CANADA � MEASURES AFFECTING THE IMPORTATION OF MILK
AND THE EXPORTATION OF DAIRY PRODUCTS

SECOND RECOURSE TO ARTICLE 21.5 OF THE DSU
BY NEW ZEALAND AND THE UNITED STATES

AB-2002-6

Report of the Appellate Body

(Continued)

5. Assessment of Evidence

117. We recall that the Panel examined the evidence from two different perspectives-that is, using both the complaining Members' and Canada's proposed COP standards. The Panel found that, under both of these standards, "payments" were being made through the supply of CEM.⁹⁹

118. Canada submits that the Panel erred in its assessment of the evidence by placing a burden on Canada that it "cannot possibly be expected to meet."¹⁰⁰ Canada's argument relates to the Panel's assessment of the evidence using Canada's proposed COP standard, that is, a COP standard applied on an "individual", as opposed to an "industry-wide" basis, and excluding from the COP standard, the costs of family labour and management, and of owner's equity, and also quota, transport, marketing, and administrative costs.

119. We have held that the COP standard is to be determined on an industry-wide basis and that it includes all the costs that Canada proposed be excluded, as they involve economic resources invested in the production of milk.¹⁰¹ As such, the Panel's examination of the evidence from Canada's perspective is rendered moot, because it is based on a legal standard that we have found to be the incorrect one. Any review of the Panel's treatment of the evidence must, instead, focus on its examination of the evidence which included the various costs Canada proposed to exclude. That is, we must review the Panel's comparison of the price of CEM with the COP standard including the costs of family labour and management, and of owner's equity, and also quota, transport, marketing, and administrative costs.

120. The evidence submitted to the Panel by the complaining Members, in the form of CDC data, included amounts for all these costs, other than quota. According to this evidence, the industry-wide cost of production figure for the year 2000 was C$57.27 per hectolitre ("hl"), and for 2001, it was C$58.12/hl. The average prices for CEM for these periods were C$29/hl and C$31.72/hl, respectively.¹⁰² Thus, as the Panel found, on an industry-wide basis, CEM prices are significantly below the COP standard. On the basis of this evidence, the Panel found that there was a prima facie case that "payments" are being made.¹⁰³ Moreover, under Article 10.3 of the Agreement on Agriculture, the burden of proof was on Canada to establish the contrary. The Panel found that Canada had not satisfied that burden.¹⁰⁴ We can see no error in the Panel's assessment of the evidence.¹⁰⁵

6. Conclusion on "Payments" under Article 9.1(c)

121. For all these reasons, we uphold the Panel's finding, in paragraph 5.89 of the Panel Report, that the supply of CEM, by producers to processors, involves "payments" within the meaning of Article 9.1(c) of the Agreement on Agriculture.

B. "Financed by Virtue of Governmental Action"

122. We turn now to the second element of Canada's appeal of the Panel's findings under Article 9.1(c) of the Agreement on Agriculture�whether the Panel erred in finding that "payments", made on the sale of CEM, are "financed by virtue of governmental action".

123. The Panel recalled that there must be a "demonstrable link" between governmental action and the financing of "payments".¹⁰⁶ The Panel proceeded to examine several actions of the Canadian government in regulating the supply of domestic milk and CEM. It concluded that New Zealand and the United States had made out a prima facie case that a demonstrable link exists between these Canadian governmental actions and the financing of CEM payments. Further, the Panel found that Canada had failed to establish, pursuant to Article 10.3 of the Agreement on Agriculture, that these governmental actions were not demonstrably linked to the financing of the payments.¹⁰⁷

124. On appeal, Canada argues that the Panel erred under Article 9.1(c) of the Agreement on Agriculture, in particular by finding that a "demonstrable link" exists between Canadian governmental action and the financing of CEM payments. Canada claims that it has removed government action from "every stage of the export transaction" and that producers and processors "freely choose to enter into export transactions".¹⁰⁸ Therefore, Canada argues that no demonstrable link exists between governmental action and financing of CEM payments.

