Required Report - public distribution

**Date:** 11/21/2007

**GAIN Report Number:** CA7061

CA7061

**Canada**

**Dairy and Products**

**Annual**

**2007**

**Approved by:**

![](media/image1.wmf)Lisa Anderson

U.S. Embassy

**Prepared by:**

Darlene Dessureault

**Report Highlights:**

Due to an increase in Canadian dairy requirements, total milk production
for calendar year 2007 is forecasted to increase to 8.1 MMT. Production
of cheese is expected to increase to 297 TMT. Available production data
shows a 10% decrease in butter production in 2007 compared to the
previous year. Due to the need to replenish butter stocks, butter
production in 2007 is forecasted to reach 80 TMT. Available trade data
suggests that an increase in usage of the IREP program will result in
increased milk imports in 2007 compared to year 2006 levels, while
butter imports will decrease due to a decrease in IREP usage for butter.
A strong Canadian dollar vis a vis the US dollar, stable production
levels and an increased domestic requirement is forecasted to result in
lower dairy exports in 2007. Proposed changes to Canada's cheese
compositional standards were announced in 2007 that, if made into law,
could have a negative on US cheese and dairy ingredients exports to
Canada.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Ottawa \[CA1\]

\[CA\]

Table of Contents

[**PRODUCTION 3**](#production)

[Figure 1: Recent MSQ Adjustments; based on 3.6 kilograms of butterfat
per hectoliter
3](#figure-1-recent-msq-adjustments-based-on-3.6-kilograms-of-butterfat-per-hectoliter)

[CONSUMPTION 4](#consumption)

[Per Capita Consumption of Dairy Products
4](#per-capita-consumption-of-dairy-products)

[Utilization of Milk 5](#utilization-of-milk)

[Table 1: Milk Utilization by Class
5](#table-1-milk-utilization-by-class)

[TRADE 5](#trade)

[Regulations For Imports and Exports of Dairy Products
5](#regulations-for-imports-and-exports-of-dairy-products)

[Export and Import Permits Act: 5](#export-and-import-permits-act)

[Export and Import Controls for Dairy Products:
5](#export-and-import-controls-for-dairy-products)

[Table 2: Tariff-Rate Quotas for Dairy Imports into Canada
6](#table-2-tariff-rate-quotas-for-dairy-imports-into-canada)

[Import for Re-export Program (IREP)
6](#import-for-re-export-program-irep)

[Imports of Fluid Milk, Cheese, Butter, Skim Milk Powder
7](#imports-of-fluid-milk-cheese-butter-skim-milk-powder)

[Fluid milk and Cream 7](#fluid-milk-and-cream)

[Cheese 7](#cheese)

[Butter 7](#butter)

[Non-fat Dry Milk (Skim Milk Powder)
8](#non-fat-dry-milk-skim-milk-powder)

[Exports 8](#exports)

[STOCKS 9](#stocks)

[DAIRY POLICY DEVELOPMENTS 9](#dairy-policy-developments)

[Article XXVIII Action 9](#article-xxviii-action)

[Cheese Compositional Standards 10](#cheese-compositional-standards)

[STATISTICAL TABLES 11](#statistical-tables)

[Table 1: Fluid Milk PSD 11](#table-1-fluid-milk-psd)

[Table 2: Cheese PSD 12](#table-2-cheese-psd)

[Table 3: Butter PSD 13](#table-3-butter-psd)

[Table 4: Nonfat Dry Milk (Skim Milk Powder) PSD
14](#table-4-nonfat-dry-milk-skim-milk-powder-psd)

[Find FAS on the World Wide Web: 15](#find-fas-on-the-world-wide-web)

# PRODUCTION

Milk production in Canada supplies two markets. The fluid milk market
includes creams and flavored milks. The industrial milk market is milk
used for to make products such as butter, cheese, yogurt, ice cream and
milk powders. In Canada, provincial milk marketing boards maintain
responsibility for the production of its own fluid milk and set its own
pricing formulas, quota policies and other regulations. Industrial milk
production levels are allocated using a national management tool called
the Market Sharing Quota (MSQ). Quota is allocated on a butterfat basis.
It is set by the Canadian Milk Supply Management Committee (CMSMC),
which applies the terms of the National Milk Marketing Plan (a
federal-provincial agreement) to establish each province's share of the
MSQ. The provinces are then responsible for distributing shares of the
quota to producers according to provincial policies and in accordance
with pooling agreements.

