imported butter plunged and almost led to penetration of Canadian markets, even with a 299 per cent tariff. Now imagine how concerned milk producers are when they hear the tariff might be dropping to 164 per cent, which is almost half.

Did Canada come up with a strong response to the Harbinson proposal? Did Canada issue directives or press releases, or simply express strong opposition to the proposal? What is Canada's official position?

[English]

Mr. Steve Verheul: Yes, the Harbinson proposal that you refer to did cause us a lot of concern when it was released on February 12, in particular the provisions relating to market access. It actually calls for a 60% reduction by average in tariffs over 90%, which would affect all of our supply management tariffs.

We have expressed a great deal of concern about this. We first expressed our concern through Minister Vanclief and Minister Pettigrew in Tokyo at those meetings. We subsequently expressed our concerns very strongly in the main negotiating session at the negotiations in Geneva and again in a personal meeting we had with Stuart Harbinson, the chair of the negotiations. And we expressed our concerns with a variety of different countries we met with during the course of the week.

We've used every possible opportunity we could think of to express our concerns, including a follow-up letter we've sent on to the chair of the negotiations.

[Translation]

Mr. Louis Plamondon: So if I understand correctly, you sent the letter to the chair immediately. He is aware of the government's very clear position, and both Minister Pettigrew and Minister Vanclief endorse those positions strongly. Is that what you are saying?

Now, I'll come back to those 100 non-quota-holding producers. You say that they come under provincial jurisdiction. Can you give us the provinces' current position on the ruling? What is their attitude, and what kind of decision do they seem to be moving towards on non-quota-holding producers?

[English]

Mr. Steve Verheul: To date, we've seen a number of provinces taking actions. Actions to re-regulate the entire dairy industry, including non-quota-holding producers, have been taken in Ontario, Saskatchewan, Manitoba, New Brunswick, and Nova Scotia. There are ongoing discussions in Quebec and P.E.I. and in Alberta and B.C.

Among the provinces I've mentioned, those that have already completed their re-regulation have taken a decision not to allow an avenue for non-quota-holding producers to continue in operation.

[Translation]

Mr. Louis Plamondon: That's fine. We'll come back to this during the next round.

[English]

The Chair: Then we'll come back to you in the next round.

Now it's on to Mr. Eyking, for seven minutes.

Á (1130)

Mr. Mark Eyking (Sydney—Victoria, Lib.): Thank you for coming, gentlemen.

My question is a little different. I have a few dairymen in my riding who called me on the weekend. These new products that are being used in dairy products, supplemented or whatever, was a major concern for them. I'm looking at the graph here. There is butter, oil, sugar, and then there's whey powder and what not. It seems to be quite a problem.

What do you suggest we do to curb this, from a government point of view? Keep the consumers in mind. We have to think about them. Do they like this product?

Is it better to curb the stuff, keep it from coming in, or should we have a regulation that changes the name of the product? For instance, if you're not using cream, should you be allowed to call your product real ice cream?

I'm just throwing this out to you to see where you're at with it. I know it wasn't brought up this morning, but it seems to be a big issue for my dairy people, and I'd like to get some clarification.

Mr. Steve Verheul: Certainly.

Last August, when the Dairy Farmers of Canada met with Minister Vanclief and Minister Pettigrew, the two ministers decided to form a working group to look at these issues and study them in detail. The working group looked at a whole series of issues, including imports of butter, oil, sugar blends, imports of whey protein concentrate, flavoured milks and pizza kits. The working group also looked at issues surrounding the labelling of dairy products and compositional standards for dairy products, which gets to the issue you raised.

It met with the Dairy Farmers of Canada on several occasions and prepared a series of options to present to ministers. Those options were presented to ministers in February and are currently being considered at this time.

Mr. Mark Eyking: To follow up on that, I take it that you're quite satisfied with the options that were presented. Would you suggest to us, as a government, that we push this along and encourage it?

Mr. Steve Verheul: I don't think I would want to speak directly about the recommendations the ministers are currently reviewing, but I think there are approaches that can be taken to those issues.

A lot of these imports have come in as a means of evading some of our higher tariffs on dairy products. There's an incentive to try to get around those tariffs.

We do have some difficulties, in that a lot of the access conditions represent a binding commitment we made at the WTO with respect to the access levels, so all of those issues have to be taken into account, as well as the interests of some processors and consumers in making those decisions.

Mr. Mark Eyking: Speaking as a consumer, I guess, is this a North American phenomenon, using these blends in those products? Is this happening in Europe and Asia, where they're also replacing dairy products with these so-called substitutes? And if it's happening in Europe, what are the people thinking over there? Or do they do not let it happen?

Mr. Steve Verheul: It tends to vary from country to country, depending on their own import regime. This has been a big issue in the United States as well. Dairy producers in the U.S. have been concerned about imports of milk protein concentrates that they don't control at the border.

These products might not necessarily be used in the production of these products if it weren't for the impact of the tariff levels. For example, the use of butter-oil-sugar blends in the production of ice cream may not happen if it is not an attractive alternative, from a cost perspective, to using cream directly in the production of ice cream.

Mr. Mark Eyking: What are they doing in Europe? Are they doing the same thing with these products?

Mr. Steve Verheul: You don't see as much of it in Europe, because Europe's tariffs at the border are fairly uniform across the board. There's no distinction between products to the same degree that there is in the U.S. and in Canada.

The Chair: We will now move to Mr. Proctor for five minutes.

Mr. Dick Proctor (Palliser, NDP): Thank you very much, Mr. Chair.

Mr. Verheul, you spoke about the Government of Canada looking for a little bit of flexibility in complying with the WTO ruling. Can you elaborate a little bit on what kind of flexibility we're seeking?

Mr. Steve Verheul: What we're actually looking for is flexibility in the amount of time we have to implement the decision. We've approached the U.S. and New Zealand to indicate that we would like to have more time to allow the industry to adjust, without causing major disruption in the industry by making the decision come into effect more quickly. That's been the thrust of our discussions with the U.S. and New Zealand. In an effort to avoid arbitration or retaliation, we've asked for more time to bring our practices into compliance.

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Mr. Dick Proctor: In general terms, sir, are you suggesting a couple of months, or longer than that?

Mr. Steve Verheul: The decision formally came into effect on January 17, as Ian mentioned earlier. So far, we've agreed with them to hold off any further action until April 10. At that time we'll review what steps we've taken within Canada to comply with the ruling, and then we'll have another discussion with them to see where we go from there.

Mr. Dick Proctor: So far, are the New Zealanders and the Americans somewhat sympathetic to the flexibility you're suggesting?

Mr. Steve Verheul: Yes, I think they've demonstrated quite bit of flexibility with respect to the time. Their major concern is the end point and what kind of system we'll have in place at the end of the day. If they're satisfied that we're moving toward a completely compliant system, in their view, then they won't see any need for retaliation or arbitration.

Mr. Dick Proctor: It seems to me that linking this issue with the butter-oil-sugar blend that was raised a minute or two ago is interesting, in that New Zealand and the Americans are two of the countries that are most involved in this little escapade that does impact Canadian dairy farmers. I guess I'm wondering if there's any thought of when we do comply and make a change--and I heard your answer to Mr. Eyking on that--to mitigate against the impact of the loss of commercial export milk by taking action on the butter-oil-sugar blends simultaneously. It would be “teat for tat”, I guess!

Voices: Oh!

A voice: Stop it, stop it.

Mr. Steve Verheul: Yes, they are essentially unrelated issues. I know that the dairy farmers have made the linkage that if they're not going to be able to export any more, then they should have more of their domestic market to themselves. It is an extra pressure on the dairy farmers, and that's why the working group was established. That's why we're looking at those issues.

Mr. Dick Proctor: It may be an unrelated issue, but it's $100 million more or less on the butter-oil-sugar blends versus $440 million you're losing on export milk, so there would be some mitigation, as I said.

