Free Trade Agreements and their Potential Implications for Agri-Food in Quebec and Canada Maurice Doyon in conjunction with Raymond Dupuis FCC Annual Public

Free Trade Agreementsand their Potential Implications

for Agri-Food in Quebec and Canada

Maurice Doyonin conjunction withRaymond Dupuis

FCC Annual Public MeetingAugust 20, 2014

Doyon-Dupuis - 2

Presentation Outline

1. Importance of foreign markets to Quebec’s agri-food industry

2. Overview of the Canada-Korea Free Trade Agreement (CKFTA)

3. Overview of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA)

4. Other negotiations currently under way (Japan, TPP, TTIP)

5. Specific issuesa. Porkb. Specialty cheesesc. Maple syrup

6. Conclusions

Importance of Foreign Markets to the Agri-Food Industry in Canada and

Quebec

3

4

Canada

• In 2012, Canada’s agri-food industry generated 12.5% of all jobs and 6.7% of Canada’s GDP.

• $103.5 billion in GDP

• 2.1 million jobs

• Canada’s export sales grew 8.1% in 2012 to a total of $43.6 billion, making the country the fifth largest exporter in the world.

• It is estimated that about half of the value of Canada’s primary farm production is exported, either as primary products or as processed food and beverages.

3,767 60,619

6,827

63,554

3,000

27,702

3,261

124,961

4,919

198,353 Agriculture and Fishing

Food, Beverage Process-ing and Tobacco

Wholesale Trade

Retail Trade

Restaurants and Drinks Outlets

$21.8BGDP

475,189jobs

Quebec

In 2012, the agri-food industry generated 12% of all jobs and 7% of GDP in Quebec.

* Jobs and direct Gross Domestic Product on 2012 basis; GDP in chained 2007 dollars.Sources: Statistics Canada, Institut de la statistique du Québec, MAPAQ, 2012. 5

Quebec’s Agri-Food Markets2013P

Local53%

Buy from RoC21%

Imports23%

Domestic Market$21.3B

Foreign Market$12.7B

Export

s46%

Sales to RoC54%

Quebec companies supply 53% of the Quebec market.

The foreign market accounts for 53% of all sales by Quebec

industry.

P: PreliminarySources: Statistics Canada, Institut de la statistique du Québec, MAPAQ and researcher compilations.

$11.3B $6.7B $6.0B

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7

United States63%

Mexico2%

Other TPP11%

European Union7%

BRICS7%

Others10%

Exports$6.0B

United States27%

Mexico1%

Other TPP9%

European Union30%

BRICS11%

Others22%

Imports$5.7B

Quebec’s Bio-Food Trade Partners2013

Note: BRICS (Brazil, Russia, India, China, South Africa); Transpacific Partnership (TPP), includes Australia, Brunei Darussalam, Canada, Chile, United States, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam.Source: Statistics Canada.

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Overview ofCKFTA

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Overview of CKFTA

• Agreement in principle signed March 11, 2014

• Enters into force in early 2015

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Overview of CKFTA

• Preferential access to a market of 50 million Korean consumers with GDP of $1.1 trillion (Canada: $1.8 trillion)

• Anticipated spinoffs: 32% increase in exports and $1.7 billion annual boost to the Canadian economy

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Overview of CKFTA

• Elimination of customs duties on 98% of South Korean tariff lines, which covers practically all imports from Canada

• Currently, Korea’s tariffs are on average three times higher than Canada’s (13.3% compared with 4.3%)

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Overview of CKFTA

Agricultural and agri-food products:

• Average customs duties of 52.7% imposed by Korea in 2012

• Elimination of duties on 86.8% of tariff lines

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Overview of CKFTA

• Quebec exported nearly $72.6 million in agri-food products to South Korea in 2013, nearly half of which were pork products.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -

20.0 40.0 60.0 80.0

100.0 120.0 140.0

24.1 46.5

67.4 59.2 61.3 52.5 42.4

91.8

48.3 33.5 22.0

25.3

29.0 28.9 29.2

27.4 32.3

43.1

33.0 39.1

Quebec’s Agri-Food Exports to South Korea ($M)

Pork products Other agri-food products

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AGRI-FOOD PRODUCTS

86.8% of tariff lines gradually set at 0% following entry into force of the Agreement;

Most dairy products, poultry and poultry products, ginseng and related products, rice and rice products, refined sugar and most tobacco products are not covered.

50.7% of tariff lines set at 0% at entry into force of the Agreement;36.3% of tariff lines set at 0% five years after entry into force of the Agreement;13% of tariff lines excluded, including over-quota supply-managed products, and no increase in in-quota tariff rates for supply-managed products.

