Non-quota dairy farmers face uphill battle to survive

by JOE CALLAHAN & ROBERT WASHBURN

Already high quota prices rose to dizzying new levels as farmers who could afford to do so bought quota to cover all of their production. Farmers who couldn't afford to buy sold their cows or took a disappointingly low price for the surplus sold on world markets through traditional disposal plans.

Ironically, the people who had the least to do with the "subsidies" are the ones taking the biggest hit. Short of some kind of reprieve, the 82 "non-quota" producers who were shipping all of their production for export were to be shut down April 1.

The December ruling held that milk produced and sold for export outside Canada's supply-management system was in violation of trade agreements because the exports were deemed to be subsidized by milk produced for the domestic market and sold at a higher price. However, non-quota holders argue they were not part of the domestic milk market and therefore not subsidized. Their only connection to the supply-managed industry is that they were inspected by Dairy Farmers of Ontario (DFO) inspectors, as required by law, and also took part in the provincial transportation scheme.

Export milk and supply-managed milk are two different industries, insists Simcoe County dairy farmer Chris Birch, president of Georgian Bay Milk Company, which ships raw milk to plants in the United States under contract.

But the rest of the industry doesn't see it that way, and neither does Provincial Minister of Agriculture Helen Johns. "Non-quota holders are going to have a very difficult time," she says. "Some families are going to face a terribly difficult financial situation. I am concerned about that." But she won't stop DFO from re-regulating the industry and bringing these farmers back into the system.

Meanwhile, non-quota dairy farmers and export exchange brokers are not sitting back. They are mounting a challenge, which could keep them in business and draw a critical eye upon the supply management system.

While the appellate board's decision was aimed more at farmers shipping milk above their quota, it will be the farmers who contract exclusively for export markets that will be most dramatically affected. After March 31, they have no place to sell their milk, leaving many facing economic ruin. The alternative is to buy a minimum of five kilograms of quota, as per DFO regulations which come into effect April 1. It's a costly solution. A kilogram of quota is roughly the production from one cow. An average herd in Ontario is 55 cows.

Moreover, the timing for buying into dairy quota couldn't be worse, says Craig Martin, a research associate at the University of Guelph. He studies marketing, policy and farm viability in the dairy industry. "Some of these guys are going to have to shut down," he says. Their alternative would be to go to the United States or Australia where pastures are a little greener for those looking to break into dairy farming, he said.

Purchasing enough quota to be viable would require an investment of $2 million for a sustainable operation, Martin notes. Currently, the price of quota has skyrocketed to about $27,000 per kilogram of butterfat from $20,000 a year ago. "There's really no way to break in," he says. "In fact, quota is overpriced at the moment."

Facing bankruptcy

But the path has been thorny, and that has left him and his wife Luanne frustrated. The Proseks have been trying to start a dairy farm since the early 1980s. Over the years he has been mortgaged to the hilt, held off-farms jobs and even run a trucking business to raise enough money to get his dairy operation off the ground. The export market offered the best opportunity since it allowed him to be a dairy farmer while he saved up. But now Prosek is facing bankruptcy.

To add to all the hardship, Prosek says his barn was broken into sometime overnight on Feb. 6 and his milk tank tampered with. He blames quota holders who resent what he is doing, as if he is undermining the supply-management system.

Detective Paul Shaughnessy, a rural/agriculture specialist with the Ontario Provincial Police, is overseeing the case. This is the third time in two years there has been an alleged case of milk tampering across the province. He is classifying the incident as mischief. While he is aware of the strong feelings between quota and non-quota dairy farmers, he says it is unclear whether there was an intent to sabotage Prosek.

At a recent annual meeting of dairy farmers from across the Clarington region, Prosek says he was ignored when he attended. Some farmers made disparaging comments about non-quota farmers and Prosek clearly felt discriminated against.

But from those who support the supply management system, there is some sympathy. Mark Donnan, who runs a 240-cow dairy operation in Hastings County, north of Belleville, says he feels badly for people like Prosek who are just trying to get into the business. However, he believes strongly in supply management and is convinced there isn't room for both supply-managed farmers and export production. "If we are continually going to be challenged on export milk, sooner or later (other nations) will say that we have to have one or the other. We must work within the boundaries of supply management as they are set out."