Mr. Steve Verheul: Yes, I think part of the other element involved is that butter-oil-sugar blends aren't currently being imported from the U.S.; they're being imported from New Zealand, from Mexico, and from Europe. There are very few of those products coming in from the U.S. at this point.

Mr. Dick Proctor: I have one quick question on the Harbinson report. I had a sense prior to his interim report in February that the Canadian officials were relatively happy with the way Harbinson seemed to be going in the early modality meetings. How will our government's position change as a result of his interim report, or has it changed?

Mr. Steve Verheul: It hasn't changed at all. The Harbinson paper that's on the table now, and we're going to be receiving a second draft later on today, represents the views of the chair as to where he thinks these issues could come out. It's fair to say that there is not a single member in the WTO who's satisfied with that report. Some feel more strongly than others about certain elements, but we are happy with some parts of the report, including the elimination of export subsidies, which we think is in the long-term interests of our farmers. We have a lot of concerns about the approach on market access, and we have a lot of concerns about the approach on exporting state trading enterprises, but other countries have serious concerns as well.

I think we're moving to a point now where it's really going to be a crunch period, and we're going to have to see whether countries are prepared to move off their positions or be flexible. Failing that, I think we may have a very difficult time making the deadline at the end of March for establishing modalities.

Mr. Dick Proctor: It's been said that we Canadians don't seem to have a whole lot of allies in terms of the peculiar...whether it's supply management or the Canadian Wheat Board for marketing products. There are not a lot of examples in other countries. Is that a concern for the Canadian position?

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Mr. Steve Verheul: It is a concern with respect to exporting STEs in particular because there are only a small handful of countries that actually have exporting STEs. The majority of the membership outside that don't particularly care very strongly about that issue one way or the other. We do have the U.S. and Europe, who are very much interested in getting new disciplines on exporting state trading enterprises, so for that one we clearly do have an uphill fight to get more allies to support our position.

On the market access issues, I think the Canadian position was always prepared with the sense of being where countries could come out at the end, a kind of middle ground approach that would allow both significant improvements in market access for all products but also allowing some flexibility on how that access is provided. The fact that countries aren't moving off their initial positions at all at this point means that they haven't started to consider anything that might be more in the middle, which is where I think Canada's position is.

The Chair: Thank you, Mr. Proctor.

We'll have Mr. Borotsik for five minutes.

Mr. Rick Borotsik (Brandon—Souris, PC): Thank you, Mr. Chairman.

The Department of Agriculture and Agri-Food's philosophy over the last number of years, gentlemen, has been to access the export markets, whether it be in livestock, whether it be in grains and oilseeds, or whether it be in, say, lentils. Did Agriculture and Agri-Food Canada encourage the entry of dairy products into the export market? Was that an encouragement from your department to try to expand that export market?

Mr. Steve Verheul: When we first went into this--this has been a long-standing dispute, as I think you know--we spoke to the dairy farmers and the dairy industry at large and clearly explained to them that there would be a risk associated with pursuing this avenue. You can never really predict, as we've seen clearly now, where the dispute settlement body might come out in terms of their decision. We indicated that if they were prepared to take that risk and try to build up their exports, we would try to make sure we could defend that to the extent possible.

Mr. Rick Borotsik: So the answer to the question is yes, you did encourage it with the understanding that there were potential risks there, with the domestic market being protected and--I almost used the term “dumping”, and I can't use that term--getting into the export market. You did encourage that.

Mr. Steve Verheul: No, we didn't actively encourage it; we just advised them of the risk and the potential.

Mr. Rick Borotsik: Is there any liability on the part of the government right now with the 40% of the producers who got into the export market with respect to their loss of income of $12,500? Do you see any liability at all of the government department for those producers?

Mr. Steve Verheul: The risk of pursuing this was very clearly explained at every step, and we indicated that they would have to reach their decisions on the basis of their own judgment of that risk.

Mr. Rick Borotsik: Did the department encourage the non-quota producers? Did they encourage them to develop their operations with non-quota?

Mr. Steve Verheul: We expressed the view that we thought non-quota producers would be even more defensible under the WTO than the others, but we did not encourage them.

Mr. Rick Borotsik: It was more defensible but they're out in limbo now. We don't know where they are, unfortunately. They've invested a substantial amount now but perhaps do not have any market for their product. Do you see any liability there for the department?

Mr. Steve Verheul: Those producers were aware of the risks they were getting into when they produced only for export.

Mr. Rick Borotsik: I'll switch topics a little. We had the Dairy Farmers of Canada here not that long ago. They were very defensive, by the way, and they suggested that perhaps a lot of the countries who have this positive opinion coming forward from the WTO, including the United States and New Zealand, also do not comply. Their position was that Canada's departments of trade and agriculture should be taking a very positive offensive position here and challenging them under the WTO. Have you had those discussions, and are you in fact prepared to challenge those who challenged us on this particular issue?

Mr. Steve Verheul: We're looking very closely at the broader implications of the decision that was against us. I've certainly discussed with a number of other countries, probably a dozen or so, the potential implications of this decision and how broad it is. We have done some analysis about the potential implications for the U.S., New Zealand, Europe, and other countries as well, and there are some ongoing cases or cases that are about to be initiated at the WTO by other countries that will draw on this decision.

Mr. Rick Borotsik: But they want to take the offensive. They were adamant. In fact, there was a gentleman sitting in that chair who was terribly adamant that this could not be tolerated, that we should be challenging them. Have our trade and agriculture and agrifood departments suggested that we should be challenging the WTO on other dairy products?

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Mr. Steve Verheul: We're looking at the viability of potential challenges. I met with the Dairy Farmers of Canada yesterday to discuss this.

Mr. Rick Borotsik: I bet you did. They were adamant. I said that.

Mr. Ian Burney: If I could just add something from the standpoint of the Department of Foreign Affairs, we're always monitoring the activities of other governments. To the extent we have information brought to our attention or we believe that a government is not in compliance with its trade obligations, we will take a very hard look at it and bring appropriate recommendations to ministers. At the end of the day it would be a political call whether or not to initiate a dispute.

Mr. Rick Borotsik: Mr. Burney, on retaliation, I agree that New Zealand has said at least at the table that they're not really excited about taking their $35 million in retaliatory penalties. That's fair, but I don't know about the U.S. They certainly have lots of areas where they could retaliate.

In your opinion, what commodities exported to New Zealand could be in jeopardy if in fact we aren't successful in arbitration, we aren't successful in making New Zealand not wish to retaliate? What commodities could be in jeopardy?

Mr. Ian Burney: Both governments have published a list, what's called an indicative list.

Mr. Rick Borotsik: Can you help me with it, then? I don't have that list.

Mr. Ian Burney: In the case of New Zealand it basically covers the entire waterfront; it covers all agricultural and non-agricultural products. Given that the level of trade is not all that high, to reach that level of retaliation you'd have to pretty much cover the waterfront. On the indicative list is everything, but it would ultimately be their decision as to which specific targets to go after. But I have to emphasize that the prospect of getting there is very unlikely.

Mr. Rick Borotsik: So you believe that New Zealand will not retaliate.

Mr. Ian Burney: Our view is that we are in compliance, so the issue of arbitration only arises if--

Mr. Rick Borotsik: The WTO doesn't believe that, so I appreciate that we still have a process to get to that.

Let's say we have the worst-case scenario, and we are in fact seen to be in the wrong here, and there is retaliation. Do you see the U.S. retaliating with respect to their $35 million potential?

Mr. Ian Burney: What they would have to do is go into an arbitration process. The purpose of that would be to determine the level of countermeasures, which would only apply in the event that Canada were non-compliant. We would obviously take the position that we were compliant; we believe we will be. So in that case the appropriate level of countermeasure would be--

Mr. Rick Borotsik: You also thought that the WTO wouldn't rule against us.