The CMSMC sets the MSQ based on the recommendations of the Canadian
Dairy Commission (CDC). The CDC monitors the trends in Canadian
requirement and makes recommendations on the necessary adjustments to
reflect changes in demand for milk for industrial dairy products. Since
October of 2006, the CMSMC, based on recommendations by the CDC, has
adjusted the MSQ (and thereby production) upwards every two months in
response to increased Canadian requirements (consumer demand plus
planned exports for industrial dairy products). The recent MSQ
adjustments are presented in the graphic below:

## Figure 1: Recent MSQ Adjustments; based on 3.6 kilograms of butterfat per hectoliter

![](media/image2.wmf)

Source: Canadian Dairy Commission;
[www.cdc.ca/cdc/index_en.asp?caId=812&pgId=2180](http://www.cdc.ca/cdc/index_en.asp?caId=812&pgId=2180)

Due to the increase in Canadian dairy requirements, total milk
production for calendar year 2007 is forecast to increase to 8.1 million
metric tons (MMT) from 8.0 MMT in 2006. The first six months of
available industrial milk production data from Statistics Canada for
2007 does not show an increase in milk production in response to the
increased demand. This is because the increase in Canadian requirements
was met by releasing stocks into the marketplace. However, milk
production will have increased in the last six months, as an increase in
milk production is needed to replenish stocks and ensure that there is
no shortage in the fall. For 2008, milk production is forecast to stay
at relatively the same level with perhaps a slight decrease if support
prices are increased to reflect increases in dairy producers' costs of
production.

Total cheese production for 2007 is expected to increase to 297 thousand
metric tons (TMT, a 2% increase from year 2006 levels of 291 TMT. Cheese
production for 2006 and 2007 has been adjusted to exclude fresh cheeses
such as ricotta, cream cheese, and cottage cheese. Production of
specialty (variety) cheese (excluding ricotta, cream cheese, and cottage
cheese) is forecast to increase slightly to 154 TMT in 2007. Cheddar
cheese production is forecast to also increase slightly to approximately
143 TMT in 2007. Total cheese production is forecast to slightly
increase again in 2008 due to an expected increase in consumer demand.
The Canadian economy is doing well and consumers tend to increase their
consumption of specialty cheeses during those times.

The first six months of butter production data from Statistics Canada
shows a 10% decrease in butter production in year 2007 compared to the
same period of time in 2006. Due to the need to replenish butter stocks,
meet the Canadian requirements, and high world prices, butter production
in 2007 is forecasted to reach 80 TMT by the end of 2007. Butter
production is forecast to increase to 83 TMT in 2008. Butter production
declined from a high of 99,426 MT in 1990 to a low of 75,832 MT in 2002
to a new low of 75,406 MT in 2006. Between 2002 and 2006, butter
production had rebounded and is expected to continue to do so, due to
the increasing demand for butter for pastries and other baked products,
the increase in dairy spread production, and its increasing use in the
domestic market.

Non-fat dry milk production (skim milk powder (SMP)) production for 2007
is expected to increase by 4% to 75 TMT from 72 TMT in 2006 due to an
increase in butter production. Increased butter production in 2008 is
also expected to increase skim milk powder production in 2008. Despite
the increase in production, stocks are unlikely to become unmanageable
since additional markets are being found as an outlet for the surplus.

# CONSUMPTION

## Per Capita Consumption of Dairy Products

Per-capita milk consumption, calculated by dividing annual fluid milk
sales of standard, 2%, 1%, skim and chocolate milk by the Canadian
population decreased slightly in 2006 to 82.92 from 83.37 liters per
person in 2005. Consumption of higher-fat milk like 3.25% and 2%,
continued to decline in 2006 as consumers continue to shift consumption
away from higher-fat milk in favor of 1% and as chocolate milk continues
to gain in popularity. Skim milk consumption decreased slightly to 8.70
in 2006 from 8.73 in 2005. Consumption of 1% milk continues to increase
and increased to 18.06 in 2006 from 17.84 in 2005. Chocolate milk
consumption increased slightly in 2006, increasing to 5.49 from 5.47 in
2005. In the move away from higher-fat milk, consumers are shifting
primarily towards 1% milk. In 2006, 3.25% milk accounted for 14.86% of
consumption (15.10% in 2005), 2% milk accounted for 46.24% of
consumption (down from 46.47% in 2005), 1% milk accounted for 21.78% of
consumption (up from 21.40% in 2005), skim milk accounted for 10.49% of
consumption (unchanged from 2003), and chocolate milk accounted for
6.63% of total fluid milk consumption (up from 6.56% in 2005). Fluid
milk sales also support the changing trend in fluid milk consumption.
Canada's changing demographics and the availability of other
calcium-fortified beverages such as soy beverages, has reduced consumer
demand for milk over the past ten years. Immigration is responsible for
the population growth in Canada and milk drinking often is not part of
new Canadians' cultural eating patterns. This has a negative impact on
milk consumption in Canada. Conflicting health messages regarding the
consumption of milk has also led to the increased popularity of new
beverage such as soy beverages that compete with milk. The dairy
industry has tried to counter this with the promotion of milk beverages
as an alternative to sugary fruit and soft drinks and as a way of
combating obesity-related issues.