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AGRI-FOOD PRODUCTS Pork

Before After Application

3% 0 % Immediate

18% 0 % Immediate 18% 0 % Immediate

25% 0 % 5-13 years 18% 0 % 11 years

86.8% of tariff lines graduallyset at 0% following entry into forceof the Agreement

Trade practice

<

<

<

<

Duty

Swine genetics

Pig fats and lard oils

Pure-bred swine

Fresh/chilled/frozen pork products

Pork offal

Certain fresh/chilled/frozen pork products will be subject to transitional safeguard measures

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AGRI-FOOD PRODUCTS Beef



72% 0 % 15 years


Trade practice

Duty

<

<

<

Beef fats and tallow

Bovine genetics

Fresh/chilled/frozen beef cuts and some processed beef products

Certain fresh/chilled/frozen beef products will be subject to transitional safeguard measures

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AGRI-FOOD PRODUCTS Grains and Oilseeds


3% 0 % Immediate

108,7 % 0 % Immediate 554,8% 0 % Immediate



Trade practice

Duty

Wheat and durum wheat

Rye

Oats

Soybeans for soy sauce and soy-cake

Canola

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PRODUITS AGROALIMENTAIRES Produits transformés, boissons alcoolisées et fruits




8% 0 % Immediate

Immediate/21 yrs

30 %

0%

45%

Trade practiceDuty


Maple syrup and maple sugar

Cranberry and blueberry juice

Ice wineFrozen french fries

Certain baked/pastry goods

Tariff rate quotas< 243% 0 %Natural honey 100 tonnes / 200 tonnes / unlimited

Frozen blueberries, cranberries, unlimited 0% 7 yrs

Sweetened and unsweetened dried cranberries, unlimited

10 yrs

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Overviewof CETA

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Overview of CETA

• Four years of negotiations at federal/provincial level

• Agreement in principle signed October 18, 2013

• Ratification process involving 10 Canadian provinces and 28 European nations

• Initially scheduled for entry into force after 24 months, i.e. early 2016, but may take till late 2016 or early 2017 according to negotiators

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Overview of CETA

• Preferential access to a market of 510 million European consumers

• With NAFTA, Quebec is now at the heart of a healthy market of nearly 1 billion people (980 million) accounting for half of global Gross Domestic Product (GDP)

• In 2012, EU imports = $2.3 trillion, Canada’s GDP = $1.8 trillion

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Overview of CETA

Trade in goods:

• According to the agreement in principle, 99% of EU tariff lines will be free of duty on Canadian products, including 100% of the 7,000 non-agricultural tariff lines and over 95% of the 1,900 agricultural tariff lines.

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Overview of CETA

• Bilateral Quebec–EU trade: $25 billion in 2013. Quebec trade deficit $11.2 billion!

• The EU is the top global importer of agri-food products, at over $130 billion in 2012.

• Quebec exported nearly $410 million in agri-food products to the EU in 2013, with tariffs averaging 14%.

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AGRI-FOOD PRODUCTS Grains


0 % Transition 7 yrs




Tariff rate quotas


Trade practice

Duty

$190/tonne currently 0% but not bound (ceiling)

Durum wheat

High-quality common wheat currently 0% but not bound (ceiling)

Rye and barley < $120/tonne

Oats < $114/tonne

Low- to medium-quality common wheat – 100,000 tonnes (including Canada's existing share of EU global quota of 38,853 tonnes)

< $122/tonne

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SEAFOOD


Live lobster 8 % 0 % Immediate Frozen lobster 6-16 % 0 % Immediate Frozen scallops 8 % 0 % Immediate Frozen shrimp 12 % 0 % Immediate Cooked and peeled shrimp, retail 20 % 0 % Immediate Fresh/chilled hake 15 % 0 % Immediate Dried/salted cod 13 % 0 % Immediate Frozen herring 15 % 0 % Immediate Frozen mackerel 20 % 0 % Immediate Fresh/chilled halibut 15 % 0 % Immediate Salmon 15 % 0 % Immediate Processed salmon 5.5 % 0 % Immediate Snow crab 8 % 0 % Immediate Fresh/chilled/frozen mussels 20 % 0 % Immediate

Dogfish 6 % 0 % Immediate

Trade practice

Duty

95.5% of tariff lines set at 0% at entry into force of the Agreement

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Cattle and Bison


0 %

To be negotiated

(3, 5, 7 yrs)

20 % 0 % (3, 5, 7 yrs)