125. Article 9.1(c) of the Agreement on Agriculture provides:

Export Subsidy Commitments

1. The following export subsidies are subject to reduction commitments under this Agreement:

�

(c) payments on the export of an agricultural product that are financed by virtue of governmental action, whether or not a charge on the public account is involved, including payments that are financed from the proceeds of a levy imposed on the agricultural product concerned or on an agricultural product from which the exported product is derived; (emphasis added)

126. The phrase "financed by virtue of governmental action" has three distinct elements-"governmental action"; "by virtue of "; and "financed"�which we will address in turn.

127. As regards "governmental action", we held in the first Article 21.5 proceedings that "the text of Article 9.1(c) does not place any qualifications on the types of 'governmental action' which may be relevant under Article 9.1(c)."¹⁰⁹ Instead, the provision gives but one example of governmental action that is "included" in Article 9.1(c)�however, this example is merely illustrative.¹¹⁰ Accordingly, we stated that Article 9.1(c) "embraces the full-range" of activities by which governments " 'regulate', 'control' or 'supervise' individuals".¹¹¹ In particular, we said that governmental action "regulating the supply and price of milk in the domestic market" might be relevant "action" under Article 9.1(c).¹¹² Moreover, the governmental action may be a single act or omission, or a series of acts or omissions.

128. We observe that Article 9.1(c) does not require that payments be financed by virtue of government "mandate", or other "direction". Although the word "action" certainly covers situations where government mandates or directs that payments be made, it also covers other situations where no such compulsion is involved.¹¹³

129. Although the term "governmental action", when read in isolation, is somewhat open-ended, perhaps even abstract, the words "by virtue of " clarify further the meaning of this term. In the first Article 21.5 proceedings, we opined:

The words "by virtue of " indicate that there must be a demonstrable link between the governmental action at issue and the financing of the payments, whereby the payments are, in some way, financed as a result of, or as a consequence of, the governmental action.¹¹⁴ (original italics)

130. The words "by virtue of ", therefore, express the relationship between "governmental action" and the "financing" of payments for the purpose of Article 9.1(c). The essence of that relationship is the "nexus" or "link" between "action" and "financing".

131. Thus, although Article 9.1(c) extends, in principle, to any "governmental action", not every governmental action will have the requisite nexus to the financing of payments. In the first Article 21.5 proceedings, we observed that "[g]overnments are constantly engaged in regulation of different kinds in pursuit of a variety of objectives."¹¹⁵ Yet, we went on to say that regulation that merely enables payments to occur will not suffice for those payments to be regarded as "financed by virtue of governmental action". We stated:

[Where regulation merely enables payments to occur], the link between the governmental action and the financing of the payments is too tenuous for the "payments" to be regarded as "financed by virtue of governmental action" � within the meaning of Article 9.1(c). Rather, there must be a tighter nexus between the mechanism or process by which the payments are financed �¹¹⁶ (original italics)

132. This brings us to the meaning of the word "financing". The word refers generally to the mechanism or process by which financial resources are provided to enable "payments" to be made. The word could, therefore, be read to mean that government itself must provide the resources for producers to make payments. However, Article 9.1(c) expressly precludes such a reading, as it states that "payments" need not involve "a charge on the public account". This is borne out by the fact that the text indicates that "financing" need only be "by virtue of governmental action", rather than "by government" itself. Article 9.1(c), therefore, contemplates that "payments may be financed by virtue of governmental action even though significant aspects of the financing might not involve government."¹¹⁷ Indeed, as we have said, payments may be made, and funded, by private parties.¹¹⁸

133. The word "financing" must, nonetheless, be given meaning. Accordingly, even if government does not fund the payments itself, it must play a sufficiently important part in the process by which a private party funds "payments", such that the requisite nexus exists between "governmental action" and "financing".