Despite the consumer shift away from higher-fat milk, consumption of
cream, calculated as 10%, 18% and 35% cream sales divided by the
Canadian population increased 3.4% in 2006 from 2005. Per-capita cream
consumption has increased 95% since 1980. Increased consumption of
coffee, specialty coffee products and desserts have contributed to the
increase in the use of cream.

Per-capita total cheese consumption (including fresh cheese) in 2006 was
2.83 kilograms, a 1.5% increase from 2005. Increases in per-capita
cheddar consumption and processed fondu cheese is responsible for this
increase, increasing 4.3% and 1.8%, respectively from year 2005 levels
of 3.97 and 2.25 kilograms per capita. Consumption of specialty cheese
and cottage cheese was unchanged between 2005 and 2006.

In 2006, per-capita butter consumption decreased for the first time in
the last 10 years. Much of the decrease can be attributed to the
decrease in the number of imports arriving under the Import for
Re-Export Program (IREP) (for use in further processing) in 2006 as
these imports are a part of the per-capita consumption calculation. Per
capita consumption of butter in 2006 fell to 2.83 kilograms per person
from 3.15 kilograms per person in 2005, a 10% decrease. The high cost of
butter and greater competition from healthy oils as consumers continue
to demand healthier and lower-fat alternatives to traditional products,
may also be contributing to the consumer's demand for butter.

Domestic consumption of skim milk powder increased in 2006 by 12% to
3.15 kilograms per capita, as a result of the development of new uses
and markets for the surplus powder. The Dairy Marketing Program was
expanded in 2004/2005 into the area of innovation; the Program's main
objectives are to promote awareness and increase utilization of dairy
products and components for dairy product manufacturers. This includes
finding new and innovative uses for skim milk powder in dairy and food
products. In addition, the creation of a new milk class that encourages
the use of products like skim milk powder has also aided in the
utilization and reduction of the surplus skim milk powder. The
utilization of skim milk powder in animal feed is an additional outlet
that is aggressively being pursued. The consumption of skim milk powder
is expected to stay high, and will face reduced competition from imports
once a new TRQ currently being negotiated for at the World Trade
Organization (WTO) for milk protein concentrates is implemented. This
new TRQ will not be applicable to the U.S.

# 

## Utilization of Milk

The Canadian Dairy Commission publishes the milk utilization by class
(on a dairy year basis). The price paid for milk by processors varies
according to the milk class 1- 5. For dairy year 2006-2007, on the basis
of butterfat content (3.6 kg/hectolitre), 29.64% of all the milk
produced in Canada was transformed into fluid milk, cream, and milk
beverages, 34.76% into cheese, 6.82% into yogurt and ice
cream, 18.72% into butter, and 7.94% into further processed products
destined for the domestic and export markets. More information on the
harmonized milk classification system is available at the following
website: <http://www.cdc-ccl.gc.ca/cdc/index_en.asp?caId=812&pgId=2182>.