Continued access 0 % Immediate

0 % Immediate

0 % Immediate

Trade practice

Tariff rate quotas

93.6% of tariff lines set at 0% at entryinto force of the Agreement

Beef and veal – in-quota 50,000 tonnes carcass weight (35,000 tonnes fresh and chilled and 15,000 tonnes frozen) (including Canada's share of hormone-free meat of 4,160 tonnes)

High-quality beef - in-quota 11,500 tonnes product weight

To be negotiated

Existing beef quota of EU

Processed beef (all Chapter 16 lines)

Bison – in-quota 3,000 tonnes carcass weight

Maple syrup 8%

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AGRI-FOOD PRODUCTS Pork


0 % To be negotiated (3, 5, 7 yrs)

0 % (3, 5, 7 yrs)

Trade practice

93.6% of tariff lines set at 0% at entryinto force of the Agreement

To be negotiated

Pork – in-quota 81,000 tonnes carcass weight,fresh, chilled and frozen) (including Canada's share of EU quota of 6,011 tonnes)

Pig fat and salted, dried, smoked and cured boneless pork, and all other processed pork products covered by Ch. 16 tariff lines, such as sausages

Tariff rate quotas

Tariff rate quotas

Dairy products – non-supply managed 0 % Immediate

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AGRI-FOOD PRODUCTS Dairy and Poultry


Excluded Excluded Immediate

Excluded Excluded Immediate



0 % phase-out

To be negotiated (3, 5, 7 yrs)

Trade practice

Poultry and eggs – over-quota

All dairy products, except cheese – in-quota

Specialty cheeses – in-quota 16,800 tonnes (including reallocation of 800 tonnes from existing WTO to new EU members)

Industrial-use cheese – in-quota 1,700 tonnes

Milk protein substances (like U.S.)

92% of tariff lines set at 0% at entryinto force and 7.1% of lines excluded (supply-managed)

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Other NegotiationsCurrently Under Way

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Other Negotiations Currently Under Way

Canada-Japan Economic Partnership Agreement (CJEPA)(initiated in 2012)

• Market of 127 million consumers with a GDP of $5 trillion

• Sizeable agri-food export market for Canada ($3.9 billion in 2013)

• Canada second largest supplier of pork ($700 million) and soybeans ($296 million) in 2013

• Negotiations conducted alongside those of the United States and look to be a prerequisite for the TPP

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Other Negotiations Currently Under Way

Transpacific Partnership (TPP)

• Canada joined the negotiations in October 2012

• Potential market of 765 million consumers and nearly 40% of global GDP

• Twelve countries included (Australia, Brunei Darussalam, Canada, Chile, United States, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam)

• Agreement expected by late 2014

Transatlantic Trade and Investment Partnership (TTIP)

• United States – European Union

Specific Issues

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Issues for PorkInternational Data on the Pork IndustryK MT (carcass w eight equivalent) 2010 2011 2012 2013Imports Japan 1,198 1,254 1,259 1,223 China 415 758 730 770 Mexico 687 594 706 783 Russia 916 971 1,045 868 Hong Kong 347 432 414 399 United States 390 364 364 399 South Korea 382 640 502 388 Canada 183 204 241 221 Ukraine 146 119 281 204 Australia 183 175 194 183 Philippines 159 145 138 172 Other 885 955 1,022 1,052 World total 5,891 6,611 6,896 6,662 Exports United States 1,915 2,354 2,441 2,264 European Union 1,705 2,150 2,165 2,232 Canada 1,159 1,197 1,243 1,246 Brazil 619 584 661 585 China 278 244 235 244 Chile 130 139 180 164 Mexico 78 86 95 111 Belarus 62 85 104 74 Australia 41 41 36 36 Vietnam 19 25 25 25 Norway 6 4 6 7 Other 19 38 69 31 World total 6,031 6,947 7,260 7,019 United States Department of Agriculture, Foreign Agricultural Service

Date create 18/04/2014 14:04:51

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Issues for Pork

South Korea

Relative Share of Korean Imports

United States

Germany

Chile

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Issues for Pork

South Korea

Ensure market penetration despite barriers

Increase efforts to recapture our market, particularly from the U.S. and Europe, which have displaced us primarily due to their free trade agreements

South Korea has resumed production following foot and mouth disease (volume)

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Issues for Pork

Europe

Ensure market penetration despite barriers

Increase efforts over the next 24 months before TTIP (US-EU)

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Issues with CETA for Maple Syrup

Two producer nations worldwide; Canada will have an 8% edge over the U.S.

In a context of growth in the U.S. maple sector (150% since 2000), this is very good news.