Mr. Ian Burney: Well, if the U.S. and New Zealand are not satisfied with our compliance, if they proceed to an arbitration panel, and if they win and are awarded a certain level of countermeasures, then they will have the option of selecting specific targets and imposing them. That would be a political decision.

The Chair: Thank you, Mr. Borotsik.

We'll have Mrs. Ur for five minutes.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): Earlier in Mr. Borotsik's questioning it was stated that American dairy producers had lost $35 million annually. Have you done any fact-finding on that? Is that number accurate? When you're looking at retaliation, is that an accurate statement for them to make?

Mr. Steve Verheul: We consider that level to be significantly higher than the actual damage done to U.S. dairy interests.

Mrs. Rose-Marie Ur: So would you not be looking at engaging in some kind of correspondence with them to see what their numbers are or what they might be, to see where they came up with the numbers?

Mr. Steve Verheul: That would form part of the arbitration process. They would go in with their estimate of the damages, and we would come in with a counter-estimate of what we thought a more realistic number would be.

Mrs. Rose-Marie Ur: On March 14 the Dairy Farmers of Canada put out a press release stating that

The World Trade Organization (WTO) Secretariat today released its review of Canada's trade policy. In its review, it tries to point fingers at domestic dairy producer prices, falsely implying they inflate consumer prices. The WTO, as the Organization for Economic Cooperation and Development (OECD) has done before, failed to look at retail prices before making this false assumption.

Have you taken this factor into your considerations when you're looking at where the appellate body has come down?

Mr. Steve Verheul: We haven't taken that specific factor into mind, because—

Mrs. Rose-Marie Ur: Do you agree with the statement made by the Dairy Farmers of Canada then?

Mr. Steve Verheul: I agree that you get a very different picture if you look at consumer prices rather than wholesale prices. Clearly there's a much smaller difference in prices between Canada, the U.S., and others if you look at retail prices rather than wholesale prices.

Mrs. Rose-Marie Ur: Where are the largest export markets? Are they the United States and New Zealand, because they've obviously taken it to the WTO? Are they where the export markets are?

Mr. Steve Verheul: No. We export virtually no dairy products to New Zealand. We export a significant number to the U.S., probably amounting to about 40% of our exports in previous years. We also export to Europe, Japan, Mexico, and to a range of other countries.

Á (1150)

Mrs. Rose-Marie Ur: I'll ask a facetious question. So why is New Zealand joining with the U.S. on this then?

Mr. Steve Verheul: New Zealand is concerned that we're posing a potential threat to them in other, third-country markets where we're competing with their exports.

Mrs. Rose-Marie Ur: That's right. So it's really about market access. Are they feeling threatened by Canadian producers?

Mr. Steve Verheul: They're feeling that Canadian production is competing with them in markets they consider they should have first crack at.

Mrs. Rose-Marie Ur: Do you feel that non-quota producers will win in the end, or do you think there's still a major hurdle for them to overcome?

Mr. Steve Verheul: I would say there's a major hurdle for them to overcome. It's not an issue that's being actively considered now in the five provinces I mentioned. One or two provinces may be considering it, but for the most part I think the position of the dairy producer organizations has been against non-quota producers continuing.

Mrs. Rose-Marie Ur: If this continues, do you feel there will be further retaliation from the United States and New Zealand?

Mr. Steve Verheul: If all of the provinces take action to prevent non-quota producers from continuing, I think New Zealand in particular would welcome that result.

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

The Chair: Thank you.

Mr. Hilstrom.

Mr. Howard Hilstrom: I found it really astounding to hear today that the federal government has abdicated its legislative and leadership responsibilities on international trade matters, particularly on supply management. This is just an observation. All commodities and all agricultural commodities that are exported are vital to our economic well-being in this country. This includes supply-managed commodities.

So we have to put a report together out of this committee, and we have to deal with all the issues—not just one side, but all the issues. Through my staff, I've given you a copy of a two-page document entitled “Program for Unsubsidized Export Milk”, which is put out by the Georgian Bay milk producers. Will you, Steve Verheul, review this program with the department and then advise the committee whether it is WTO-compliant, so that we can put it into our report as a recommendation reflecting what we think?

Mr. Steve Verheul: I think it would be somewhat unfair of us to look at one specific proposal when we have received probably a dozen such proposals. The fact is that if the Ontario government and the Dairy Farmers of Ontario do not take the regulatory steps to allow non-quotas to continue, there's very little we can do about it. Agriculture is a shared jurisdiction in Canada, and the provinces have the jurisdiction over the regulatory movement of milk within the province, as well as over the transportation of milk within the province.

Mr. Howard Hilstrom: Why is the department willing to make a ruling and a decision on the DFO and DFC plan--DFO in particular, but DFC too--and not this Georgian Bay plan? You've seen the DFO plan for complying with the WTO ruling, have you not?

Mr. Steve Verheul: Yes, I have.

Mr. Howard Hilstrom: In its February 25 decision the DFO states that it will adjust current regulations to bring Ontario into compliance with the WTO decisions. These plans include holding discussions with the Ontario Dairy Council and individual processors to address milk supply in classes 5A, 5B, and 5C. My question is, if Ontario replaces some class 5 milk by increasing these other classes A, B, and C milk, and that ends up being exported, would that be WTO-compliant?

Mr. Steve Verheul: We had a decision from an earlier panel in this dispute that indicated that production under 5A, 5B, and 5C would not be outside of our WTO obligations. It would be consistent with our WTO obligations.

Mr. Howard Hilstrom: Okay. So then the Government of Canada or you or your department have advised Ontario that the DFO's plans regarding classes 5A, 5B, and 5C are WTO-compliant?

Mr. Steve Verheul: We have told them there is an existing ruling that says it is WTO-compliant. If they were to do something to that plan to change it in some fundamental way, we would want to examine it to determine whether it would continue to be compliant with the WTO.

Mr. Howard Hilstrom: Okay.

Let's get back to non-subsidized milk producers. The DFO plan of February 25 proposes that--and I think this is a direct quote--all producers be required to hold a minimum of five kilograms of quota. If non-quota producers are required to hold domestic quota in order to export, would that render them non-compliant with the WTO decision?

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Mr. Steve Verheul: The WTO decision clearly applied to producers that held quota primarily.

Mr. Howard Hilstrom: Does the department then...? Well, you can't speak for what the minister thinks, although I guess you should be able to. Is Canada operating in such a way legislatively and policy-wise that the DFO is able to impose upon non-supply-management milk producers that they have to buy five kilograms of quota? Is that where Canada is at?

Mr. Steve Verheul: The requirement to hold five kilograms of quota was in place prior to the effort to move toward a commercial export milk type of approach. What Ontario has done is to simply revert to that requirement to hold five kilograms of quota for all producers. It's within their regulatory jurisdiction to make that decision.

Mr. Howard Hilstrom: Well, they were allowed to export for quite a while there with no problems, and the WTO didn't see fit to rule against that type of milk export.

The Chair: Mr. Hilstrom, you're finished. There will be no response to that.

Mr. Gagnon.

[Translation]

Mr. Marcel Gagnon (Champlain, BQ): Thank you, Mr. Chairman.

I would like to know more about those 100 non-quota-holding producers. The issue intrigues me. You said that they knew the risks they were running by producing non-quota milk for export. Has this been going on for a long time, or are these non-quota-holding producers who produce solely for export a completely new phenomenon?

[English]

Mr. Steve Verheul: Yes, it is a relatively new phenomenon. We implemented the approach to commercial export milk in August 2000. There were no non-quota producers producing for export before that date, and a few of them built up over time to the point that we did reach about 100 at the end of 2001.

[Translation]

Mr. Marcel Gagnon: Are they producing a significant portion of the milk exported? What percentage of exports is lost to the non-quota-holding producers?

