4. Provincial Milk Marketing Boards

2.16 In each province a milk marketing board exists. The provincial milk marketing boards operate within a framework established under federal and provincial legislation. The CDC Act defines a board as ¹⁰ :

2.17 The provincial milk marketing boards have all been given general authority by the federal and provincial governments in respect of the issuance and administration of quota, the pooling of returns, pricing, producer records keeping and reporting, inspection, and agreements to cooperate with other provinces and the CDC.

2.18 The membership of the provincial milk marketing boards is made up mostly or exclusively of dairy producers. ¹¹

2.19 It is prohibited for milk producers to sell any milk individually, without using the provincial milk marketing boards as an intermediary.

2.20 With the exception of 15 producers in Ontario, a producer must have a minimum quota holding to market milk on the domestic or international market.

5. The NMMP

2.21 At a national level, the provincial marketing boards cooperate under the National Milk Marketing Plan (NMMP). The NMMP is signed by the boards for nine ¹² of the ten provinces, some provincial government representatives ¹³ , and the CDC.

2.22 The text of the NMMP states that the "[p]lan is a federal-provincial agreement in respect of the establishment of a National Milk Marketing Plan for the purpose of regulating the marketing of milk and cream products relating to Canadian domestic requirements and for any additional industrial milk requirements in Canada." ¹⁴

2.23 The NMMP sets out the structure for the calculation of an annual national production target for industrial milk - the national Market Sharing Quota (MSQ).

2.24 The NMMP is supplemented by:

2.25 The Comprehensive Agreement on Special Class Pooling is an Agreement among the authorities of nine provinces and provincial producer boards that are signatories of the NMMP in respect of pooling of revenues from sales of milk components in special classes of milk used to service domestic and external markets. The Agreement provides for the adoption of the Memorandum of Understanding on Special Class Pooling (MOU) and an Addendum to that Memorandum of Understanding. ¹⁵

2.26 The powers necessary to create the Special Classes and to administer the Special Milk Classes Scheme were conferred on the CDC by amendment to federal legislation (the CDC Act). It is implemented by the Canadian Milk Supply Management Committee (CMSMC).

6. The CMSMC and the MSQ.

2.27 As noted above, the CMSMC, established under the NMMP ¹⁶ , is the body that oversees the implementation of the Comprehensive Agreement on Special Class Pooling. ¹⁷

2.28 It is composed of representatives of each provincial marketing board and the respective provincial governments. ¹⁸ Representatives of the Dairy Farmers of Canada (the "DFC"), the National Dairy Council (the "NDC") representing the dairy processors/exporters, and the Consumers Association of Canada participate although they do not have voting rights. The CDC acts as chair of the CMSMC.

2.29 Based on production and demand forecasts developed by the CMSMC Secretariat (economists from the CDC, the producer boards, the DFC and the NDC), the CMSMC sets the level of the MSQ. The MSQ is monitored and adjusted periodically to reflect changes in demand. Acting under the provisions of the NMMP ¹⁹ , the CMSMC calculates shares of the MSQ among the provinces. ²⁰

2.30 In setting the MSQ, the CMSMC takes into consideration:

2.31 Once a national MSQ has been agreed upon by the CMSMC, the next step is to allocate the MSQ between the provinces. This is done essentially on the basis of historical market shares, with some limited latitude for adjustment through transfers of quota within regional arrangements. Since 1995 the MSQ has been established at the following levels (million hectolitres):

2.32 Subsequently, the provincial milk marketing board allocates quotas to individual farmers. In most provinces ²¹ , the board makes a single allocation ²² to each producer, which represents that producer's share of the domestic, and traditional export, milk market. The individual producer's share of the provincial quota, the producer's quota, is determined by the permanent quota rights held by that producer. While quotas were originally allocated on the basis of historic production levels, these quota rights are commercially tradable and, in many cases, have been acquired on a commercial basis.

2.33 In general, CMSMC decisions are taken by consensus. When votes occur, each province that is a member of the NMMP (provincial government representative and producer marketing board representative together) receives one vote. Some votes require a majority while others require unanimous consent. The CDC is empowered to take a decision in the event of a failure by members to agree at two meetings where the question concerns a matter not covered by the Comprehensive Agreement on Special Class Pooling. The Comprehensive Agreement on Special Class Pooling requires unanimity, including on all matters with respect to export trade.

B. The Canadian Special Milk Classes Scheme

1. Background

2.34 Prior to 1995, the proceeds of levies paid by producers were utilized to fund the CDC's losses in exporting dairy surpluses.

2.35 Following the signing of the WTO Agreement in April 1994, the CDC "directed its activities toward developing alternatives to the use of producer levies". ²³ With this in mind, a Dairy Industry Strategic Planning Committee was established. The CDC chaired this Committee and provided research and secretariat support for it. In October 1994, the Committee recommended the implementation of a "classified pricing system based on the end use of milk, national pooling of market returns, and coordinated milk allocation mechanisms." ²⁴

2.36 A Negotiating Subcommittee of the CMSMC was established, with representation from all provinces, to resolve how to implement a "special milk classes" scheme. This subcommittee presented its recommendations to federal and provincial Ministers of Agriculture in December 1994, who agreed that "some form of pooling of milk returns was urgently required to enable the dairy industry to meet Canada's international obligations and changing market conditions." ²⁵ Ministers also agreed that the CDC Act should be amended to allow the CDC to administer the Special Milk Classes permit and national pooling arrangements. These amendments were passed in July 1995. ²⁶

2.37 The Special Milk Classes Scheme, which replaced the producer-financed levy system eliminated in 1995, is embodied in a Comprehensive Agreement on Special Class Pooling. The CDC, the provincial producer boards and the provinces that participate in the NMMP are the signatories of the Comprehensive Agreement on Special Class Pooling which became effective on 1 August 1995.