Donnan argues that farmers who had quota and sold it to ship milk exclusively to the export market made a business decision with which they now have to live. That viewpoint is disputed by Chris Birch, who milks 50 cows with his wife Louise and daughter Amanda, 21, at Hillsdale in Simcoe County.

Birch has been shipping milk to the United States exclusively for two and a half years through Georgian Bay Milk Producers and has mostly kept a low profile. His farm is better known for its show cows under the prefix Valevu, producing seven All-American or All-Canadian in the last seven years. One cow was second in her class at the Royal Agricultural Winter Fair a couple of years ago.

Their success is proof that dairymen are made, not born. The Birches started into the dairy business with two Jerseys in 1986 and grew from there, When the minimum quota holding requirement was removed several years ago, they sold their quota and paid down debt.

It's not fair to change the rules again and it is not necessary, says Birch, who says he has a letter from Federal Agriculture Minister Lyle Vanclief that indicates the federal government's willingness to help set up another system that does comply with WTO rules. On the advice of his lawyer, Birch would not allow the letter to be copied.

Despite opposition from within the supply management system, Danny Prosek is not ready just to sit back and accept the situation. "... keep this low key," he says he was told by his associates. "But I am not going to let this happen to me. I don't think it should be like this."

For Prosek, the situation mirrors his grandfather's experience in Czechoslovakia during the communist takeover. "He left Czechoslovakia when the government started to take over the farms. He came to Canada to get away from it. I think that's what's happening (now)."

Although Prosek was outspoken while at his barn in Northumberland, in the boardroom of Dairy Farmers of Ontario (DFO) on Feb. 5, 2003 he refused to speak to the board because he prefers to act independently when asked by Bill Denby, the owner of International Dairy Direct, a farmer and milk broker. Denby, who says he has worked with as many as 1,800 farmers selling milk on the now-defunct export market exchange, got a hearing with DFO to appeal its decision not to honour an eight-million-litre export contract in light of the Dec. 20 WTO decision.

Denby's appeal was turned down the next day and the matter was referred to a public tribunal hearing scheduled for March 11 at Ontario Ministry of Agriculture offices in Guelph.

But this is only the beginning Denby says. In a Feb. 25 letter to DFO, Denby requested another more broad-ranging hearing, challenging the proposed re-regulation being put forward by DFO and alleging it is based on misinformation and misrepresentation specifically as it relates to the consultation process.

In the toughly worded letter, he claimed that "time after time, DFAIT (the Department of Foreign Affairs and International Trade) and AAFC (Agriculture and Agri-Food Canada) have stated clearly that non-quota holders can be allowed to continue to supply milk to domestic processors."

Meanwhile U.S. producers can sell their milk to Canadian processors under the Department of Foreign Affairs and International Trade Import for Re-export Program. Processors can then export the final product to the United States.

"You can import raw milk and process it into food or processed product using dairy ingredients or dairy products and we export the total thing," says Pierre Doyle, assistant director of the dairy section for Agriculture and Agri-Food Canada. "Everything that is imported has to be exported."

Standing behind DFO

Non-quota holders will be paid the over-quota price of 9.8 cents per litre for that milk. A recent six-month average price for quota holders is 62 cents per litre. Non-quota milk sold on the export exchange averaged roughly 30 cents per litre.

The Ontario Farm Products Marketing Commission, the body reporting to the Ontario government, has accepted DFO's plan. But Rod Stork, chair of the commission, is quick to point out that this is not the commission's solution and the matter is still under consideration.

Still, the commission is standing behind DFO's proposal. In an unsigned fax to Denby, dated Feb. 27, 2003, Stork says, "...any effort to maintain a domestic and export stream of milk while faced with the very real threat of retaliation by the complainants (WTO) would not be an appropriate course of action at this time."

Denby wants the commission to permit a marketing system outside DFO's authority and he's putting his money where his mouth is. In February he bought out his former partner Jim Skinner's half of the business. On Feb. 26, he says he paid a $50,000 retainer to the law firm Torys LLP, based in Toronto and New York, to represent International Dairy Direct.

