Required Report - public distribution

**Date:** 6/6/2005

**GAIN Report Number:** CA5033

CA5033

**Canada**

**Dairy and Products**

**Semi-Annual Report**

**2005**

**Approved by:**

![](media/image1.wmf)Gary C. Groves

U.S. Embassy

**Prepared by:**

Christina Patterson

**Report Highlights:**

Canadian fluid milk production for calendar year 2005 is forecast to
decline to 7.78 million metric tons. Butter and nonfat dry milk (skim
milk powder) production are forecast to decline from 2004 levels.
Canadian cheese production is forecast to increase slightly in 2005. The
development of alternative markets and adjustments in the composition of
milk on the farm level are helping to reduce the surplus of skim milk
powder.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Ottawa \[CA1\]

\[CA\]

Table of Contents

[**DAIRY OUTLOOK 2005 3**](#dairy-outlook-2005)

[Fluid Milk 3](#fluid-milk)

[Cheese 3](#cheese)

[Butter 3](#butter)

[Nonfat Dry Milk (Skim Milk Powder)
3](#nonfat-dry-milk-skim-milk-powder)

[STATISTICAL TABLES 4](#statistical-tables)

[Table 1: Fluid Milk PSD 4](#table-1-fluid-milk-psd)

[Table 2: Cheese PSD 5](#table-2-cheese-psd)

[Table 3: Butter PSD 6](#table-3-butter-psd)

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

[POLICY DEVELOPMENT AND INDUSTRY NEWS
7](#policy-development-and-industry-news)

[Dairy Farmers of Canada Get Price Increase
7](#dairy-farmers-of-canada-get-price-increase)

[CITT Ruling Favors Les Produits Laitiers Advidia Inc.
7](#citt-ruling-favors-les-produits-laitiers-advidia-inc.)

[Dairy Farmers of Canada Push GATT Article XXVIII
8](#dairy-farmers-of-canada-push-gatt-article-xxviii)

[Find FAS on the World Wide Web: 9](#find-fas-on-the-world-wide-web)

[Recent Reports from FAS/Ottawa: 9](#recent-reports-from-fasottawa)

# DAIRY OUTLOOK 2005

## Fluid Milk

Canadian fluid milk production for calendar year 2005 is forecast to
decline to 7.78 million metric tons (MMT) from 7.89 MMT in 2004, despite
the increase in the number of dairy cows in milk production. Fluid milk
imports are forecast to increase for 2005, as imports of milk and cream
through the Import for Re-Export Program (IREP) are forecast to
increase. Consumption of fluid milk increased slightly in 2004. The
trend towards the intake of lower fat milk products resulted in an
increase in skim milk and 1% milk consumption, while consumption of
standard milk (3.25%) and 2% milk declined in 2004. Despite its decline
in consumption, 2% milk constituted nearly half of all milk consumed.
Increased chocolate milk consumption continued in 2004. An increase in
consumption of fluid milk, especially in the lower fat milks, is
forecast to continue in 2005, as the benefits of including low-fat milk
products in consumers' diets continues to be promoted. Despite the
trends towards the consumption of lower fat products, the overall
consumption of cream increased in 2004. Coffee consumption in Canada
continues to increase, which is one of the reasons for the increase in
cream consumption. Cream consumption is forecast to continue to increase
in 2005. Fluid milk exports are forecast to remain stable in 2005.

## Cheese

Canadian cheese production is forecast to increase to 347,000 MT in
2005, from 345,000 MT in 2004. Based on eight months of available data
for dairy year 2004/2005, total production of variety and cheddar cheese
increased 6.1% from the 2003/2004 dairy year. Imports of cheese are
forecast to remain stable at 24,000 MT. Imports of cheese through IREP
are forecast to remain consistent with 2004 and 2003 levels, which were
between 3,000 and 4,000 MT. Canadian cheese exports are forecast to
decline to 9,000 MT, as Canadian exports become limited by the WTO
appellate body ruling in 2002. Slightly more than half of Canadian
cheese exports are destined for the United States. Consumption of cheese
in Canada is forecast to increase from 2004, as consumption and demand
for variety cheeses remains strong. The increase in consumption of
variety cheeses more than offset the slight decline in cheddar
consumption in 2004. In addition, the consumption of processed cheese in
2004 increased, again helping to offset the slight decline in cheddar
consumption. As the consumption of cheese continues to remain strong,
there is the expectation that cheddar consumption should rebound.