[English]

Mr. Steve Verheul: It's very small--about 1% of the exports that are produced by non-quota producers.

[Translation]

Mr. Marcel Gagnon: And is the price of their milk for export very different from the price of milk sold domestically?

[English]

Mr. Steve Verheul: The prices for export have been about the same for all producers. There has been quite a wide range, everywhere from about $25 to the high thirties in terms of prices for export, and that compares to a domestic price of about $60.

The Chair: Mr. Plamondon.

[Translation]

Mr. Louis Plamondon: A little while ago we talked about the import of oil, butter and sugar blends, which affect 3 per cent of quotas on the market. After the Saguenay demonstration, the government decided to establish an interdepartmental committee to seek solutions for eliminating this erosion of the market. However, we never heard from the committee.

You are very close to senior management. Have you heard from the committee? Did the committee come up with a report? Is it close to formulating recommendations that would help us eliminate, or at least radically reduce, this erosion of the market?

[English]

Mr. Steve Verheul: There were a series of options presented to ministers in mid-February that provided approaches that could be taken to each of the issues raised by Dairy Farmers of Canada, including butter or sugar blends; the whey protein concentrate; the flavoured milks; the pizza kits; labelling issues; and the compositional standard issues. All of those issues were prepared in a report that was given to ministers in mid-February.

[Translation]

Mr. Louis Plamondon: And that report was provided to the three ministers on the committee in mid-February?

[English]

Mr. Steve Verheul: Actually I think it went to four ministers. It went to the Minister of Agriculture and Agri-Food; the Minister of Foreign Affairs and International Trade; the Minister of Customs and Revenue; and the Minister of Finance.

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[Translation]

Mr. Louis Plamondon: And as for the recommendations, were they made after consulting producers, or did you take producers' complaints into account only afterwards? Do you have any idea how the four ministers received those recommendations? I assume the recommendations are not public and that we have no access to them.

[English]

Mr. Steve Verheul: The options that were prepared were prepared after discussions with the dairy farmers. The options include options that have been put forward by Dairy Farmers of Canada. And options for all of the issues were put forward to ministers in the usual way recommendations from the department are made to ministers, so they're not public recommendations.

[Translation]

Mr. Louis Plamondon: When would a decision normally be made? Do you know? You are not in a position to speak on behalf of ministers, but you can tell us what the usual timetables are. The ministers have been given a report that apparently comprises very specific practical recommendations. So would they normally come up with a statement soon thereafter?

Mr. Mark Corey: Mr. Chairman, I would like to add that our minister publicly stated that ministers had received the reports, and were currently consulting on the issue. We are expecting an announcement from the ministers. I do not know when that announcement will be made, but we hope it will be made soon.

Mr. Louis Plamondon: Thank you.

[English]

The Chair: Thank you very much, Monsieur Plamondon.

That draws to a conclusion the time we have for questioning, although I do want to have a final question, I think for the benefit of all of us. Can you give us, in an abbreviated form, a profile of a non-quota dairy producer? Where did he originally come from? Was he a pork producer? Was he a beef producer? Was he a former owner of quota who sold and got into this business? Give us a brief profile so we have something to put our thoughts about.

Mr. Steve Verheul: It varies quite a bit from province to province. Most of the non-quota producers have existed in Ontario and Quebec, about 90% of them in those two provinces. A number of them did sell quota to go into the export-only production under commercial export milk. Some of them were new entrants to the dairy industry and saw that as a way to get in, as a foothold, without having to purchase quota. So it's really been a mix of a number of them. A number of them are also mixed farms whereby the producer decided he would have a bit of a sideline with commercial export milk and purchased a few cows for that purpose.

The Chair: Thank you very much, gentlemen. I think it's been very helpful. Unless someone else has something they want to add to that, I'm prepared to conclude the discussions with you gentlemen. Thank you very much for appearing this morning. You've been very helpful and forthright and we appreciate again you coming here this morning.

We'll come back in a few minutes.

Â (1205)

Â (1212)

The Chair: I'll call the meeting back to order.

Before we get to our witnesses, I want to have our committee look at the budget that's been put forward this morning. I need a motion to approve this budget. This budget has to do with the witnesses coming in who we've called for the matter of dealing with the matter in Saskatchewan and Alberta.

The budget is for $34,300. Do we have a mover to support that? Mr. Proctor. Seconded by Ms. Ur.

Is there any discussion?

(Motion agreed to)

The Chair: We'll now move on to our witnesses, which is the second part of our purpose for being here this morning, and this is to deal with the members who represent the producing element of our dairy industry.

We have with us, from the Dairy Farmers of Ontario, Mr. Gordon Coukell, who is the chairman of the board. He's been before this committee a number of times. With him is Mr. Bob Bishop, general manager of the Dairy Farmers of Ontario. And we also have, from the federation of dairy producers in Quebec, Mr. Jean Grégoire, the chair, and Mr. André Belzile,who is the assistant to the director general.

We will begin. I presume, Mr. Coukell, you're first on our list. I'm not sure whether you're the first presenter. I would ask you to keep to your time limits so that we can stay within a timeframe wherein we can have all our members engage in some sort of questioning. You have ten minutes if you wish, and you people from the Quebec side likewise.

Mr. Coukell is first, for ten minutes.

Mr. Gordon Coukell (Chairman of the Board, Dairy Farmers of Ontario): Thank you, Mr. Chairman.

I'm sure you all have my document now. It probably goes over some things you've already dealt with for the past hour, but it maybe lays them out in sequence for you. I'll just go through it, if you wish.

The Canadian dairy industry developed its supply management system in the 1970s to focus on our domestic industry. Over the years since then, from 2% to 5% of our total production has been exported. This level is not inconsistent with the rest of the world, for internationally only about 6% of the world's dairy production is traded; the vast majority is consumed domestically. There are a few notable exceptions, such as New Zealand and Australia, which export the majority of their production.

The Canadian dairy industry responded to both federal and provincial government encouragement to expand our markets through exports by attempting to develop programs that were consistent with our WTO commitments. These efforts have resulted in our export program being challenged since 1998. The transition that Canada has gone through is listed briefly below in point form.

Prior to the Uruguay Round, levies were used to fund exports. After the Uruguay Round and the loss of article 11, levies were deemed to be illegal and were eliminated. Following that, the Ontario optional export program was created using a class 5E. New Zealand and the United States challenged class 5E and that type of export in 1998. The WTO panel and appellate body ruled in favour of New Zealand and the U.S. In October of 1999.

Canada agreed to comply with the ruling by August of 2000. In the timeframe between January to June of 2000 the Dairy Farmers of Ontario consulted with the Department of Foreign Affairs and International Trade, Agriculture and Agri-Food Canada, the provincial government in Ontario, and also our dairy processors regarding an export program that might be WTO-compliant. In July the Ontario Dairy Council and the Dairy Farmers of Ontario appointed the accounting firm of Deloitte and Touche as a third-party administrator to run the Export Contract Exchange. That was to take us as a dairy farmers' organization out of it, because we were deemed to be a government body.

The ECE, the export exchange, allowed producers and processors to enter into contracts for exporting milk using a bulletin board system. In August of 2000, DFO exempted milk contracts over the ECE from certain regulations, and it's at that point that the non-quota producers came into existence and were allowed to ship export milk, provided it was registered on the Export Contract Exchange.

In February 2001 the U.S. and New Zealand challenged the CEM program, and there was another ruling against Canada in July 2001. The appellate body ruling in December 2001 was not conclusive, and we went through the exercise again throughout 2002. The panel then ruled against Canada; then the appellate body ruled against Canada in December 2002.

Canada has indicated we will comply with the ruling and bring our subsidized exports into line with the allowed limits that were negotiated in the Uruguay Round. The compliance, as Mr. Verheul indicated, is listed there.

