Why Mexicans Don't Drink Molson

by Andrea Mandel-Campbell

  Dubbed dairy’s “dirty little secret,” quota is both the monkey on farmers’ backs and a cash cow. Originally given out for free by the government in the 1960s, it is now a highly sought after commodity, traded on special exchanges. A fifty-cow herd is worth $1.45 million in quota, representing half the assets of an average farm, including land, equipment and animals. With farmers either forced to take out loans to buy quota or using it as collateral against other debt, quota is at once a tremendous financial burden and the price of entry into an exclusive club. But however you see it, the results are the same: it jacks up the cost of producing milk and means that the price for milk and, by extension, quota stay high.

  “The Canadian dairy industry is really no longer about milk,” says Jim McIlroy, a Toronto-based trade lawyer and long-time critic of supply management. “It’s about quotas, and the number one objective is to protect the value of that asset.”

  Which is why dairy farmers would rather lose the ability to export than give up even a single dollop of their domestic monopoly. They were faced with that very choice in 2002, when the United States and New Zealand successfully challenged Canada at the World Trade Organization (wto), proving that its high milk prices were used to subsidize cheaper cheese exports. Rather than tamper with the system, the farmers voluntarily forfeit their right to export. “Okay, so we can’t export,” says Hall matter-of-factly. “We chose to live with it because we chose to focus on the domestic market.”

  For Hall, who owns sixty-five cows and probably close to $2 million in quota, it only makes sense. But his decision — to, in effect, stake his entire future on a small, captive Canadian market — not only flies in the face of sweeping global trends, but threatens the viability of Canada’s agrifood industry, to the long-term detriment of Hall himself. He and other supporters of supply management argue that Canada’s ability to supply its own market is a question of sovereignty. But just as Hamilton’s industrial might quickly crumbled once the walls supporting its artificially enhanced muscle were knocked down, so too will the dairy industry evaporate.

  It’s already happening. Since the farmers opted out of export markets, multinational processors like Nestlé and Parmalat, which turn milk into cheese and yogourt, have been steadily closing their Canadian operations. Limited to the Canadian market, the processors are running their plants below capacity, with no way of offsetting the high cost of milk with increased production. “Every month, one or two dairy plants close. They are getting out of here,” says McIlroy. “We’ve already lost a tremendous amount of the future of the industry. It’s gone and it’s never coming back.”

  Montreal-based Saputo is among those seeking greener pastures. Founded by Sicilian-born Lino Saputo, who immigrated to Canada in 1950, the company is the world’s number two mozzarella maker, with 40 per cent of the Canadian cheese market and 6 per cent of the U.S. market. Since 2002, Saputo has closed seven cheese processing plants across Canada. Within months of the wto ruling effectively barring Canadian dairy exports, Saputo spent us$51 million to buy Argentina’s third-largest dairy processor. From Argentina, Saputo exports to over thirty countries. In November 2005, company chief executive Lino Jr., citing high milk prices in Canada, said he was looking to invest in Australia and New Zealand, which boast the world’s most competitively priced milk since dismantling their supply-managed systems.81

  In a bid to stem the flow, dairy farmers are encouraging the processors to import cheaper milk products from abroad, which can be used for re-exporting processed cheese and yogourt. The imports, part of a government quota program referred to as “the shortage” that processors must make up for in order “to compete,” has more than doubled since the wto ruling to 49 million kilograms in 2005–2006.82 The dairy farmers have already made similar leaps of logic to keep food manufacturers like McCain and Kraft from going stateside. The food companies pay 30 per cent less for the cheese they use on their frozen pizzas; otherwise, they say, they wouldn’t be able to compete with U.S. manufacturers. Altogether, the dairy farmers have had to create eighteen separate categories of milk prices to remain competitive with the U.S. and other markets.