134. These general remarks illustrate well that "[i]t is extremely difficult � to define in the abstract the precise character of the required link between the governmental action and the financing of the payments, particularly where payments-in-kind are at issue."¹¹⁹ In each case, the alleged link must be examined taking account of the particular character of the governmental action at issue and its relationship to the payments made.¹²⁰

135. With this mind, we turn to the facts of this dispute. We recall that we have described the key features of the Canadian regulatory system in paragraphs 12-14 of this Report.¹²¹

136. We have also upheld the Panel's finding that producers make "payments", under Article 9.1(c) of the Agreement on Agriculture, to processors through sales of CEM at prices that are below the COP standard. As a result, producers' sales revenues do not recoup all of the costs associated with producing and selling CEM. As this short-fall in revenues must be "financed" from some other source, sales of CEM necessarily involve the "financing" of "payments". The crucial question is the source of that financing and, in particular, whether the financing occurs "by virtue of governmental action".

137. The Panel considered that "a significant percentage" of Canadian milk producers are able to cover the entirety of fixed and variable costs of production through in-quota sales of domestic milk. As a result, the Panel opined, these producers can afford to make export sales at marginal cost.¹²² The Panel found that governmental action regulating the domestic milk market "cross-subsidizes many sales that otherwise would not be made or would at least constitute sales at a loss."¹²³

138. We note that CEM is produced almost exclusively by the same producers who supply milk to the domestic market.¹²⁴ It is not contested that these producers use the same production facilities to produce domestic and export milk-that is, the same land, cattle, buildings, machinery, milking facilities, and so on. Indeed, in some provinces, even after production, both regulatory classes of milk have common storage and transportation facilities.¹²⁵ There is, in other words, a single line of production for all milk, whatever its destination market.

139. Where fungible goods, such as milk, are produced using a single line of production, but sold in two different markets, the fixed costs of production are, in principle, shared between sales revenues from both markets. However, in the event that one of the two markets offers much higher revenues, a disproportionately large part, possibly even all, of the shared fixed costs may be borne by sales made in the more remunerative market.

140. Where sales in the more remunerative market bear more than their relative proportion of shared fixed costs, sales in the other market do not need to cover their relative proportion of the shared fixed costs in order to be profitable.¹²⁶ Rather, these sales can be made profitably below the average total cost of production. If the more remunerative sales cover all fixed costs, sales in the other market can be made profitably at any price above marginal cost. In these situations, the higher revenue sales effectively "finance" a part of the lower revenue sales by funding the portion of the shared fixed costs attributable to the lower priced products.

141. In Canada, the domestic price of milk is fixed by a government agency�the CDC�on the basis of an annual survey of producers' costs of production. The CDC has a statutory mandate to ensure that, through the administered price, a "fair return" is secured for "efficient producers". The CDC sets this administered price on the basis of data covering 70 percent of producers, such that these 70 percent of producers can, on average, cover all of their costs of production, including all fixed costs, through domestic sales of milk.¹²⁷ Moreover, for other producers, domestic sales will cover a significant part, if not all, of the fixed costs. This suggests, to us, that a large proportion of producers can finance the sale of CEM at a price that is below the COP standard as a result of participation in the domestic market.¹²⁸ In that respect, we note also that the domestic milk market represents 96.4 percent, by volume, of total Canadian milk production, with export production representing only 3.6 percent, by volume.¹²⁹

142. We observe that, although there is a large proportion of producers that could sell CEM below the COP standard, the proportion of producers who have actually made at least one CEM sale is around 40 percent of all producers.

143. In these circumstances, we agree with the Panel that the evidence indicates that a "significant percentage" of producers are "likely" to make sales of CEM at below the costs of production as a result of highly remunerative in-quota sales in the domestic market. For these producers, domestic sales are likely to "finance" payments made on the sale of CEM. Although the Panel's finding is based on "likelihood", this likelihood seems, to us, to be rather high. Any producer whose fixed costs have been, in large part, covered by domestic sales, and who has sufficient capacity to produce for the export market, has a powerful profit incentive to sell CEM at a competitive export price, even if that price is below the average total cost of production, as long as the price is above marginal costs of production. In any event, we recall that, pursuant to Article 10.3 of the Agreement on Agriculture, Canada bears the burden of proving that sales of CEM do not involve the granting of export subsidies.