Canada has asked for some time to come into compliance, as provinces running an export exchange wonder why there have been no new contracts after December 31, 2002. We're continuing to look to DFAIT and Agriculture Canada, as they negotiate with New Zealand and Australia, to determine when the final date is. The provisions they have asked for are that we be allowed to ship until the end of April and remove product from Canada up until the end of July.

Â (1215)

The compliance means a commitment to stay within Canada's permitted subsidized export obligations. Starting in the next dairy year, 2003-2004, that will mean respecting both the dollar and quantity subsidy reduction commitments. Up until now, we've only been declaring our exports on quantity, not on the dollar value. While the dollar value reduction is highly dependent on world price and exchange rates, Canada's ability to export will definitely be lower in the future.

The U.S. and New Zealand have been satisfied with the commitments made and the steps taken to date, which include five provinces--including my own province--having taken steps to regulate all milk marketed within their provinces. All provinces have indicated they will follow suit, and Canada has indicated the process will be completed by March 31. Failure to achieve re-regulation in all provinces could trigger the retaliation or arbitration process Mr. Verheul was talking about.

The response in Ontario--and probably you would like to know what is happening there--from the Dairy farmers of Ontario, after participating in the conference calls with DFAIT, Agriculture Canada, provincial governments and other provinces, is that we must comply with the ruling and make every effort to reduce the likelihood of retaliation. Therefore, it is our view that the exemption granted in August of 2000 for ECE milk must be rescinded, thereby bringing all milk produced in the province of Ontario within the DFO regulations.

The Ontario Farm Products Marketing Commission, which oversees our work as DFO, held an industry stakeholder meeting on January 24, 2003, and at the conclusion requested DFO to further consult with the industry players and submit a report to the commission by February 13, 2003.

DFO carried out their consultation and presented its proposal. The following week, DFO was notified by the Farm Products Marketing Commission that they supported our approach and that we were free to proceed. The approach included requiring all non-quota producers to hold a minimum of five kilograms of quota by August 1, 2003, rescinding the exemption that allowed producers to sell milk using the ECE, and working with processors to ensure access to milk supplies for special classes and, where possible, otherwise minimize the impact of the ruling.

At our board meeting on February 27, 2003, the necessary regulation changes were made and the deliveries against export contract volumes committed by producers on or before the December exchange for January and February have been respected. This will continue for the month of March and possibly into April. That will be determined by DFAIT. When we're advised that we can no longer honour those contracts--there are some contracts that go through until the end of the year--at whatever point DFAIT says we cannot honour them, we will abide by that.

Direct raw milk exports to the U.S., as per the above, could continue until the end of April. However, after February 2, 2003, DFO required that all export contract milk delivered to an Ontario plant had to be picked up through the regular transportation system. Raw milk delivered to the U.S. has been a segregated supply out of the province of Ontario.

In conclusion, winding down the export mechanism and complying with the WTO ruling is not without its challenges. DFO has tried to be as fair as possible, keeping in mind that the long-term health of the supply management system was in the best interests of 5,800 dairy farms in Ontario and the 19,000 dairy farms across Canada.

The ruling and Canada's compliance commitment means that the system will be run more tightly than it has been in recent history. This means that production will have to closely match quota and that production will have to be fairly even throughout the year. It also means that it's critical to have the right amount of quota in the producers' hands in order to supply the domestic market.

There have been some increases in quota to date, and also an attempt, I think a very realistic attempt, to limit the over-quota production so that equity between producers is preserved, as it's required.

Â (1220)

The Chair: Thank you, Mr. Coukell.

We'll move to Mr. Grégoire for ten minutes, or less, if you can.

[Translation]

Mr. Jean Grégoire (Chair, Fédération des producteurs de lait du Québec): Mr. Chairman, we would like to thank you for hearing us today. We will be talking about the WTO ruling, as well as the Doha round of negotiations. So to begin, I will ask Mr. Belzile to read the brief that we tabled. After that, we will be pleased to answer your questions.

Mr. André Belzile (Assistant to Director General, "Fédération des producteurs de lait du Québec"): Good afternoon, ladies and gentlemen. I believe you met with the Canadian Dairy Producers on the 13th of February last and you have just heard our colleagues from Ontario who have described the situation in their province. You already have a good idea, therefore, of what last December's decision means for the Canadian dairy industry and I will not repeat everything that you have already heard.

For our part, in Quebec, we are currently undertaking the regulatory changes necessary in order to comply with that decision. There will be public hearings tomorrow before the agricultural marketing board to come to an agreement on those changes and to ensure that their implementation will be carried out before the March 31 deadline, as the United States and New Zealand have requested.

Last December's decision is quite clear for our dairy producers. It means that it will no longer be possible to export beyond a certain level, in relation to Canada's commitment to reduce export subsidies, unless producers are paid the same price for exporting as they are paid on the domestic market. We will therefore need to focus on niche markets that can sustain those prices. Supplying these markets does not require a new system because the current system can already accommodate this.

However, let's not fool ourselves on the size of these markets. Dairy product markets receive enormous subsidies from the governments of foreign countries, so it is difficult to compete globally. Let's take for example our neighbour to the south, the United States. We recently spoke with an American dairy producer who will be receiving a cheque amounting to 6 to $7 per hectolitre of all his production this year. Furthermore, he will not have to bear the burden of production surpluses; the American government takes responsibility for that. In fact, it's as if the Canadian government were to spend 800 to $900 million in cash per year to support the Canadian dairy production. I'd like to point out that the Canadian government has invested nothing in direct support of Canadian production. Furthermore, to come back to our American colleagues, that doesn't include all the other subsidies available to producers for other products. Despite this assistance, the producer that we met, with 180 cows, is having a hard time making ends meet. He has eight children and he is making sure that none of those children take over the farm. He has discouraged them from doing that and has told them to go somewhere else. These children are lucky enough to have dual citizenship, because their mother is Canadian and their father is American. They can therefore study in Canada and pay Canadian tuition fees. Otherwise they would not have been able to go to university; they could not have afforded it.

So to think that Canadian dairy producers can compete with producers who are subsidized to that extent is dreaming in technicolor.

This brings me to the current WTO negotiations that will lead to changes in the agreement on agriculture. Like other organizations, we are very concerned because the chairman of the negotiating committee for agriculture, Mr. Harbinson, produced a report last month intended to bring the parties closer together. That report mentions a minimum reduction in tariffs of 45%. That would spell the end of supply management in Canada and would guarantee a movement of production to the south, where the government is in a better position to subsidize production. The results would be dramatic.

The Government of Canada must now make a choice and it must clearly decide whether it wants to protect supply management or whether it wants to abandon one of its production sectors, which would then disappear. If the Government of Canada truly wants to preserve supply management within this current round of negotiations, we think it needs to move away from the current thinking within these negotiations and propose a food sovereignty policy that countries could use for certain goods of their choice. They would have to comply with certain export conditions that would give them the right to be exempt from certain tariff reductions for those specific sectors.

There is nothing inconsistent in this type of thinking as the United States themselves believe that a strong nation is a nation that produces its food. In fact, in his last agricultural budget last summer, the most generous budget in years, President Bush stated:

We are a blessed nation because we can grow our own food and, therefore, we are secure. A nation that can feed its people is a nation more secure.

I gave you my own translation in French, as I pointed out, but in the information that we gave you you will find the original statement that President Bush made.

So if it is true for them it must be true for us and because we don't have the same financial means that they do, shouldn't we be thinking about preserving our agricultural marketing tools before it is too late?

Â (1225)

Canadian producers under the supply management regime are preparing a more detailed proposal along these lines, and once we can make it public and table it with the government, we will need your support in defending it.