## Table 1: Milk Utilization by Class

  ----------------- --------------- --------------- --------------- --------------- ----------
  **Milk Class**    **Milk                          **% Total                       **%
                    Utilization in                  Milk**                          Change**
                    Million HL**                                                    

                    **2005-2006**   **2006-2007**   **2005-2006**   **2006-2007**   

  ***1***           23.5            23.9            29.14%          29.64%          2%

  ***2***           5.8             5.5             7.21%           6.82%           -5%

  ***3(a) and       27.3            28              33.91%          34.76%          3%
  3(b)***                                                                           

  ***4(a) and       15.3            15.1            19.08%          18.72%          -2%
  4(a)1***                                                                          

  ***4(b), 4(c),    1               1.1             1.23%           1.35%           10%
  4(d), 4(m)***                                                                     

  ***5(a), 5(b),    5.7             6.4             7.07%           7.94%           12%
  and 5(c)***                                                                       

  ***5(d)***        1.9             0.6             2.36%           0.78%           -67%

  ***total***       **80.5**        **80.6**        **100.00%**     **100.00%**     
  ----------------- --------------- --------------- --------------- --------------- ----------

Source: Canadian Dairy Commission

# TRADE

## Regulations For Imports and Exports of Dairy Products

Tariff Rate Utilization Tables and Quota holders for various dairy
products in Canada:

<http://www.international.gc.ca/trade/eicb/agric/milk-en.asp>

## Export and Import Permits Act:

<http://laws.justice.gc.ca/en/E-19/index.html>

## Export and Import Controls for Dairy Products: 

Quantitative restrictions in ten categories of dairy products were
converted to TRQs to support supply management of industrial milk under
the *Canadian Dairy Commission Act* and as a result of the agreement at
the World Trade Organization (WTO) in 1994.

## Table 2: Tariff-Rate Quotas for Dairy Imports into Canada

  ----------------------------------- --------------- -------------------
  **Dairy Product Description**       **Access in     **Tariff Item
                                      tons**          Number (to
                                                      6-digit)**

  Fluid Milk                          0                0401.10, 0401.20

  Cream, not concentrated, no sugar,  394             0401.30
  (heavy cream)                                       

  Skim Milk Powder                    0                0402.10.10

  Whole Milk Powder, whether or not   0                0402.21, 0402.29
  sweetened                                           

  Concentrated and Evaporated milk    12               0402.91, 0402.99

  Yogurt                              332              0403.10

  Powdered Buttermilk                 908              0403.90

  Liquid Buttermilk, sour cream       0                0403.90

  Dry Whey                            3,198            0404.10

  Products consisting of natural milk 4,345           0404.90
  constituents                                        

  Butter, fats and oil from milk      3,012            0405.10, 0405.90

  Dairy Spreads                       0                0405.20

  Cheese                              20,412          0406

  Ice cream mixes                     0                1806.20, 1806.90

  Food prep. With milk solids         70              1901.90

  Food prep. with \>= 25% ms; not for 0               1901.20
  retail sale                                         

  Ice cream and other edible ice      484             2105.00

  Milk cream and butter subs.         0                2106.90

  Non alcoholic beverages containing  0                2202.90
  milk                                                

  Complete feeds and feed supplements 0               2309.90
  ----------------------------------- --------------- -------------------

## Import for Re-export Program (IREP)

Imports of dairy products/ingredients to be sold on the Canadian market
are limited through import quotas and prohibitively high over-access
tariffs. Canadian processors can, however, import certain dairy
products/ingredients for use in the manufacturing of goods destined for
export (for example pastries and confectionary items, cheeses, butter)
through a program administered by International Trade Canada called the
Import for Re-Export Program (IREP). Due to the fact that these goods
are exported, they do not compete with domestic dairy ingredients. The
advantage to Canadian exporters is that they do not suffer a competitive
disadvantage as they have access to dairy products/ingredients at world
price. Details of this program is available at the following website:
<http://www.dfait-maeci.gc.ca/eicb//notices/ser663-en.asp> . The Import
for Re-export Program has grown in popularity since its creation in 2003
and is expected to continue grow in popularity as Canadian processors
take advantage of the strong Canadian dollar.