  But like a dike that constantly springs leaks in the wake of a rushing river, as soon as the system plugs one hole, another bursts open. The cheaper prices paid by the frozen-pizza makers put restaurants like Pizza Pizza at a competitive disadvantage, forcing the chain to use less cheese and hampering its ability to innovate and come up with new product offerings. “We are completely hamstrung by the system,” says Ron Reaman, vice-president of food supply for the Canadian Restaurant and Foodservices Association. “We’re stuck in an outdated mode that has left us behind in terms of innovation and production development.”

  It’s the same story for ice cream makers, who import “butter–oil” blends that get around the high tariffs rather than use Canadian milk products. For Reaman, it’s no coincidence that per capita milk consumption in Canada has declined 15 per cent in the last twenty years. But while so many are hurt by what he describes as an “archaic and Byzantine” system, the farmers are largely immune to the fallout. By shorting the system— issuing negligible amounts of new quota, which invariably stifles farmers’ own ability to grow, expand and be more productive, they ensure that demand outstrips supply.

  Safely ensconced behind the quota, tariffs and high milk prices, farmers have very little incentive to be more efficient and innovative. According to the OECD, over 60 per cent of the value of production is subsidized by the Canadian government through higher milk prices. Birch, who travels frequently between the United States and Canada, notes the difference between dairy operations on either side on the border. “The U.S. farms are lean and mean, and they’re expanding to compete globally. The Canadian farms are neat, tidy, forty- or fifty-cow operations, just like in the U.S. back in the 1960s,” he says. “They are caught in a time warp — and they like it that way. Why would you want to milk two hundred cows when you can continue to make a living with sixty? It’s just a big hose job.”

  Some might argue that running a fifty-cow dairy farm is a nice alternative to the mass monoculture factory farming that now pervades the agricultural sector and robs it of its human side. But if that’s something Canada would like to encourage, the best way to protect it is to make it self-sustaining, which it is not. If it were, anyone who had a hankering to be a dairy farmer would be one, and those who produced the best, most-sought-after milk at the best price would succeed. Instead, the system is “a little like agriculture in the Soviet Union. And we all know how that ended,” says Valentin Petkantchin, the Bulgarian-born director of research at the Institut économique de Montréal. Which is why it needs the government to pass laws and institute favourable legislation that will keep the creaking system intact. What’s not as clear, though, is, who exactly is running the show? With 16,300 dairy farmers owning an estimated $20 billion in quota, each one is technically a millionaire. Together they represent a powerful lobby group that has politicians “running scared,” say critics. Birch likens them to a “mob,” their political clout comparable to that of a Colombian drug cartel. How else to explain the government’s willingness to sacrifice long-term national interests in favour of a few thousand farmers?

  But there are things that not even Ottawa and the provincial governments can protect them from. The sheer force of globalization will continue to draw multinational manufacturers to the most competitive markets while moves towards freer global trade are steadily chipping away at the kind of prohibitive tariffs essential to sustaining supply management. New Zealand, which used to produce 25 per cent less milk than Canada, now produces 80 per cent more and is leading the charge into the huge, untapped Chinese market.

  Meanwhile Canada, the world’s tenth-largest milk producer in 1969, is now ranked twentieth.

  “There’s something much bigger than the farmers out there. It’s bigger than Ottawa and it’s bigger than Queen’s Park [the Ontario legislature]. It’s called globalization,” says M
cIlroy. “When trade barriers inevitably come down, we’ll be buying products made by Saputo, but they won’t be produced in Canada. They’ll be made in Argentina. And we’ll have to ask ourselves how on earth we let it happen — how we drove the future of the industry out of this country to protect a few thousand millionaire farmers. It just doesn’t make sense.”

  Of course, the story doesn’t have to end this way. Chris Birch successfully competes in the U.S. market, making a tidy profit selling his milk for forty to forty-five cents a litre, transportation costs included. In contrast, dairy farmers under supply management say they need to charge sixty-five to seventy cents a litre. The 30 per cent price differential is a direct result of the quota. “The only reason the industry can’t compete is because it’s hobbled with a tremendous burden that people have to work under whether they want to or not,” says Birch. “It’s called quota.”