Finally, we spoke earlier about border controls. The Canadian industry is experiencing serious problems at the moment because of border controls. The Canadian government has the power to deal with these problems while complying with the international trade agreements it has signed. We do not understand what is preventing it from taking action at the moment. The market losses associated with the decision made last December 20 would be offset significantly if the controls at the Canadian border were a little tighter. Earlier, we distributed a folder of documents that set out ways of solving these problems. If the government were to implement them—and we hope it will do so as quickly as possible—this would demonstrate in concrete terms what the federal government means when it says it supports supply management 1,000 per cent.

Mr. Jean Grégoire: We would like to thank you for listening and we will now answer any questions you may have.

[English]

The Chair: Thank you very much, gentlemen.

We'll now move to the first round of questioning. I'll ask all members to stay within a five-minute period so we can get in as many members.... We have only half an hour. If we have time at the end you'll get a second round.

Mr. Hilstrom, please.

Mr. Howard Hilstrom: Mr. Coukell, non-quota milk was not included in the WTO ruling. Why is DFO so opposed to a supply management system and a non-quota-holding system--farmers, processors, also--on the export side? Why are you so against both of those systems operating at the same time inside Canada?

Mr. Gordon Coukell: We've looked very carefully at this, and our view is that out of the 80 non-quota producers in the province of Ontario, there are only 19 who have not held quota. We think the cross-subsidization argument can be made just as well for the sale of quota to subsidize an operation as it can for the domestic price.

Mr. Howard Hilstrom: Do the Dairy Farmers of Ontario have a formal legal opinion that you can provide to this committee to support your views regarding this? We have to put a report in. Will you provide that to us?

Mr. Gordon Coukell: I don't have a formal legal opinion. We have some legal opinions from Dairy Farmers of Canada lawyers and all that the risk.... It's a matter of the judgment of the risk. No one has said categorically that it would be legal or not. To go back through another panel challenge...we've been through three of them already, and it's our view that the risk is too high to go through another one.

Â (1230)

Mr. Howard Hilstrom: Well, we'd sure appreciate a legal opinion, because we may well make a recommendation to the minister that there should be a non-quota-holder system operating at the same time as the supply management system.

Does Dairy Farmers of Ontario believe that you and the whole DFC can hold Canada hostage in its trade negotiating stance? Canada has to look at the bigger picture of international trade in all agriculture commodities. Do you believe the Dairy Farmers of Ontario and the Dairy Farmers of Canada should be able to hold the country hostage and protect supply management at all costs?

Mr. Gordon Coukell: If you hadn't added those last two words, it would have been easy to say yes. I don't see it “at all costs”, but I don't see it as being held hostage either, sir.

The reality is that many countries within the WTO have sensitive areas, and they put those sensitive areas and sensitive issues on the table. Canada has not done that.

Mr. Howard Hilstrom: Why is supply management sensitive? Just review that for us again. Why is it sensitive, and not beef exports, or horticulture, or all the other things that Ontario exports? Why is dairy sensitive?

Mr. Gordon Coukell: It's sensitive because of the price structure. As in the comments my colleague from Quebec made, the federal or provincial governments do not put any money into our industry through subsidies, as they do in many other countries, so we take our price out of the marketplace. The world marketplace is certainly.... We cannot pay the prices we have to pay for our inputs, and receive what world prices are. That's the sensitive nature. It's no different from the rice in Japan or China or many of those other countries.

Mr. Howard Hilstrom: We've heard from Mr. Verheul that until the countries of the world move off their hard and fast positions on these issues, it looks as if there won't be any movement on furthering these trade negotiations. Are you suggesting that's a position the Government of Canada should take, not to move off its position?

Mr. Gordon Coukell: Certainly the Harbinson report is totally unacceptable, I think, to all nations. Unless there's some realization and some more middle-of-the-road—

Mr. Howard Hilstrom: How do you square off the argument that a major portion of Canadian agriculture says the Harbinson report doesn't go far enough in the area of increased market access and lower tariffs? How do you square these two arguments?

Mr. Gordon Coukell: I can't speak for the rest of them, but certainly on market access, all the Harbinson report is doing is perpetuating the inequities that are already there. It's not correcting them.

Mr. Howard Hilstrom: You've had the Auto Pact and free trade in car parts since 1965. Do you not believe it's in the best interests of Ontario to also have free trade in agriculture commodities, particularly in the North American context? Forget about the world for a minute; what about the North American context? Do you not believe in that?

Mr. Gordon Coukell: If the federal government is prepared to give us a farm bill such as the U.S. farmers received, we could certainly look at that.

The Chair: Mr. Gagnon, for five minutes—or Mr. Plamondon.

[Translation]

Mr. Louis Plamondon: You speak about mixtures of oil, butter and sugar that have a tremendous impact on your quotas; it amounts to almost 3 per cent. These mixtures are coming into Canada quite casually.

Canada's attitude has always been not to take a stand and to refer the matter to the Canadian International Trade Tribunal. Given the lack of clarity in the definition of the words "that may be used as substitute", the case put forward by the agricultural producers was not upheld. Therefore, if Canada maintains its decision to let the tribunal decide, the ministers are washing their hands of the issue. However, I think that in one of your documents, you state that the Minister of Finance could intervene directly, not to contradict what was said, but rather to cancel the effect of this judgment made by the Canadian International Trade Tribunal, provided he assumed his responsibilities and clarified the definition of the expression "that may be used as a butter substitute".

In your opinion, are there are precedents, cases in which the minister overturned a judgment made by the tribunal, by making some clarifications to the definition of terms?

Â (1235)

Mr. Jean Grégoire: I do not know whether any judgments have been overturned in this way in the past, but when we look at the tribunal's judgment, we see that it was unanimous, there was a split. One commissioner was in favour of this being a substitute, because the option selected was that it was not a spread. So we think this is playing with words to some extent.

If you take butter oil and add salt, it is a butter substitute. If you take sugar and put it into the butter oil, it is not a butter substitute. So, as far as we are concerned, there is a question of political will in the act as regards the definition of substitutes. The Minister of Finance could and may at any time amend it to add or remove certain products as substitutes.

Mr. Louis Plamondon: Thank you.

As regards the tariff line, you suggest that a different classification be used. Rather than putting the product on line 2006.90.95, you would put it on line 2106.90.33, and you say that the World Customs Organization would accept that. What makes you think that a decision to change paragraphs in this way would make this acceptable to the World Customs Organization, which would mean that we could then apply much stricter regulations to the import of these oils?

Mr. Jean Grégoire: We're not talking about stricter regulations. We would change tariff lines, and automatically, certain tariffs would apply. Consequently, customs would have to charge importers tariffs, and we know the effects of that.

Mr. Louis Plamondon: But who has the authority to change paragraphs or tariff lines?

Mr. Jean Grégoire: It has to be a butter substitute.

Mr. Louis Plamondon: I see. Then that needs to be recognized first.

Mr. Jean Grégoire: Yes.

Mr. Louis Plamondon: Fine. We absolutely need the political will to do this in order for it to happen.

Mr. Jean Grégoire: Yes.

Mr. Louis Plamondon: In order to avoid a ruling from the Canadian International Trade Tribunal, all that is required is the will on the part of the minister to change the definition, which would then allow you to work on tariff lines at the level of the World Customs Organization.

There is another issue I wanted to talk to you about. You mentioned the memorandum in your documents. Is clarifying a definition of a substitute linked to changes in tariff lines?

Mr. Jean Grégoire: Yes.

Mr. Louis Plamondon: One needs to happen before the other.

Mr. Jean Grégoire: You take the definition of a product. That is what they did to establish the tariff lines. They said that butter oil was a butter substitute. Therefore, it automatically appears on the same tariff line as butter. It is a butter substitute.

Sweetened butter oil is not considered a substitute, so it automatically appears on a tariff line that includes no taxes at the entry point. When products come in at customs, the customs agents look at the tariff line. If it is not taxable, then they do not tax the product.