2. The Special Classes

2.38 The "Special Milk Classes" are the sub-classes of Class 5 milk in the national common classification system, under which the pricing of milk is based upon the end use to which the milk is put by processors. Classes 1 to 4 comprise:

2.39 The definition of the Special Milk Classes under Class 5 as contained in the Comprehensive Agreement on Special Class Pooling is as follows ²⁷ :

2.40 Class 5(e), which is referred to as "surplus removal", is made up of both in-quota and over-quota milk. The over-quota portion of Class 5(e) represents the production that is in excess of the MSQ. The in-quota portion of Class 5(e) exports represents the milk production that is surplus to domestic and planned export needs. This "surplus" may be derived either from the:

2.41 Table 2 shows Canada's total exports compared to their export volume commitments under the WTO. Canada also provided data on the amount of exports generated through Classes 5(d) and (e) but requested that this data be kept confidential on the ground that the amounts for some entries make identification of individuals possible. The figures provided indicate that the total amount of exports generated through Classes 5(d) and (e) exceeds Canada's export quantity commitment level in respect of all three marketing years and this for all products contained in Table 2 other than skim milk powder (see also paragraph 7.115).

3. In-quota milk and over-quota milk

2.42 A national production quota (the national MSQ) for industrial milk is set each year by the CMSMC (paragraph 2.29 and 2.30). Each province is allocated a share of the MSQ which is then allocated among producers within a province by the various provincial milk marketing boards and agencies.

2.43 If a province exceeds its share of the MSQ, the milk that is in excess of the province's share of the MSQ is referred to as "over-quota" milk (further detail in paragraph 2.57). If a province does not exceed its share of the MSQ, all of the province's milk is referred to as "in-quota" milk.

2.44 Prior to 1995, the percentage of farmers producing in excess of 105 per cent ³³ of their allocated quota was small. In 1994-95, only 10 per cent of producers were in this group, a figure consistent with levels observed since 1992. A year later, under the new system, 25 per cent of farmers produced over 105 per cent of quota. By 1997-98, 34 per cent of Canadian producers were producing over 105 per cent of their quota.

2.45 In each of the regional pooling arrangements, fluid milk requirements are estimated on a regional basis, based on previous years' consumption. Since fluid milk demand is the highest priority use for milk supplies in the system, the industrial milk system acts as a buffer for any fluctuations in fluid milk demand or supply. In the event of a milk shortage, for instance, milk that would otherwise have found an industrial use is sent into the fluid milk system to cover the shortfall.

2.46 Each province's share of the total in-quota milk market is the sum of its share of the MSQ and the fluid milk market within its regional pooling arrangement.

To continue with The price of milk to the processor

¹⁰ CDC Act, Section 2 (Definitions).

¹¹ This is true for Ontario and Quebec and all other provinces except Nova Scotia, Alberta and Saskatchewan. In Nova Scotia, the board members are appointed by the provincial government with one member of five to be a producer. In Alberta and Saskatchewan, the provincial governments also appoint the members but historically producers are well represented on the boards. Currently, each five-member board includes two producers, one consumer representative and one processor representative. Nova Scotia, Alberta and Saskatchewan accounted for 1.91 per cent, 4.77 per cent and 2.51 per cent of domestic production in 1997. (Canada, Exhibit 3)

¹² Newfoundland is not a party to the NMMP (its producers produce almost exclusively for the local fluid milk market and it has not traditionally contributed to the industrial milk supply that was the subject of the NMMP).

¹³ Canada, Exhibit 10 contains a full list of signatories.

¹⁴ NMMP, A. (Introduction).

¹⁵ Comprehensive Agreement on Special Class Pooling, Introduction.

¹⁶ NMMP, Section H.1.

¹⁷ MOU, Schedule I, Section 1.

¹⁸ Newfoundland sits on the CMSMC as an observer.

¹⁹ NMMP, Section I, Quota Allocation.

²⁰ 1996/1997 Annual Report of the Canadian Dairy Commission, pp. 7-8.

²¹ In Alberta, producers receive two quotas, one for fluid milk, expressed in litres per day, and one for industrial milk, expressed in kilograms of butterfat per annum.

²² This is usually expressed in kilograms of butterfat per day.

²³ 1994/1995 Annual Report of the Canadian Dairy Commission, page 4.

²⁴ 1994/1995 Annual Report of the Canadian Dairy Commission, pages 3-4.

²⁵ Ibid.

²⁶ Ibid.

²⁷ Comprehensive Agreement on Special Class Pooling, Annex A.

²⁸ The "sleeve" is a safety margin built into the annual estimate of Canadian domestic requirements - its purpose is to cover for any unexpected changes in domestic demand in the course of the dairy year.

²⁹ This structural surplus, which consists of skim milk powder, had declined in recent years to about 17,800 tonnes of skim milk powder.

³⁰ Such surpluses could arise where there is a temporary imbalance in supply and demand, such that milk is available in a province which is not needed immediately on the domestic market in that province. This can also be described as seasonal variation in demand through the year.

³¹ Data provided in response to Panel Question: Source of Total Exports: Statistics Canada.

³²The data provided by Canada in response to Panel questions on exports generated through Classes (d) and (e), which is more extensive than that reproduced in paragraph 7.114 below, is on record and is available to the Appellate Body as necessary.

³³ This is based on the assumption that 105 per cent of quota is a level that reflects a deliberate decision to produce for the over-quota market, allowing for other factors such as weather and biological variability in milk production that may cause producers not to meet their quotas exactly.