144. It falls now to consider the role of the Canadian government in financing payments made on the sale of CEM. We have agreed with the Panel that a significant percentage of producers are likely to finance sales of CEM at below the costs of production as a result of participation in the domestic market. Canadian "governmental action" controls virtually every aspect of domestic milk supply and management.¹³⁰ In particular, government agencies fix the price of domestic milk that renders it highly remunerative to producers. Government action also controls the supply of domestic milk through quota, thereby protecting the administered price. The imposition by government of financial penalties on processors that divert CEM into the domestic market is another element of governmental control over the supply of milk. Further, the degree of government control over the domestic market is emphasized by the fact that government pools, allocates, and distributes revenues to producers from all domestic sales. Finally, governmental action also protects the domestic market from import competition through tariffs.¹³¹

145. In our view, the effect of these different governmental actions is to secure a highly remunerative price for sales of domestic milk by producers. In turn, it is due to this price that a significant proportion of producers covers their fixed costs in the domestic market and, as a result, has the resources profitably to sell export milk at prices that are below the costs of production.

146. Accordingly, we agree with the Panel that "governmental action" in the domestic market plays a critical part in the "financing" of payments made by a significant percentage of producers on the sale of CEM. As such, we agree with the Panel that payments made through the supply of CEM at below the COP standard are financed by virtue of this governmental action.¹³² We also agree with the Panel that Canada failed to establish the contrary, pursuant to Article 10.3 of the Agreement on Agriculture.

147. We do not agree with Canada that the circumstances indicate that the Canadian government has merely created a regulatory framework whereby it has enabled producers to sell CEM at prices that are below the costs of production. Certainly, producers decide for themselves whether and when to sell CEM. However, governmental action in the domestic market goes further than simply creating a regulatory environment in which producers choose to make export payments using their own resources. Rather, as we have said, Canadian governmental action is instrumental in providing a significant percentage of producers with the resources that enable them to sell CEM at below the costs of production.

148. Canada also objects that this reasoning brings "cross-subsidization" under Article 9.1(c) of the Agreement on Agriculture.¹³³ We have explained that the text of Article 9.1(c) applies to any "governmental action" which "finances" export "payments". The text does not exclude from the scope of the provision any particular governmental action, such as regulation of domestic markets, to the extent that this action may become an instrument for granting export subsidies. Nor does the text exclude any particular form of financing, such as "cross-subsidization". Moreover, the text focuses on the consequences of governmental action ("by virtue of which") and not the intent of government. Thus, the provision applies to governmental action that finances export payments, even if this result is not intended. As stated in our Report in the first Article 21.5 proceedings, this reading of Article 9.1(c) serves to preserve the legal "distinction between the domestic support and export subsidies disciplines of the Agreement on Agriculture".¹³⁴ Subsidies may be granted in both the domestic and export markets, provided that the disciplines imposed by the Agreement on the levels of subsidization are respected. If governmental action in support of the domestic market could be applied to subsidize export sales, without respecting the commitments Members made to limit the level of export subsidies, the value of these commitments would be undermined. Article 9.1(c) addresses this possibility by bringing, in some circumstances, governmental action in the domestic market within the scope of the "export subsidies" disciplines of Article 3.3.

149. In our view, the nexus between the Canadian governmental actions in regulating the domestic market and the financing of payments made on the sale of CEM is sufficient, on its own, for us to uphold the Panel's finding that these payments are financed "by virtue of " governmental action. However, we note that, besides these actions, the Panel also relied on other forms of governmental action in support of its conclusion on this issue.¹³⁵ The first of these was that processors are exempt from paying the higher domestic price for milk when they purchase CEM.¹³⁶ We do not believe that this action influences the "financing" of payments by the producer. Certainly, this action explains why the processor of CEM is not required to pay the higher domestic price for CEM. However, the mere fact that the processor is not obliged to buy CEM at the domestic price does not demonstrate a link between this exemption and the financing of payments by the producer on the sale of CEM. The exemption is, in short, not linked to the mechanism by which the producer funds the payments.