As will be discussed in further detail in the following section, for
2006, total imports of fluid milk and cream, butter, cheese, and skim
milk powder were approximately 56 TMT, of which imports under IREP
accounted for approximately 56% of total imports (31 TMT). The
popularity of this program highlights the growing importance of the
dairy ingredient market in further processing. It is key to growing the
dairy industry in developed markets where dairy consumption has reached
maturity. The Canadian dairy industry has in place a number of programs
that compete with the IREP program in an attempt to capture this dairy
ingredients market. One such program is the Special Milk Class Permit
Program (class 5 of the classified dairy pricing system). The Special
Milk Class Permit Program (SMCPP) was created by the Canadian Milk
Supply Management Committee (CMSMC) in 1995 and is run by the Canadian
Dairy Commission. The program objective is to provide eligible further
processors, distributors, and animal feed manufacturers with the means
to access Canadian manufactured dairy ingredients, at prices that will
allow them to remain competitive in the marketplace. The prices in this
class are based on US prices. Therefore, when US prices get closer to
world prices, the incentive to use IREP decreases. In dairy year
2006/2007, strong demand for cream, cheddar cheese and liquid milks
contributed to a growth of 12.6% in the special milk classes. More
details on the special class program can be found on the following
website:
[www.cdc-ccl.gc.ca/cdc/index_en.asp?caId=124&pgId=1530](http://www.cdc-ccl.gc.ca/cdc/index_en.asp?caId=124&pgId=1530).
Other programs used to foster the use of dairy ingredients by food
processors include the CDC's Innovation Support Fund and the Domestic
Dairy Product Innovation Fund. In 2007, the CDC has also held seminars
to illustrate how dairy ingredients could be used in further processing.

## 

## Imports of Fluid Milk, Cheese, Butter, Skim Milk Powder

### Fluid milk and Cream

The fluid milk access level for is 64,500 MT, a figure that represents
estimated annual cross-border purchases by Canadian consumers. There is
no commercial quota available for fluid milk. The goods are imported
under **[*General Import Permit No. 1 - Dairy Products for Personal
Use*.](http://www.dfait-maeci.gc.ca/trade/eicb/general/Bluebook/A_Section/GIP1-en.asp)**
Small amounts of fluid milk are also imported under supplemental permits
issued by IT Canada, and through the IREP program. In 2006,
International Trade Canada issued supplemental permits for 31 MT of
fluid milk and for 8,556 MT of fluid milk under the IREP program for
fluid milk imports totaling 8,587 MT. As of November 2007, IT Canada,
had issued 12,761 MT fluid milk under the IREP program, and 52 MT of
fluid milk under supplemental permits for other purposes. By November of
2007, fluid milk imports under IREP had surpassed year 2006 levels by
nearly 50%. Fluid milk imports in 2007 are expected to reach close to 13
MT, with most of it being due to the increased usage of the IREP
program. In 2008, usage of fluid milk imports is expected to continue.

Cream, unlike fluid milk, has a small commercial quota, which is
determined on a dairy year (August-July) basis rather than an annual
calendar year (CY) basis. The cream access level is 394 MT. In 2006
imports of cream totaled 3,700 MT, and of that quantity, imports under
the IREP accounted for 3,486 MT. As of November 2007, imports of cream
totaled 3,256 MT, with IREP accounting for 2,906 MT. Imports for cream
are forecasted to decrease in 2007 to 3.4 MT from 3.7 MT in 2006. This
is due to the decrease in use of the IREP program.

Total milk imports (fluid milk plus cream) for 2007 is forecasted at 16
TMT, a 33% increase from year 2006 levels of 12 TMT. This increase is
due to the increased usage of the IREP for fluid milk in 2007. IREP
accounted for approximately 98% of the total milk imports in 2006. Due
to market proximity and the perishable nature of fluid milk and cream,
the U.S. is the primary source for imports of milk and cream into
Canada. In 2006, the US, the Netherlands, and Denmark accounted for 80%,
10% and 5%, respectively, of imports of fluid milk and creams. Country
of origin data was not available for 2007. Imports in 2008 are expected
to remain at similar levels to those in 2007 due to a strong Canadian
dollar.

### Cheese

The commercial quota on cheese is 20,411,866 kilograms, and 66% of that
cheese quota is specifically allocated to the European Union. In year
2006, International Trade Canada issued permits for 25,309 MT of cheese,
with IREP imports accounting for 13% of that total. Year to date import
trade data (excluding fresh cheeses) suggests that year 2007 cheese
imports are 3% higher than they were a year ago for the same time
period. As a result, cheese imports are expected to increase to 25,411
MT in 2007. Specific, year to date IREP data was not available at the
time of this report. IREP does not constitute a significant portion of
cheese imports and import levels tend to stay stable due to the TRQ in
place. Therefore, post predicts a similar level of cheese imports for
2008.

Due to the country specific access, the EU-25 remains the largest cheese
supplier to Canada. In 2006, the US and France both supplied 21% of the
cheese imports into Canada (50,006 MT and 5,128 MT, respectively), while
Italy accounted for 14% of cheese imports (9,636 MT). Country of origin
cheese import data was adjusted to exclude fresh cheeses.

