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World Trade
Organization

WT/DS103/R WT/DS113/R
17 May 1999
(99-1924)
Original: English

Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products

Report of the Panel

(Continued)


5. Returns to producers from exports

(a) General

2.52 Exports of dairy products from Canada fall within two categories, exports that result from:

(a) milk from in-quota sources such as planned production for exports to traditional markets and the part of the sleeve not used in domestic markets;

(b) milk that is the result of over-quota production.

(b) In-quota exports

2.53 In-quota milk for export use consists of milk that falls within the annual MSQ but is not used for the domestic market. It is sourced from a fixed amount set aside for planned export within Class 5(d), as well as MSQ milk surplus to domestic requirements (under Class 5(e)).

2.54 The CMSMC specifies the amount of sales under Class 5(d), currently 1.2 million hectolitres. Exporters with access to these traditional markets approach the CDC with proposals to purchase milk under Class 5(d). 34 Sales of surplus milk (i.e., Class 5(e)) begin with a declaration that milk surplus to domestic requirements is available. The determination whether there is in fact milk available in system surplus to domestic and traditional export market requirements is made by the Surplus Removal Committee, which is formally known as CDC Advisory Group on Preemptive Surplus Removal (hereafter the "SRC") of the CMSMC. If the SRC determines that milk is available 35 and the CDC believes that the proposal should be accepted, it provides a permit to the exporter that is subject to acceptance by the relevant board. This permit carries a recommendation to the board that the required amount of milk should be supplied at the recommended price.

2.55 Once the exporter has agreed on a milk price with the board it may export the resulting processed products. It keeps the export documentation available for examination by the CDC auditors. To allow the CDC to maintain its monitoring programme on behalf of the CMSMC, the exporter is also required to file proof of export with the CDC. All holders of such permits must provide the CDC with regular reports on their dairy ingredient purchases and use.

2.56 The returns to the producer for in-quota milk sold for export use are based on world market conditions, resulting from prices negotiated between the processor/exporter and the CDC. These returns are subject to pooling with domestic market returns before receipt by the individual producers.

(c) Over-quota exports

2.57 Exports of dairy products produced with over-quota milk may arise in two ways:

(a) Over-quota production: There are production quotas at the individual farm level and at the provincial level. At the provincial level, over-quota production occurs when producers in a province produce milk in excess of their individual quotas and as a result a province as a whole exceeds its share of the national MSQ in a defined period of time. Independent of the level of production in a province as a whole, at the farm level, an individual producer may exceed his individual farm production quota. It is noted that returns to the producer are calculated on the basis of the over-quota production at the individual level.

(b) Optional Export Program (OEP): The OEP is a programme whereby milk is produced in addition to quotas and sold outside of the classification system to meet a specific marketing need. 36 OEP contracts are negotiated between the producer marketing board and a processor. The board then offers the agreed terms to the producers who can voluntarily accept to produce for the OEP contract.

2.58 The returns to the producer from over-quota production is based on a three month average reflecting actual Class 5(e) prices, as calculated by the CDC. At year's end, returns during the year for over-quota milk are adjusted to reflect actual total returns. Over-quota returns through Class 5(e) sales are not pooled with the domestic market returns before being paid to the individual producer. Returns from sales under the OEP are likewise, not pooled with the domestic market returns before being paid to the individual producer.

6. Pooling

2.59 Pooling calculations are made under the Comprehensive Agreement on Special Milk Classes (P9).

2.60 Revenues from all in-quota sales of milk are pooled between provinces in two regional pools (Table 4).

Table 4

P6
Agreement on All Milk Pooling
P4
Western Milk Pooling Agreement
Ontario
Quebec
New Brunswick
Nova Scotia
Prince Edward Island
British Columbia
Alberta
Saskatchewan
Manitoba
Note: Manitoba currently belongs to both pools.
It first pools its revenues under the P4, then under the P6.
P9
Comprehensive Agreement on Special Class Pooling "National Pool"
(all 9 provinces)

2.61 The pooling process is illustrated by way of an example with the following assumptions:

Assumptions

- Production P4 P5 P9
Class 1-4 15 hl 45 hl
Class 5 in-quota 2 hl 5 hl
Total 17 hl* 50 hl 67 hl
- Actual returns
Class 1-4 $58 / hl $55 / hl
Class 5 $21 / hl $22 / hl
- Target return: (Class 1-4): $54.00 / hl
* Includes 3 hl from Manitoba.

2.62 There are four steps in the pooling process:

Step 1
Remove from pooling calculations sales from:
  • Over-quota.
  • Optional Export Programme.
  • Step 2
    Pool Class 5 in-quota: at actual price obtained.
    Pool Classes 1-4: at the target price: $54.00 / hl.

    Gives: Revenue to be pooled by region.

    Regions: P4 P5 P6 P9
    Target Revenue @ $54.00 / hl.
    Class 1-4 $810 $2,430
    Class 5 (@ $21 and $22 / hl) $42 $110
    Total $852 $2,540 $3,392

    Step 3
    Class 5 in-quota is pooled with all Classes. Gives: Average return, all classes.
    Adjustment between regional pools is calculated
    Regions: P4 P5 P6 P9
    Class 5 is pooled in all Classes
    $3,392 / 67 hl $50.63 / hl
    Revenue at:
    Target return
    total in Step 2 $852 $2,540
    Pooled return (all classes)
    @ $50.63 / hl $861 $2,531
    Difference (Adjustment) + $9 - $9

    Step 4
    Pool the P4 at actual market returns from all milk sales. Apply the adjustment for P9.

    Pool P5 at actual market returns from all milk sales.

    Manitoba adds revenues from P4 into the P5. This becomes the P6. Pool the P6 at actual returns from all milk sales. Apply the adjustment for P9.

    Regions: P4 P5 P6 P9
    Actual revenue
    Class 1-4 (@ $58 and $55 / hl) $870 $2,475
    Class 5 (@ $21 and 22 / hl) $42 $110
    Total $912 $2,585 $3,497
    Adjusted revenue + $9 - $9
    Total$921 $2,576
    Quantity (P4) 17 hl 50 hl
    Average Return (P4) $54.18 / hl
    + Manitoba (3hl @ 54.18) +$162.5
    Total Return P6$2,738.5
    Quantity (P6) 53 hl
    Average Return P6$51.67 / hl

    2.63 The result is that each provincial board in a regional pooling arrangement receives:

    (a) a regional average return for all its Class 1-4 sales;

    (b) a national average return for all of its adjusted Class 5 sales derived from in-quota milk; and

    (c) an average world market return for any over-quota shipments.

    To continue with Canada's Tariff-rate Quota on Fluid Milk and Cream


    34 These traditional sales are linked to certain trade opportunities, such as TRQs that are traditionally made available to Canadian exporters, as well as sales arising out of long-term trade patterns. The main markets for Class 5(d) transactions are aged cheddar to the U.K, cheese to the United States under Canada-specific tariff quotas, cheese to Mexico, mainly evaporated milk to Libya, skim milk powder and whole milk powder to Algeria and skim milk powder, whole milk powder and evaporated milk to Cuba.

    35 The Comprehensive Agreement on Special Class Pooling states that the CDC will be guided by the decisions of the SRC.

    36 This is to be contrasted with over-quota production. Over-quota production is also produced over and above quotas but is not linked to any specific export market need. Producers are paid for OEP milk on the basis of the prior negotiated price, whereas the board pays the producer for over-quota milk on the basis of actual returns on Class 5(e) sales, i.e., returns from sales made in the spot market. The OEP Agreement is Annex C of the Comprehensive Agreement on Special Milk Classes (P9).