150. The second other form of governmental action relied on by the Panel was "the prohibition on the diversion of CEM back into the domestic regulated market".¹³⁷ We have already mentioned this factor in our analysis of governmental action.¹³⁸

151. The final governmental action relied on by the Panel was the requirement for producers to pre-commit to sell CEM. The Panel found that this requirement creates "an additional incentive" to sell a larger quantity of CEM than would be the case if producers could decide to sell to that market "ex post ".¹³⁹ Although this may be the case, we also consider it possible that producers are able to make a reasonably accurate prediction of production levels, particularly as pre-commitment occurs on a 30-day basis.¹⁴⁰ Further, we think producers are just as likely to err on the side of caution to ensure that CEM sales do not prejudice their ability to exhaust their quota entitlement to sell milk at the higher domestic price. In the light of these doubts, we attach no weight to the pre-commitment requirement.

152. Before concluding, we wish to comment on Canada's arguments concerning the approximately 100 producers out of the 8,000 who sell CEM, and out of the total of 19,000 producers that do not participate in the domestic market at all and sell solely CEM.¹⁴¹ Canada argues that the Panel erred in finding that, for these producers, sales of CEM involve payments "financed by virtue of governmental action". We do not believe that it is necessary for us to make any findings regarding these 100 producers. The complaint made by New Zealand and the United States is that Canada has acted inconsistently with its export subsidy commitments under the Agreement on Agriculture. Canada may act inconsistently with these commitments, as we have found, even if some producers never make payments financed by virtue of governmental action.

153. We also wish to emphasize that we do not suggest that Canada's domestic supply management system is inconsistent with Canada's obligations under the covered agreements and, specifically, the Agreement on Agriculture. The consistency of Canada's domestic milk supply management system is not at issue in these proceedings. However, pursuant to Articles 3.3, 8, and 9.1(c) of the Agreement on Agriculture, Canada must ensure that it confines, to its export subsidy reduction commitment levels, any export "payments" which are "financed by virtue of " the governmental action Canada takes to regulate the domestic milk market.

154. In conclusion, therefore, we uphold the Panel's finding, in paragraph 5.135 of the Panel Report, that the supply of CEM, by producers to processors, involves payments which are "financed by virtue of governmental action", within the meaning of Article 9.1(c) of the Agreement on Agriculture.

C. Conclusion on Article 9.1(c) of the Agreement on Agriculture

155. We have upheld the Panel's finding that the supply of CEM involves "payments" on the export of dairy products and also its finding that these payments are "financed by virtue of governmental action". Accordingly, we uphold the Panel's finding, in paragraph 5.136 of the Panel Report, that the supply of CEM involves export subsidies under Article 9.1(c) of the Agreement on Agriculture.

156. In consequence, we also uphold the Panel's conclusion, in paragraph 6.1 of the Panel Report, that, through the combination of the supply of CEM and the operation of Special Milk Class 5(d), Canada has acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture.

VII. Article 10.1 of the Agreement on Agriculture-"Export Subsidies"

157. Canada also appeals the Panel's alternative finding, in paragraph 5.165 of the Panel Report, that, if the CEM scheme does not involve export subsidies under Article 9.1(c) of the Agreement on Agriculture, it nevertheless constitutes export subsidies under Article 10.1 of that Agreement.¹⁴² In making this alternative finding, the Panel recalled that Article 10.1 of the Agreement on Agriculture is residual in character to Article 9.1 of the Agreement on Agriculture and that a measure cannot simultaneously be an export subsidy under both Article 9.1 and Article 10.1.¹⁴³ The Panel stated that its alternative finding under Article 10.1 of the Agreement on Agriculture would be relevant only if we were to reverse its finding that the CEM scheme falls within Article 9.1(c) of that Agreement.¹⁴⁴

158. As we have concluded that the CEM scheme involves export subsidies under Article 9.1(c) of the Agreement on Agriculture, those subsidies cannot, by definition, simultaneously be export subsidies under Article 10.1. Therefore, the condition on which the Panel premised its alternative finding under Article 10.1 of the Agreement on Agriculture does not arise. In these circumstances, both the Panel's reasoning and its finding under Article 10.1 of the Agreement on Agriculture are moot and of no legal effect. There is, therefore, no reason for us to rule upon Canada's appeal of the Panel's finding under Article 10.1, nor to make any finding under this provision.