### Butter

Total butter imports are comprised of three HS codes: 0405.10.00 for
butter, 0405.90.00 for fats and oils from milk, and 0405.20.00 for dairy
spreads, which contain butter. Similar to cream imports, the butter
import access level is determined based on the dairy year, rather than
the calendar year. The access quota is set at 3,274 MT. According to
International Trade Canada, imports for 2006 calendar year under 0405
totaled 14,849 tons, with butter accounting for 9,722 MT and oils and
fats from milk accounting for 5,126 MT. Seventy-six percent of the
butter imports and all imports of oils and fats from milk took place
under the IREP in 2006. As of November 2007, butter imported under the
IREP program was 50% below total IREP butter for calendar year 2006,
possibly due to higher world prices. Due to the decreased usage of the
IREP program for butter, total imports under tariff lines 0405 are
expected to decrease to 13 TMT in 2007 from 15 TMT in 2006. Imports are
expected to increase in 2008 as the world price for butter will likely
decline as other, lower cost countries ramp up their milk production.

In 2006, New Zealand remained Canada's largest supply of butter by
supplying 38% of imported butter. Uruguay, Argentina and the US supplied
29%, 11% and 2%, respectively of butter imports in 2006. In 2007, year
to date country of origin trade data shows the US share of imports into
Canada double what was imported from the US for the same period the
previous year. It should be noted that butter imports from the US in
2006 were the lowest levels since the year 2000.

### Non-fat Dry Milk (Skim Milk Powder)

According to IT Canada, in 2006, import permits for re-exports were
issued for 3,296 MT of skim milk powder (SMP) (non-fat dry milk).
Supplementary permits for other purposes were issued for 13 MT of skim
milk powder. As of November 2007, imports permits for re-export for
2,580 MT of SMP were issued and 8 MT of SMP were imported under
supplemental permits for other purposes had been issued. SMP imports for
year 2007 are expected to decrease to 2,650 MT, 20% below year 2006
levels. This decrease is likely due to the increase in the price of
protein in the world market. The world price for protein is likely to
remain high in 2008. High world price and the continued efforts of the
CDC to develop programs that provide skim milk powder at competitive
price to Canadian processors, leads Post to predict that import levels
in 2008 will remain similar to year 2007 import levels. The US accounts
for nearly 100% of skim milk powder imports into Canada.

## Exports

The 2002 ruling by the World Trade Organization (WTO) capped subsidized
exports of dairy products from Canada. As a result, Canadian dairy
producers are limited in the quantity of dairy products that can be
exported from Canada and this has resulted in a negative trade balance
in dairy products. As the difference between Canada's domestic support
prices and world prices decrease, however, the amount that Canada can
export within the WTO limits also increases. However, higher domestic
requirements in the later part of the year, a relatively low increase in
milk production, and the appreciation of the Canadian dollar vis-avis
the US dollar will likely offset any possible increases in exports in
2007.

Total milk and cream exports in 2006 totaled 5,565 MT. In 2007, based on
year to date trade data, fluid milk and cream exports are expected to
decline by 25% to 4,175 MT due to the increase in Canadian requirements
in the later part of 2007. In 2006, the US and Taiwan each received 45%
of the milk exported from Canada. Year to date country of origin trade
data suggests that this trend will be repeated in 2007. Milk exports for
2008 are expected to remain similar to those levels in 2007.

Total cheese exports (excluding cream and fresh cheeses) for 2006 were
9,414 MT. Based on seven months of available data, cheddar exports in
year 2007 are expected to decline to 8,284 MT. Canadian cheddar faces
strong competition on the world market from other countries, which
specialize in cheddar production. In addition, the strong Canadian
dollar makes it difficult for Canadian cheddar exports to compete
favorably with cheddar exports from other countries. In 2008, cheese
exports are expected to stay similar to year 2007 levels. In 2006, the
U.S. and the U.K. were the two primary markets for Canadian cheese,
accounting for 35% and 42%% of exports respectively. During the first
eight months of 2007, cheese exports to the US have increased slightly
above levels they were at the same time period the previous year. Canada
has specific market access for 4,000 MT in the U.K. markets and has
three specific quotas for U.S. cheese markets, for cheddar, Swiss- and
Emmental-type cheeses, and non-specific cheeses.