  Experts like Mike Gifford, Canada’s lead agricultural negotiator during the wto’s Uruguay Round of trade liberalization, say it’s about time the government started thinking about buying the farmers out of their quota. Once unshackled, their high-quality breeding stock, combined with the relative proximity of Quebec and Ontario farmers to the fluid milk sheds of the northeastern United States, would give them a distinct advantage over dairy farmers in Wisconsin. And when it comes to cheese, Canada has plenty of potential; a century ago cheese was the country’s second-largest export after wood, with thousands of small factories stretching from Ontario to Prince Edward Island.

  For the moment, however, the high-end cheese industry, which is enjoying a resurgence in the United States and the United Kingdom, remains stifled by the same intrusive regulation. Dairy farmers who want to make cheese must first sell their milk to the provincial marketing board and then buy it back, paying the board a transportation fee to move the milk from the barn to their cheese house. If a producer wants to use someone else’s milk, it has no choice in what milk it gets. In either case, the would-be producer must still be lucky enough to get its hands on some cheese-making quota already in circulation. The only other option is to convince the government that your cheese won’t compete with an already-existing cheese. To get this “innovation quota,” regulators actually taste the cheese and decide whether it tastes different enough from other products already on the market.

  Despite the impressive obstacles, Quebec manages to produce close to four hundred varieties of artisanal cheese. Only a very minute amount, however, is actually exported. Ron Reaman doesn’t understand it. “Why wouldn’t you want to be exporting around the world? Why wouldn’t you want to be a global leader?” J.L. Kraft may very well have asked himself the same question in 1903 when, in order to get around stiflingly high tariffs, he decided to move from Stevensville, Ontario, to Chicago, where he founded what would become the world’s largest cheese company.

  Laurent Pellerin, head of the powerful Union des producteurs agri-cole, the Quebec farmers’ union that represents almost half of all Canadian dairy farmers, doesn’t see it quite that way. “There’s not a lot of people in North America who lack food — there’s plenty of food everywhere,” says Pellerin. “This whole idea that we could be market winners, it’s the American dream. But it’s not my dream.”

  Is it any wonder?

  GLOBALLY STUMPED

  As far back as anyone can remember, Cornwall, Ontario, has brimmed with potential. The city of 45,000 near the Quebec border is smack in the middle of the densely populated Quebec City–Windsor corridor, an hour’s drive from Ottawa and almost within spitting distance of northern New York state. Its central location on the banks of the St. Lawrence River is what first drew Loyalist settlers here two hundred years ago along with the silk factories and paper mills that followed. By the 1970s, Cornwall was a thriving industrial town in which anyone out of high school was able to walk into a well-paying mill job.

  But then the factories started closing. First it was the cotton mills, then the chemical plant and the massive rayon complex, which is now just an empty field on the edge of town. In 2005, Montreal-based Gildan shuttered its yarn-spinning operations and the Swiss multinational Nestlé closed a dairy plant, bringing to 2,100 the number of layoffs over an eighteen-month period. “Everyone always talked about Cornwall’s potential,” says Claude Macintosh, a Cornwall native and associate editor at the local Standard-Freeholder newspaper. “But it never really happened. Instead, we’ve watched factories close one after another.”

  Still, no one, not in their wildest dreams, imaged that the towering, fume-belching stacks of the Domtar pulp and paper mill could ever be snuffed out. In November 2005, the Montreal-based company closed the one-hundred-year-old icon, laying off nine hundred workers and setting adrift the community that had grown up around the sprawling mill. “Nobody ever believed Domtar could close,” says Macintosh. “It was such an institution. Domtar and Cornwall were all one thing. We were a pulp and paper town.”

  While Canada has almost gotten used to the slow dismantling of its branch-plant economy, the forestry industry is as old as cod and beaver pelts, its deep roots and vast canopy providing sustenance and well-paying jobs to hundreds of communities. Which is perhaps why its long-heralded collapse has been routinely ignored and discounted for more than a decade. But there is no ignoring it any longer. As Cornwall reels in disbelief, towns from Miramichi, New Brunswick, to Squamish, British Columbia, are being felled by an industry-wide crisis that is cutting a swath through the country’s rural backbone.