Â (1240)

Mr. Louis Plamondon: In terms of the Harbison proposal, have you seen the text, communiqués or directions that have reputedly been provided by the Canadian government following the tabling of that proposal in Tokyo in February?

Mr. Jean Grégoire: I did not see a text sent by the government. However, we did speak with the ministers, and they agreed that the report was really not adequate at that point. Going by what the ministers said, I am assuming that this report went well beyond what Canada felt it could accept.

Mr. Louis Plamondon: So you would like the ministers to take a very clear position, and it seems that they are moving in that direction right now.

Mr. Jean Grégoire: That is what we hear.

Mr. Louis Plamondon: Thank you.

[English]

The Chair: I'll now move on to Mr. Binet.

[Translation]

Mr. Gérard Binet (Frontenac—Mégantic, Lib.): Good afternoon, Mr. Grégoire. I am a new member of the Standing Committee on Agriculture and Agri-food. Last week, over 200 producers demonstrated n Lac Mégantic. We had a good discussion, which started in the street and continued inside my office. I was asked a lot of questions. Many of them have already been asked by Mr. Plamondon, but there is one that bothered me, and it dealt with prices for Canadian dairy producers. I was told that Quebec did not have the same price for milk. It there a standard price?

Mr. Jean Grégoire: No, I do not think that is the case. Quebec may differ from other provinces in the way it sets prices, but the price of milk in Canada is the same everywhere.

Mr. Gérard Binet: And producers in Quebec get the same price?

Mr. Jean Grégoire: Yes, normally.

Mr. Gérard Binet: Normally? But then why did a producer tell me that?

Mr. Jean Grégoire: Normally, the price of milk in Ontario and Quebec should be the same, since all the income is combined. Of course, for the period just ended, since we have made representations to the board to ask for more then was given elsewhere, we are waiting for the board's decision.

Mr. Gérard Binet: There have been a lot of answers to the questions I wanted to ask, but I still have one question about a financial problem. When the bank calls me, the member of Parliament, about a dairy producer, about protection and management, I wonder whether dairy producers are having problems—

Mr. Jean Grégoire: There is no doubt that if you take into consideration the costs that have been imposed for at least the last two or three years, particularly on dairy producers in Quebec, in areas such as environmental protection, fertilization plans that are required, and all these processes being implemented in Quebec, it is clear that production costs are being driven up considerably. That is basically why producers say that steps should be taken to a least increase their milk price to offset the additional costs they have to incur.

Mr. Gérard Binet: But when you talk about increasing the milk price, is it the federation of Quebec dairy producers that sets the price?

Mr. Jean Grégoire: Right now, the Canadian Dairy Commission sets the price at the national level, and at the P6 level we have a process that requires agreement to increase the price of Class 1 milk. However, that process is being questioned, and that is more or less why we have gone to the board in Quebec.

Mr. Gérard Binet: Moreover, we know that the Kyoto Protocol will have an even more severe impact in the environmental area. Costs will not go down. But is there some flexibility? We were told that the price of milk cannot be raised any further because it will cost more than soft drinks.

Mr. Jean Grégoire: Well, if we compare the price of milk and soft drinks, we might as well stop milking our cows.

Mr. Gérard Binet: No, but I am passing along to you what I have been told. I am not comparing a glass of pop to a glass of milk.

Mr. Jean Grégoire: I think that the price to be paid must reflect what the product is worth.

Mr. Gérard Binet: And is that currently the case?

Mr. Jean Grégoire: Given the current cost of production for us in Quebec, it is difficult for producers to make ends meet. We always get by, but it depends on the kind of salary you want to pay yourself. If you want to pay yourself $2 an hour, you can get by easily. If you want to pay yourself $10 an hour, it is a different ball game. That is what we are saying, quite simply.

Mr. Gérard Binet: That means that at present, dairy producers, with the assets they have, are not making very much money.

Mr. Jean Grégoire: Imagine what they are making at present, if people from the bank called you. If bankers are not paying attention, there may be some surprises in store for them. If tariffs were reduced at the WTO, some bankers would not be in a good position. But they were involved as lenders; they must be able to calculate their risks.

Â (1245)

Mr. Gérard Binet: Thank you.

[English]

The Chair: That is the end of our questioning.

We now move on to Mr. Proctor.

Mr. Dick Proctor: Thanks, Mr. Chair.

Thank you for an interesting presentation.

Are you folks concerned at all about whether the Canadian government is doing as much for your industry as it could or should at the WTO and other bodies? Are there more things that could be done to assist your industry? That is essentially the question I'm interested in having a response to.

Mr. Gordon Coukell: Thank you, sir.

Yes, I would say there's quite a bit more. Certainly, in the next round of trade negotiations Canada hasn't come out really strongly against the Harbinson report. Mr. Verheul indicated this morning that he has concerns about it. We think he should have huge concerns, and not just for supply management. There is an issue of the Wheat Board: it's being challenged there as well. So I think we have to take a more aggressive approach at the WTO and put more things forward that are important to us.

Mr. Dick Proctor: Would you like to see more challenges to other countries? I note, for example, in this booklet—and I appreciate it was prepared by the Quebec dairy farmers, but it is in there—that they're getting three times the subsidies, as has already been stated, that Canadian farmers are; yet we always seem to be on the short end, whether it's supply management or the Canadian Wheat Board.

Mr. Gordon Coukell: Unfortunately, I think we probably have to go through the process of challenging some of the other countries. I say unfortunately because it is very time-consuming and expensive to do, but we may have to do it in order to get to the point where they pay more attention to our point of view at the WTO. Certainly, in my view, the rules need to be changed and clarified. Maybe you have to go through the other process in order to get the latter to happen.

Mr. Dick Proctor: Just to jump back quickly to Harbinson, there is talk in his interim report about state trading import enterprises, which is very much, I think, supply management—

Mr. Gordon Coukell: More so the Wheat Board.

Mr. Dick Proctor: More so the Wheat Board? Okay, but that's not an import—

Mr. Gordon Coukell: The state trading agency is the Wheat Board. The CDC would probably come into some of it, in that it imports the butter into this country that we have to bring in.

Mr. Dick Proctor: The concern that's been raised, however, as I understand it, is that it would take the responsibility out of a country—the domestic responsibility—and place it in the hands of an international body to regulate. That's the whole foundation of the supply management system, with the CEM set-aside.

Mr. Gordon Coukell: That's a huge concern, and while they keep saying that supply management wasn't affected by the WTO ruling, the further down this road you go the more the WTO is making decisions on domestic markets. That really wasn't where, in my view, it was supposed to go at the start.

Mr. Dick Proctor: That's fine for me. Thanks, Mr. Chair

The Chair: Thank you, Mr. Proctor.

Mr. Hilstrom, for a short period.

Mr. Howard Hilstrom: Your reference to the Canadian Wheat Board was interesting, Gordon, because the province of Alberta and the farmers who produce the bulk of the wheat and barley in western Canada do not want a Canadian Wheat Board. They want it to be a voluntary organization. The problem with the Wheat Board is that it stifles innovative marketing. The wheat farmer's a pretty efficient operator.

You were talking, Monsieur Jean, about the cost of production for dairy farmers. You say it's just going up and up all the time. Can you tell me how the non-quota-holder milk farmer in Quebec was able to operate at a profit, selling at the price they were able to get for milk, and yet supply management people are struggling? Is this an efficiency issue, or what?

[Translation]

Mr. Jean Grégoire: The optional export system in Quebec was used by the majority of producers who had quotas. Those producers adjusted their production. So instead of adjusting production that was too tight and deciding to sell two cows and to buy three more, they produced a little bit more, regularly, each year. When they had a milk surplus, they would send it for export, and when they did not have enough, they would enter the domestic market, without being forced to create additional investments by selling or buying animals. So it is a kind of flexibility that producers established for themselves, and that is how it worked.