"DFO is moving ahead to try to address the issue, but whether we've solved the problem or not is another story," Stork said. "We see no reason why the commission would be in any position to take away the authority for DFO to re-regulate."

Gordon Coukell, the DFO board chair, confirmed his intention to act now. "We've been given the authority to market milk in the province," he said. "This is our solution."

In Quebec, farmers have to hold a minimum of 0.1 kilogram and reach five kilograms over two years, said Jean Vigneault, director of information for the Fédération des producteurs de lait du Québec. This allows farmers to take advantage of varying quota prices over a two-year period, unlike the current Ontario plan.

While DFO's solution may work well for quota holders, those who solely export still face a major hurdle. How can a mechanism be developed for exporting their milk that complies with WTO guidelines and avoids a minimum $70 million retaliation penalty for non-compliance?

Both federal minister Lyle Vanclief and Johns have said clearly that the Dec. 20 WTO ruling did not directly specify non-quota holders. "They did not rule on the exclusively non-quota holders," said Vanclief. "I said all along that I don't discourage the exporting of dairy products, but we have to do it within WTO rules. We have said very clearly that this government is one thousand per cent behind supply management."

But, in the end, Vanclief concluded, producers have little choice. "(Non-quota holders) are going to have to quit producing milk or buy quota."

Big boy on the block

His appeal states that Georgian Bay Milk Company is aggrieved by the Feb. 25 letter signed by Coukell ".... in which DFO has decided to change its regulations and eliminate unsubsidized exports from Georgian Bay and other producers who do not participate in the domestic market."

On Feb 12 Birch submitted to Stork and the commission a proposal entitled Program Unsubsidized Export Milk. Copies were circulated to the respective ministers at both levels of government and key staff.

"DFO has been the big boy on the block for 34 or 35 years and I don't think they've ever really been challenged on anything and lost," said Birch. "We (export milk marketers) are in fact a separate industry. The WTO decision just clarified that."

But there is one obstacle in the road. According to Tom Kane, president of the Ontario Dairy Council, the only thing stopping a parallel system of milk marketing is DFO and its authority over the milk supply in Ontario. "This is a political legislative question. We can't have parallel systems in this country because of supply management," said Kane. "We have been trying to develop a WTO-compliant system. Whether that requires political lobbying, whether that requires legislative changes remains to be seen."

The political will doesn't exist in Ontario. "The (WTO) decision was silent on export and non-quota holders," says Johns. " I can't stop DFO from moving forward. They have the legal ability to do what they want. Supply management has allowed farmers to have a quality of life with their families, get their kids to university and those kinds of things. As minister of agriculture, I have no intention of revisiting the supply management system in Ontario."

However, not all doors are closed, according to Johns. "We would certainly hear a proposal (about financial assistance for non-quota holders) that makes sense," she said.

That's not enough for Danny Prosek. To him, this is about more than financial aid. "We are talking about our freedom," he said. "We don't want to lose our freedom."

Freedom for Prosek may be one casualty. Another, casualty, according to Denby, would be a missed business opportunity for many Ontario milk producers. A separate export dairy system would be good for Ontario agriculture, both economically and environmentally, he says, noting that there is a huge, unmet demand for raw milk in the northeastern United States. Until the WTP ruling in December, Denby was brokering between seven million and 15 million litres per month. Depending on the type of contract, farmers and processors shared a fee of 50 cents each per hectolitre or farmers alone paid Denby's company 25 cents per hectolitre.

Canadian farmers producing for the northeastern United States market would get a price at least as high a price as they get here in Ontario. In time, Denby predicts, this market could rival the domestic market in size, taking the pressure off incredibly high quota prices and also producing a demand for forages and other feeds.

Birch reiterates that he doesn't like making his business public and that the issue isn't "farmer against farmer. "I can't get a reasonable explanation for their (DFO) position," Birch says. The federal government should be making decisions about trade policy, not Dairy Farmers of Ontario, he says. "It's not their mandate." BF