Canada’s biggest cheese and yogurt makers look poised to profit from the Trans-Pacific Partnership, though even the companies say details are so scarce they simply don’t know exactly what greater foreign market access will mean to their bottom lines.
Bertrand Montel, a Montreal-based agriculture consultant, says because Canada’s so-called “big three” — Saputo Inc., Agropur and Parmalat — have operations in the United States they may be able to negotiate better deals on dairy ingredients with suppliers on either side of the border.
“By having better access to cheaper imports at the margin, it will decrease their cost of production, and this will have an effect on the negotiating power and negotiating price with farmers,” Montel said.
Details of the TPP released Monday include allotting 3.25 per cent of annual production to foreign dairy products imported to Canada, and easing some tariffs on exports to the U.S.
The deal will give $4.3 billion in federal government compensation to Canadian dairy and poultry farmers and processors over the next 15 years: $2.4 billion towards income, $1.5 billion for protection against a decrease in quota value, $450 million for processor modernization and $15 million for marketing.
Montel said opening up the international market should also help provide incentives for processors to invest in modernizing their facilities to become more competitive.
Gay Lea Foods Co-operative Ltd., the largest farmer-owned dairy co-op in Ontario and the second-largest in Canada, for years has advocated for more access to foreign markets, believing it can be competitive on the world stage.
“Being farmer-owned we are strong supporters of supply management, but we also see that there’s opportunity to be able to have Canada participate in a global dairy market place,” said president Michael Barrett.
He said Gay Lea has one of the largest skim milk drying facilities in Canada, so a lot of the product is exported globally through the Canadian Dairy Commission in the form of dairy powder.
Although Gay Lea does not regularly use foreign dairy products in its processing, it has occasionally imported whey powder, for example, when the ingredient was locally unavailable.
“We’re not like the Big Three that utilize foreign imports as a matter of course in their business,” said Barrett. “They would use it as a day-to-day part of their recipe and strategy. We do not.”
Agropur is also a co-op and advocates the need to maintain a strong supply management system to protect against an increased flow of cheaper milk products from the U.S., though the Longueuil, Que.-based company does itself have facilities south of the border.
Some analysts say Montreal-based Saputo is well-positioned for these potential changes of a globalized markets, with existing customer relationships and extensive processing in TPP countries including the U.S. and Australia.
“(Saputo) is very successful in different structural models and its production configuration is well-positioned for north-south movement of product,” RBC Dominion Securities Inc. analyst Irene Nattel wrote in a research note.
Michael Van Aelst, an analyst at TD Securities, said that although Saputo should be able to profit from its foreign operations, it still runs the risk of losing about $26 million, assuming new imports do not push domestic industry pricing lower.
The major Canadian dairy processors say they were not consulted throughout the TPP negotiations, and as such they say they simply don’t know the details of what these changes will mean to their business.
Kraft, Agropur, Danone and Saputo declined requests to comment on the TPP because of the lack of information available.
For instance, nobody knows whether that extra 3.25 per cent for the foreign market will be for butter, raw milk or finished goods.
“A lot of people are asking how this is going to impact the business, and I really hate to say it but I don’t know,” said Barrett. “We’re operating in a vacuum a little bit here.”
As much as analysts and companies can plan for changes to Canada’s dairy imports and exports, more uncertainty stems from the fact that it will be the new Parliament after the Oct. 19 federal elections that will debate the TPP. The approval process across the 12 member nations is anticipated to take two years, followed by a five-year implementation period if ratified.
Source: Financial Post