## Butter

Canadian butter production for calendar year 2005 is forecast to decline
slightly to 85,000 metric tons (MT) on lower forecast milk production.
In addition, based on eight months of data for dairy year 2004/2005,
butter production has declined 5.6 percent from the same period in the
2003/2004 dairy year. Butter imports for 2005 are forecast to remain
stable as IREP imports of butter are forecast to remain strong. New
Zealand will continue to be the primary source of Canadian butter
imports for 2005, but Uruguay is increasing its exports of butter to
Canada. With the decline in production and stable imports, Canadian
butter supplies are forecast to decline to 121,000 MT in 2005 from
127,000 MT in 2004. Total butter exports are made up 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
for 2005 are forecast to increase slightly from 2004, as exports of
dairy spreads, and fats and oils derived from milk are forecast to
continue to increase in 2005. The increase in exports of dairy spreads,
and fats and oils derived from milk will more than offset the forecast
continued decline in butter exports. The United States will continue to
be the primary export market for total butter exports in 2005. Butter
consumption will continue to increase in 2005, as it did in 2004, as
consumers continue to switch from margarine to butter.

## Nonfat Dry Milk (Skim Milk Powder)

Nonfat dry milk (skim milk powder) production for 2005 is forecast to
decline to 85,000 MT as result of a decline in fluid milk production. In
addition, changes in milk composition are being made at the farm level,
producing milk with more fat and less of other solids in order to reduce
the inventory of skim milk powder (SMP). Imports of SMP are forecast to
increase slightly in 2005 from 2004. As with other dairy products, there
is an increasing trend in the IREP imports of SMP and this is forecast
to continue to increase and contribute to the slight increase in SMP
imports for 2005. High carry-in stocks in 2005 are contributing to the
increase in the total supply of SMP in 2005 and will offset the decline
in SMP production. The loss of the export market for SMP as a result of
the WTO ruling in 2002 is forcing readjustments to the dairy system. In
order to help reduce the structural surplus of skim milk powder, which
is purchased and stored by the Canadian Dairy Commission (CDC),
alternative markets for SMP are being sought. According to the CDC, new
markets are being developed to replace the traditional export markets
and this includes maximizing export categories such as blends and
exploring the possibility of making different ingredients such as milk
protein concentrates. Large quantities of SMP are also being sold to the
livestock industry to be used in animal feed, especially for use in the
veal calf industry. Carry-out stocks are forecast to decline in 2005 to
32,000 MT as the structural surplus moderately declines.

# STATISTICAL TABLES

## Table 1: Fluid Milk PSD

![](media/image2.wmf)

## Table 2: Cheese PSD

![](media/image3.wmf)

## Table 3: Butter PSD

![](media/image4.wmf)

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

![](media/image5.wmf)

# POLICY DEVELOPMENT AND INDUSTRY NEWS

## Dairy Farmers of Canada Get Price Increase

On December 9, 2004, the Canadian Dairy Commission (CDC) announced that
effective February 1, 2005, the price of industrial milk would increase
by 5.2 percent. Included in the new support prices was an add-on of 1.66
cents/liter for a total effective increase of 7.8 percent. The CDC
stated that the price increase was necessary to cover the cost of
production and to assist producers in dealing with the financial
consequences of the BSE crisis. The Canadian Restaurant and Foodservices
Association (CRFA) immediately denounced the price increase, disagreeing
with the CDC's justification for increasing the price to offset the
financial hardships caused by BSE. In addition, the CRFA deemed the
price increases as unnecessary, given that dairy prices have risen by
38% since 1994, while the cost of production has decreased by 5.1%.
Dairy farmers are eligible for the various BSE programs announced by the
federal government and the price increase to offset their losses was
seen by the CRFA as double-billing the taxpayers for BSE compensation.
The Dairy Farmers of Canada (DFC) was pleased with the announcement,
stating that the increase in price would help the average farmer with
the mounting losses as a result of the closed border and the lower cull
cow prices.