Total butter exports are comprised of three HS codes: 0405.10.00 for
butter, 0405.90.00 for fats and oils from milk, and 0405.20.00 for dairy
spreads, which contain butter. Total butter exports (all three lines)
for 2006 totaled 17,819 MT. Dairy spreads accounted for 73% of those
exports, while butter and oils and fats derived from milk accounted for
20% and 5%, respectively. In 2006, the US received 80% of the exports
under these lines (14,333 MT), with 93% of it in the form of dairy
spreads, 7% in the form of oils and fats from milk, and 2% in the form
of butter. In 2006, Morocco was the number one destination for Canadian
butter. Based on seven months of data, exports are forecast to decrease
to 16 TMT. A forecasted increase in the export of dairy spreads in 2007
is offset by a significant decrease in butter exports. Seven months of
butter trade data from the beginning of the year shows the US remaining
the destination for nearly all dairy spread and fats and oils derived
from milk. This drop in exports is likely due to an increase in the
domestic need for butter. For 2008, despite increase butter production,
an increased domestic demand for butter is likely to keep butter exports
at 2007 levels.

The 2002 WTO ruling capped Canada's exports of SMP at 44,953 MT limiting
the ability of the industry to reduce the structural surplus of SMP that
is inherent in an industry where the quota system is based on butterfat.
Total non-fat dry milk (skim milk powder (SMP)) exports in 2006 totaled
13,325 MT. In 2006, the Netherlands and Egypt were the two primary
destinations for Canadian exports of skim milk powder receiving 22% and
28% of Canadian skim milk powder exports, respectively. In 2007,
exports, based on seven months of export data are forecast to decline to
8 MT. This projected decline is due to an appreciation of the Canadian
dollar vis a vis the American dollar as well as the high price for SMP.
Increased domestic demand for skim milk powder in 2008 is expected to
keep export levels of skim milk powder at similar levels to those in
2007.

# 

# STOCKS

In order to ensure that supply management operates as it is designed and
the Canadian market has a constant supply of product, the Canadian Dairy
Commission (CDC) holds stocks of butter in storage throughout the year.
During the 2006/2007 dairy year (August-July), the CDC held 12,000 MT of
butter as target stocks. This is referred to as the normal butter
inventories. In addition, the CDC also purchases butter that is surplus
in order to balance the system. The CDC also purchases and sells stocks
of milk powders. The CDC beginning stocks for the 2006/2007 dairy year
for butter and skim milk powder were 19.1 TMT and 18.9 TMT respectively.
The CDC then purchased 22.2 TMT of butter and 26.2 TMT of skim milk
powder during the dairy year. In addition to the purchases of those
products, the CDC sold 29.8 TMT of butter and 34.5 TMT of skim milk
powder, resulting in ending stocks of 11.5 TMT of butter and 10.6 TMT of
skim milk powder on July 31, 2007. With the forecast increase in
production of butter in calendar year 2005 and 2006, Post expects butter
stocks held by the CDC in dairy year 2007/2008 will increase. With an
increase in production of skim milk powder forecast in calendar year
2008 but with a corresponding increase in consumption in 2008 due to
efforts by the CDC to find additional markets for the surplus skim milk
powder, Post is expecting that stocks held by the CDC will decline in
dairy year 2007/2008.

# DAIRY POLICY DEVELOPMENTS

## Article XXVIII Action

On February 7, 2007, Canadian Agriculture Minister, Chuck Strahl,
announced that Canada will be initiating negotiations under Article
XXVIII of the General Agreement on Tariffs and Trade (GATT) to restrict
imports of milk protein concentrates. GATT Article XXVIII provides a
mechanism for member countries to renegotiate their tariff concessions
in the WTO, allowing increased tariffs and setting new tariff rate
quotas. In exchange for withdrawing a concession, compensation must be
given to affected members. A formula for compensation is included in the
GATT provision and suggests a guarantee of access 10% above the current
highest level of imports for the tariff item in question. This trade
action was in response to Canadian dairy industry concerns about the
increasing use of these concentrates in making cheese and other dairy
products. This decision came after a year-long effort by a
government-facilitated technical working group, comprised of dairy
producers and processors, failed to reach a consensus on long-term
solutions to the challenges facing the industry. Minister Strahl had
previously stated that if a consensus could not be reached, the
government would take action on behalf of the industry. Canada has begun
negotiating compensation with affected parties. The Article XXVIII
action is not applicable to the United States as a signatory of NAFTA.
The measure is expected to negatively impact the future growth of MPC
imports from New Zealand and Europe.