The maximum number of producers in Quebec who produced milk for export was 36. There are currently 16 left, and most of these producers are producers who have sold their quota. At home, when someone sells his quota, the flexibility that exists in the system is such that he needs to produce for a certain number of days to bring his quota to zero. Those people would choose the export option in order to gradually get rid of their herds. For the most part, that is how exports work in Quebec.

Â (1250)

[English]

Mr. Howard Hilstrom: Sure, and then of course they didn't have to buy $30,000 quota in order to operate their dairy farm, which is also a big advantage.

Here is one last question here before we pass on; we're short on time. Mr. Rick Phillips, director of policy and government relations for the Dairy Farmers of Canada, was here. I know that none of you are directly from the DFC, but Mr. Phillips told the committee that processors are still free to expand their export sales using imported inputs under the “import for re-export” program, or “duty drawback” provisions.

Now, I'm not 100% familiar with these terms, but it sounds to me as if the processors can bring milk in from the United States, process it, and then export it. Do you agree that using these programs will increase the amount of dairy products Canada imports? Is it going to negatively impact supply management? Is there a WTO ruling that will say that somehow these processors are mixing supplies, or anything? Is there any concern with that program from dairy farmers, Gordon?

Mr. Gordon Coukell: That program is audited. It's not really milk in most cases. Companies will bring in, say, processed cheese and make a pizza here, and it goes back to the U.S. under bond. But the product coming in comes in under bond and all has to go back; that's audited by the CDC.

It's an efficiency factor from the processor's point of view. You make better use of the manufacturing capability here. It doesn't reduce necessarily our industry itself.

Mr. Howard Hilstrom: So the Dairy Farmers of Ontario aren't willing to change the system enough so that Canadian milk is being exported?

Mr. Gordon Coukell: The provision is there. That's what the Class 5A, 5B, and 5C is for--import competition, the products that are coming in here--so the processor in Canada can access milk here at competitive U.S. prices--

Mr. Howard Hilstrom: But my question is--

Mr. Gordon Coukell: --and make the same products and sell them on both sides of the border at the same prices.

Mr. Howard Hilstrom: But you don't want to see Canada's milk be processed and exported. You'd rather just keep supply management domestically.

Mr. Gordon Coukell: Definitely, keep supply management domestically.

The Chair: Mr. Duplain, very quickly. I'll give you five.

[Translation]

Mr. Claude Duplain (Portneuf, Lib.): Good afternoon. Thank you for coming. I have two questions. Earlier on, you talked about sovereignty over food and also about a study, about something that you are currently working on and which you could share with us. Where did you prepare and present the study you were talking about? I would like you to tell us about....

Mr. Jean Grégoire: We are currently preparing a document on all supply-managed commodities, to come up with a consensus among the supply-managed commodities, to provide the government with an alternative to the tariff system that might suit Canada as well as other countries. We are also prepared to promote it internationally, if it is accepted by everyone, as we have done on other issues. You are aware that we have an association made up of 34 international organizations that support supply management and production control in various countries. So we would be prepared to sell the idea to the agricultural groups in various countries.

Â (1255)

Mr. Claude Duplain: Is it being prepared by Quebec or is the initiative Canada-wide?

Mr. Jean Grégoire: Canada-wide.

Mr. Claude Duplain: Earlier, my colleague asked a question that got a few laughs, but that interests me a great deal. He compared milk to soft drinks. But have dairy producers conducted any studies on Canadians' ability and willingness to pay, as compared to the asking price for milk? Have comparisons been drawn?

Mr. Jean Grégoire: There are quarterly studies that are carried out regularly on products sold to Canadian and American consumers. So far, to my knowledge, those studies have not shown that Canadian consumers are paying more for dairy products in Canada than in the United States. So it is something that is done on a regular basis, every three months.

Mr. Claude Duplain: Okay. But depending on what Canadians are willing to pay... I'm just trying to understand, because I have never seen a study that looked at what Canadians are willing to pay for a dairy product.

Mr. Jean Grégoire: I'll give you just one example. For fluid milk, chains get more than 20% a litre rebates. So even if there were a 3- or 4-cents-a-litre increase, as long as the price that the consumers pay does not increase, there wouldn't be a problem. The margin would still be quite adequate.

Mr. Claude Duplain: In your opinion, where does the resistance to giving a little more to producers come from?

Mr. Jean Grégoire: Everybody's trying to gain as much as possible in life, and our industry's no different from others. So chains are trying to make a little more, and processors are trying to make a little more too. The last in line is the producer. So the producer is always the one they're trying to squeeze to get the lowest price possible.

Mr. Claude Duplain: You say that he's at the end of the line, but in reality he's at the front of it, because he or she is the one producing the milk. He should therefore be at the forefront; he should be first. That's all I had to say. I don't know if my colleagues have other questions.

[English]

The Chair: Okay, one question, and then he can finish his five minutes.

He's finishing his time. There's still time here. Then we'll go back to you.

[Translation]

Mr. Gérard Binet: I want to go back to my story on soft drinks. I was watching a television program where according to a consumers' association, people with low income are finding that soft drinks cost less than milk. That is the reason why I mentioned this earlier. But I hear that in the United States, milk costs even more than here in Quebec, in Canada. So the margin would be there. Is it your association or is it the producers that are too conservative? They should be more liberal.

Mr. Jean Grégoire: As I said earlier, regardless of the price... if you go today to any supermarket or grocery store, all you have to do is compare the price of milk with that of water or even a Coke. The price of milk will always be too high for some consumers.

We did some research in Quebec and even in the Toronto market, and we asked consumers whether price was an issue when they bought milk. Price came in fourth, which goes to show you it is not a priority. Clearly the price of milk should not increase excessively, but if it is in keeping with inflation, I don't think that any consumer would complain that these products are too costly.

Mr. Gérard Binet: Thank you.

[English]

The Chair: Mr. Gagnon, for one question.

[Translation]

Mr. Marcel Gagnon: It's a shame I don't have much time left, because the document that you are producing is an extremely important and interesting one, and it speaks to the problem that we are faced with. Having worked in a farmers' union myself, I know that if you endanger supply management, you lose agriculture alltogether, as you've mentioned.

You are shocked by the fact... Maybe the word “shocked” is too strong, but you realize that agriculture is subsidized in other jurisdictions, including in the United States, and you say that it is time Canada made a choice. Why is it that we can't seem to navigate properly, why is it that we feel that our supply management is always vulnerable? Are we weak when it comes to negotiations? In your opinion, why is it that we're always afraid of losing what we've gained in agriculture?

· (1300)

Mr. Jean Grégoire: I think that that when we look at the kind of economic liberalization that is favoured by the WTO, what we are recommending as a process may well be in contradiction to that. However, we have to face facts. Agriculture is not the same as trade. That is where the problem lies. A multinational company will set up in Canada and stay here only if it is making a profit. As soon as it stops making a profit, it will close down its companies, pack its bags and go to some other country. A milk producer, a grain farmer or any other kind of producer in Canada cannot pack up his land, put it in his suitcase and go somewhere else to try to make a profit. Producers have to work within the Canadian context. That is why agriculture has to be looked at from more than just a profit standpoint: the cost is so much and so the return has to be so much. That is not always the way things are calculated in agriculture. I think that trade discussions at the WTO do not take that problem sufficiently into account.

So what we are saying is that in Canada we developed a supply management system 25 or 30 years ago, which was set up by Mr. Whalen when the Liberals were in government. Do you know why Mr. Whalen did that? He made a deal with the farmers and the industry in Canada because he did not know what to do with the surplus dairy production in Canada. No one knew where to dump the products. Do we want to go back to that situation? That is an option.

[English]

The Chair: Thank you very much. I appreciate the questions and the responses.

Gentlemen, you represent a very vital part of our agricultural industry, and as you can tell by the questions, there's as much diversity around this table as there is in your industry. Thank you again for appearing.

The meeting is adjourned.