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 20160

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

U.S. maple syrup production (000 lb)

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Issues for Maple Syrup

Our companies may be able to use this advantage to increase development and penetration of European markets ($42 million last year).

The U.S. is a marginal player but is growing rapidly (EU 1,060% and 460% worldwide).

Value of U.S. exports to the EU (US $000 ) Value of U.S. exports (US $000 )

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Issues for the Dairy Sector

Quota of 16,000 tonnes of fine cheeses, likely over five or seven years

Quota of 1,700 tonnes of industrial-use cheeses (5-7 years)

Free access to European milk protein substances (same as for U.S.) (5-7 years)

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Cheese

The fine cheese quota is particularly distressing, especially for Quebec, which will be the one most affected (80% of our goat’s milk is made into fine cheese).

16,000 tonnes is 4% of our overall cheese production, but 32% of the fine cheese volume. Quebec produces about 50% of Canada’s cheese and 60% of its fine cheese.

Until now, our quota was 20,400 tonnes and Europe held 14,000 tonnes of that quota. The 17,700-tonne increase represents about 0.25% of European cheese production.

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Cheese

A critical variable is how the quota is allocated.

We know that cheese imported under the new quotas will be sold at the domestic price, generating significant rent for quota holders without impacting the price for the consumer.

We know that holders must use 100% of their import quota (rent) in order to keep it.

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Cheese

We know that about 80 entities hold import quotas, including distributors such as Loblaws and processors like Agropur and Saputo.

The increase in quota over seven years will be equal to or greater than the domestic demand (but a loss in any case).

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Cheese

If the new quota is allocated on a pro-rated basis

We will be making one group richer based on past history rather than on merit or competition.

No justification, in our view, for distributors or individuals.

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Cheese

If the new quota is allocated on a pro-rated basis

Agropur and Saputo: may be seen as compensation for fine cheese producers. Some of the rent will go back to Agropur’s producer members (not the case for Saputo). Historically, Agropur has used its quota to develop the domestic market.

Overall, milk and fine cheese producers will not benefit at all.

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Cheese

If the new quota is allocated to fine cheese producers

CILQ position adjusted based on size

Reinforces promotion and identification (“Aliments du Québec” label), agricultural tourism, harmonization of standards, consolidation program

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Cheese

Why allocate the import quotas rather than auction them?

Take the money obtained and apply it to development projects for fine cheese producers to allow them to compete, grow the domestic market and explore exports

If we do not recover the volumes, Quebec’s dairy producers are not penalized.

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Cheese

What does the 16,000 kg rent for imported fine cheeses mean?

Producer price differential basis

1 hectolitre of milk in Quebec: $80 or $8 per 1 kg of cheese 1 hectolitre of milk in France: $55 or $5.50 per 1 kg of cheese

A difference of $2.50 per kg of cheese, or 45%

If we use discounted dollars over a five-year period and deduct import costs, we get a value of $145 million or $29 million per year.

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Cheese

Consumer price differential basis

Basket of 14 cheeses, comparing Quebec City and Grenoble Average of $37/kg in Quebec City versus $18/kg in Grenoble

Difference of $19/kg of cheese or 110%

If we use discounted dollars over a five-year period and deduct import costs, we get a value of $1.232 billion over five years or $246 million per year.

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Cheese

Examples of development projects

Explore niche markets in New York and Boston. Murray’s Cheese NYC sells cheese for $48 to $72/kg. The price of milk in Quebec is $8/kg.

Saxelby NYC sells cheese for $89/kg.

We exported over 6,000 tonnes of specialty cheese to the U.S. in 2012.

Bring cheese producers together to obtain volumes (Distribière’s microbrewery co-op model) and hire dealers to develop the market.

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Conclusion

Quebec’s agri-food industry is highly dependent on foreign markets and mainly exports processed products.

Bilateral and multilateral agreements are critical to our economy and our bio-food sector.

However, they affect the way we do business, they disrupt the status quo and upset our comfort level.

The issue is to take advantage, see the glass as half full rather than half empty.

Conclusion

For the sectors that theoretically come out ahead: ensure that the potential benefits materialize by making sure we actually access the markets and by working harder to develop markets.

For supply-managed enterprises: strengthen the important parts, take the opportunity to modernize the system, change the threats (which are significant) into opportunities.

There are choices and decisions to make and attitudes to adopt. This is the difference between success and failure.

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Documents

Free Trade Agreements and their Potential Implications for Agri-Food in Quebec and Canada Maurice Doyon in conjunction with Raymond Dupuis FCC Annual Public