  “It has never been this bad,” says Jamie Lim, president of the Ontario Forest Industries Association. In 2004 and 2005, close to twelve thousand sawmill workers and pulp and paper machine operators lost their jobs in forty-six communities. Half the cuts came in Ontario. “It’s different this time,” she says. “The valley is deeper than anyone has ever been in before, and when we climb out, the industry is not going to be the same.”

  Whether it emerges pruned back but sturdy, or shrunken and withered, will depend on whether the industry is able to address the roots of the crisis. In 2005, Ottawa and the provincial governments coughed up more than $2 billion in emergency aid to stanch the damage caused by a costly softwood lumber dispute with the United States, a sharp rise in the loonie and surging energy prices in Ontario. The conjunction of events, some argue, combined to form the perfect storm at a time when the global forestry industry is being revolutionized by new technologies and the emergence of low-cost competitors in South America and Asia.

  What is not as easy to explain away is why Canadian companies failed to anticipate the looming changes and remain the least prepared of their global peers to survive the inevitable restructuring.

  It shouldn’t be this way. Canada is home to 10 per cent of the world’s forestry resources and is the leading exporter of wood products; it is responsible for 21 per cent of the global trade. Yet its companies are lightweights by international standards, with not one among the world’s top twenty. Not only are these companies among the least global of their peers — they are even confined to regions within Canada — but their mills and machines are among the most antiquated and unproductive on the planet. They churn out commodity goods like two-by-fours, pulp and newsprint instead of producing high-value-added products like tissue paper and engineered wood products. As for Canadian manufacturers of printing presses and paper machines, well, there aren’t any.

  It’s a stark contrast to Finland, which in 1949 received the World Bank’s first-ever forestry loan to rebuild its industry, which had been left decimated after World War ii. Sixty years later, the country of five million still has a fraction of Canada’s resources, but three of its companies are among the world’s ten largest. Helsinki-based Stora Enso, with sales of us$15 billion, is three times the size of Canada’s leading forestry-products company, Abitibi-Consolidated. Stora Enso is also the most globalized forester, with far-flung operations in Russia and China and a us$1.2 billion pulp mill joint venture in Brazil. In neighbouring Uruguay, a trio of Fi
nnish firms, together with the Spanish, are investing us$2 billion to build the world’s largest pulp complex.

  The Finns have gone global on the back of a dynamic domestic industry. They harvest 65 per cent more lumber per hectare than do operators on New Brunswick Crown land, and their labour costs are less than a third of those of coastal British Columbia, thanks to massive investments in research and technology. Their mills are not only three times as large as the average mill in Quebec, but state-of-the-art, with equipment furnished by homegrown companies like Metso, the world’s largest supplier of papermaking machinery.

  So why is it that tiny Finland is a forestry giant, while Canada, with its towering Douglas-firs and lumberjack legacy, watches as communities from Cornwall to Kenora are left to scramble for twelve-dollar-an-hour call-centre jobs? According to forestry experts, the slow decline that has culminated in the current crisis can be traced back to the public ownership of Canada’s timberlands and the onerous government regulations that have at the same time bred complacency and handcuffed companies’ ability to compete.

  Unlike Finland (and in fact most other major forestry producing nations), where timberland is privately owned, Canadian companies are given provincial licences to harvest an annual “allowable cut” for a period ranging from five to twenty-five years. In some cases, the area to be harvested can change from year to year and is shared by several companies at once, while the amount to be cut is calculated on the basis of forestry yields rather than market conditions. At times, companies must harvest trees even when it’s unprofitable, or risk losing their licence, resulting in both a drag on efficiency and a subsidy at the same time. In return, companies pay a government-set stumpage fee and are subject to a web of regulation, the most important of which ties cutting rights in a specific area to a local mill.*