## CITT Ruling Favors Les Produits Laitiers Advidia Inc.

In a recent ruling, the Canadian International Trade Tribunal (CITT)
found in favour of the Les Produits Laitiers Advidia Inc. (Advidia) and
against the Dairy Farmers of Canada (DFC) and the Commissioner of the
Canada Customs and Revenue Agency (CCRA). The CITT was ruling on an
appeal by Advidia of a decision of the CCRA regarding the tariff
classification of PROMILK 872 B, a dairy ingredient with low lactose
content, which is used to make sugar free confectionary products and
products for those who are lactose intolerant, thereby replacing the
need for traditional dairy ingredients. PROMILK 872 B is manufactured in
Switzerland and was imported into Canada by Advidia in June of 2003. The
issue of the appeal was whether PROMILK should be classified in Chapter
4, as it had been by the CCRA, and thereby face a TRQ with "over access
commitment" high tariff duties or in Chapter 35, as argued by Advidia,
and face a low tariff duty upon entry to Canada. During the appeal,
Advidia argued that PROMILK should be classified under Chapter 35,
rather than Chapter 4 for several reasons. First, Advidia claimed that
the CCRA's handling of the importation of their product was unfair and
that onus should not be on them to prove that the classification of
their product was correct, but rather on the CCRA to prove it was not.
In addition, Advidia argued that the classification depended on whether
the product at issue was a milk protein isolate (MPI) or a milk protein
concentrate (MPC) and that the CCRA had an administrative policy to
classify MPIs in Chapter 35 and MPCs in Chapter 4. Advidia also
contended that PROMILK 872 B was covered by both Chapters 4 and 35, but
that the headings of Chapter 35 provided a more specific description and
hence the product at issue should be classified there. The DFC and CCRA
both disagreed with the arguments put forward by Advidia. The CITT
rejected the argument by the DFC that PROMILK is not specifically
covered by Chapter 35 and Chapter 4 was the most appropriate
classification. The Tribunal also found that is was not necessary to
enter into the debate on whether PROMILK was a MPI or MPC and that
Advidia had proven PROMILK was within the meaning of Chapter 35. Based
on all the evidence and arguments of all the groups involved in the
case, the CITT determined that PROMILK 872 B should be classified under
Chapter 35. The findings of the case means that PROMILK can be imported
into Canada with a minimal tariff applied to it.

## Dairy Farmers of Canada Push GATT Article XXVIII

In response to the increasing imports of dairy ingredients that are
replacing Canadian milk and cream in Canadian cheese, yogurt and ice
cream, the Dairy Farmers of Canada (DFC) have been relentlessly lobbying
the Government of Canada to formally request Article XXVIII negotiations
under the World Trade Organization (WTO). One of the three pillars of
supply management is predictability of imports and according the DFC, it
is essential that the pillar be maintained in order for the supply
management system to function properly. According to the DCF, the
unpredictable level of dairy replacement ingredients that enter the
Canadian market at low to zero tariffs act to displace Canadian dairy
products which compromises the import pillar of supply management.
Therefore, the DFC is advocating that the Government of Canada pursue an
Article XXVIII case to introduce tariff-rate quotas (TRQ) on those
products which are coming in at low to zero tariffs. The DFC is claiming
that the absence of effective import controls have cost Canadian dairy
farmers \$175 million in 2004 and this amount is growing by \$2 million
a month. The Government of Canada has indicated that it will not pursue
an Article XXVIII, but the powerful DFC lobby will continue its pressure
to force the government's hand. This, in addition to the current ruling
by the CITT, has strengthened the resolve of the DFC to pursue its
Article XXVIII initiative to restrict dairy imports with higher tariffs
or new TRQs.

# Find FAS on the World Wide Web: 

Visit our headquarters' home page at
[http://www.fas.usda.gov](http://www.fas.usda.gov/) for a complete
listing of FAS' worldwide agricultural reporting.

# 

# Recent Reports from FAS/Ottawa: 

  ----------------- ---------------------------------------- -------------
  Report Number     Title of Report                          Date

  CA5035            This Week in Canadian Agriculture, Issue 5/13/2005
                    18                                       

  CA5032            This Week in Canadian Agriculture, Issue 5/6/2005
                    17                                       

  CA5031            Dairy Farmers and Article XXVIII         4/29/2005

  CA5030            This Week in Canadian Agriculture, Issue 4/29/2005
                    16                                       

  CA5029            Quarterly Grain and Feed Update          4/25/2005

  CA5028            This Week in Canadian Agriculture, Issue 4/22/2005
                    15                                       

  CA5027            This Week in Canadian Agriculture, Issue 4/15/2005
                    14                                       
  ----------------- ---------------------------------------- -------------

VISIT OUR WEBSITE: The FAS/Ottawa website is now accessible through the
U.S. Embassy homepage. To view the website, log onto
[http://www.usembassycanada.gov](http://www.usembassycanada.gov/); click
on Embassy Ottawa offices, then Foreign Agricultural Service. The
FAS/Ottawa office can be reached via e-mail at: <agottawa@usda.gov>