October 1, 2018 / 7:41 PM / in 22 days

Cash, cuts and confusion; Trade deal spurs Canadian dairy fears

WINNIPEG, Manitoba/MONTREAL (Reuters) - Canada’s dairy concessions to the United States helped secure a hard-won trade deal, but they spurred talk on Monday of compensation, confusion and curtailed milk production, as a protectionist system faces new threats.

U.S. and Canadian negotiators on Sunday reached a tentative trade deal, following an earlier deal between the United States and Mexico, that preserves a trilateral pact between the three North American countries, newly named the United-States-Mexico-Canada Agreement (USMCA).

Under the terms covering the dairy sector, Canada surrendered tariff-free access representing about 3.5 percent of the domestic dairy market and agreed to dismantle a pricing system called Class 7 and to restrictions on exports.

The concessions are the latest Canada has made to secure trade pacts that have eroded a system of dairy production quotas and tariffs designed to support prices. The supply-management system has survived, however, thanks to its influence with politicians who fear angering dairy farmers, who live mainly in vote-rich Quebec and Ontario.

Prime Minister Justin Trudeau said negotiators successfully maintained the supply management system, and the Canadian government will compensate farmers for any deal-related losses.

But Dairy Farmers of Canada, the industry’s influential lobby group, tweeted that Trudeau “can’t claim that he protects supply management while subjecting it to a thousand cuts.”

“A handful of dollars doesn’t replace the livelihood of dairy farmers,” the group added.

Another industry group, the Dairy Processors Association of Canada, estimated losses from the additional market access at C$2 billion over the course of implementation.

Between trade deals with the United States, Europe and Pacific nations, Canadian dairy farmers will cede almost 9 percent of the domestic market to foreign competitors, or about 28 days worth of production volume, said Francois Dumontier, spokesman for a group representing Quebec dairy farmers.

Cuts to production quotas are inevitable, said Al Mussell, research lead at Agri-Food Economic Systems. In addition, the deal’s language is vague in places and does not appear to rule out, for example, Canada’s creating a new class to accomplish the same objective as Class 7, he said.

Like farmers, Manitoba dairy Bothwell Cheese is queuing for compensation, given “the cost to the industry, which is very significant,” said Wally Smith, Bothwell’s executive vice-president.

Even so, investors registered relief that supply management remains in place. Shares of Canadian dairy Saputo Inc (SAP.TO) rose 5 percent on the Toronto Stock Exchange.

Under the deal, Canadian exports of milk protein concentrates and skim milk powder - ingredients in cheese and yogurt - cannot exceed 55,000 tonnes in the first year, and 35,000 tonnes in the second, before exporters pay an export tax. Canada’s volumes currently amount to 70,000 tonnes annually, Mussell said.

The Class 7 changes, which must be eliminated within six months, are most concerning to Quebec farmers, as they will “profoundly destabilize” the industry, provincial Premier Philippe Couillard said. U.S. dairies had accused Canada of using Class 7 to undercut global skim milk prices and curtail their exports.

Reporting by Rod Nickel in Winnipeg, Manitoba and Allison Lampert in Montreal; Editing by Leslie Adler

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