Along with the Article XXVIII action, Canada's Minister of Agriculture
also announced his intention to launch a regulatory process to determine
compositional standards for cheese. Compositional standards regulations
which restrict the use of certain dairy ingredients is a way of closing
the door left open by excluding Canada's NAFTA partners from the TRQ
that will be created through the Article XXVIII provision.

## Cheese Compositional Standards

The proposed amendments to the Food and Drug Regulations and the Dairy
Products Regulations were published in Gazette Part 1 (the Canada
equivalent of the Federal Register) in mid-June. The sponsoring agency
was the Canadian Food Inspection Agency. Dairy products in Canada are
currently regulated under two different sets of regulations: The Food
and Drug Act and the Dairy Products Regulations. The stated purpose of
the amendments is to harmonize the two sets of regulations and set
compositional standards with the goal of setting a benchmark that would
ensure cheese identity and serve consumer interests. The proposed
amendments would change the current regulations in a way that would now
require a minimum amount of fluid milk be required in cheese produced
and/or sold in Canada. This is accomplished through a requirement that a
minimum percentage of the casein content of the cheese be derived from
milk, or from partly skimmed milk, skim milk or cream, rather than from
other milk products (such as dried, imported milk ingredients). This
percentages change depending on the cheese being produced. This is good
news for Canadian dairy farmers, as the standards will limit the amount
of domestic milk protein that will be displaced by imported milk
proteins. It is bad news for Canadian dairy processors. Dairy processors
will face higher production costs as these regulations limit the use of
cost-reducing technologies, such as technologies that make possible the
re-introduction of whey and the use of cheaper imported dairy
ingredients in cheese processing. The different ratios also change the
competitive advantages of making some cheese versus making others.
Cheese processors who make cheeses that will require more protein from
raw milk compared to those who make cheeses that require less will be at
a competitive disadvantage. Consumers will have cheese made primarily
from milk, but may see increases in the retail prices. Costs to
processors are estimated by CFIA to be approximately C\$72 million.
These cost estimates are disputed by processors who argue the costs will
be much greater. Gains to milk producers are increased revenues of
C\$187 million.

Also included in the regulation is an enforcement/compliance component
in the form of a cheese import license, which would ensure that imports
meet the Canadian standards. Cheese from the U.S. is mentioned
specifically. CFIA does not believe that cheese imports from the U.S.
will be impacted since current US compositional standards for cheese
require that it be made primarily from milk. Despite CFIA assurances,
these proposed regulations will likely impact U.S. dairy trade with
Canada for several reasons. First, if there is to be an
enforcement/compliance component, this will mean additional costs to
U.S. cheese exporters who will be required to provide some sort of legal
proof of compliance. Second, the implementation of this type of
regulation affects the terms of trade on dairy ingredients. Dairy
ingredients that are exported to Canada may be displaced because of a
reduced demand for these ingredients. In addition, these proposed
regulations, by restricting the amount of whey that may be re-introduced
in the cheese making process, could result in the further displacement
of US dairy ingredients, as a surplus of the domestic whey will be
created. Third, the United States has standards of identity of a select
number of cheeses while under the Canadian regulations, the cheeses
affected by the proposed regulations are nearly exhaustive.

The period for comments closed September 30^th^, 2007. Due to the level
of resistance to these amendments by Canada's trading partners and the
processing industry, the Canadian Food Inspection Agency now faces the
daunting task of addressing the issues raised by the responders. Two of
the most difficult issues that will need to be addressed will be the
"functionality" of using milk protein concentrates and re-introducing
whey to make low-fat cheese, and developing an enforcement/compliance
measure for something that cannot be tested. The provenance of a protein
is not something that can be tested for. The date by which these
regulations will be finalized has not been announced. After the
regulations are made public, there will likely be a year delay in
implementation to give time for the industry to comply.

# STATISTICAL TABLES

#  

## ![](media/image3.wmf){width="6.583333333333333in" height="3.4923611111111112in"}Table 1: Fluid Milk PSD

## Table 2: Cheese PSD

![](media/image4.wmf){width="6.583333333333333in"
height="3.3569444444444443in"}

## Table 3: Butter PSD

![](media/image5.wmf){width="6.833333333333333in"
height="3.202777777777778in"}

## Table 4: Nonfat Dry Milk (Skim Milk Powder) PSD

![](media/image6.wmf){width="6.833333333333333in"
height="3.484027777777778in"}

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listing of FAS' worldwide agricultural reporting.

# 

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