VIII. Findings and Conclusions

159. For the reasons set out in this Report, the Appellate Body:

(a) reverses the Panel's interpretation of Article 10.3 of the Agreement on Agriculture in paragraph 5.19 of the Panel Report, according to which a complaining Member would be required to make out a prima facie case in support of all aspects of its claims under Articles 3.3, 8, 9.1(c), and 10.1 of the Agreement on Agriculture, but holds that this error did not vitiate the Panel's findings under Articles 3.3, 8, 9.1(c), and 10.1 of that Agreement;

(b) upholds the Panel's finding, in paragraphs 5.89 and 5.135 of the Panel Report, that Canada, through the combination of the supply of CEM and the operation of Special Milk Class 5(d), has acted inconsistently with its obligations under Article 3.3 and Article 8 of the Agreement on Agriculture by providing export subsidies listed in Article 9.1(c) of that Agreement in excess of the quantity commitment levels specified in Canada's Schedule; and

(c) declines to rule on the Panel's alternative finding under Article 10.1 of the Agreement on Agriculture in paragraph 5.165 of the Panel Report, as, in the light of the Appellate Body's finding in subparagraph (b) above, that alternative finding is moot and of no legal effect.

160. The Appellate Body recommends that the DSB request that Canada bring its measures found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with its obligations under the Agreement on Agriculture, into conformity with that Agreement.

Signed in the original at Geneva this 5th day of December 2002 by:

_________________________
Luiz Olavo Baptista
Presiding Member

_________________________ Giorgio Sacerdoti Member

_________________________ Yasuhei Taniguchi Member

Return to Index

99 Panel Report, para. 5.89.

100 Canada's appellant's submission, para. 47.

101 Supra, paras. 110 and 116.

102 Panel Report, para. 5.33; Canada's response to Question 61 posed by the Panel during the Panel proceedings.

103 Panel Report, para. 5.89.

104 Panel Report, para. 5.89.

105 Pursuant to Article 11 of the DSU, a panel must make an objective assessment of the facts. As such, a panel is the trier of facts, responsible for evaluating the credibility and weight of the evidence. As we have stated, we will interfere with a panel's assessment of the evidence only if the panel has exceeded the bounds of its discretion as trier of facts. (Appellate Body Report, US - Wheat Gluten, para. 151)

106 Panel Report, para 5.106, referring to Appellate Body Report, Canada - Dairy, para. 113.

107 Ibid., paras. 5.133-5.135.

108 Canada's appellant's submission, paras. 74 and 101.

109 Appellate Body Report, Canada - Dairy (Article 21.5 - New Zealand and US), para. 112.

110 The example given is "payments that are financed from the proceeds of a levy imposed on the agricultural product concerned or on an agricultural product from which the exported product is derived".

111 Appellate Body Report, Canada - Dairy (Article 21.5 - New Zealand and US), para. 112.

112 Ibid.

113 Article 9.1(c) of the Agreement on Agriculture may be contrasted with Article 9.1(e) of the Agreement on Agriculture, as well as with Article 1.1(a)(1)(iv) of the SCM Agreement, and items (c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the "Illustrative List") of the SCM Agreement. In these provisions, some kind of government mandate, direction, or control is an element of a subsidy provided through a third party.

114 Appellate Body Report, Canada - Dairy (Article 21.5 - New Zealand and US), para. 113.

115 Ibid., para. 115.

116 Ibid.

117 Appellate Body Report, Canada - Dairy (Article 21.5 - New Zealand and US), para. 114.

118 Supra, para. 87.

119 Appellate Body Report, Canada - Dairy (Article 21.5 - New Zealand and US), para. 115.

120 Ibid., para. 115.

121 See also Panel Report, paras. 2.1-2.4.

122 Ibid., para. 5.128.

123 Ibid., para. 5.127.

124 According to Canada, approximately 100 milk producers produce CEM without, at the same time, holding a domestic quota. (Canada's response to Question 2(c) posed by the Panel during the Panel proceedings, confirmed by Canada's response to questioning at the oral hearing) These 100 producers represent approximately 0.5% of all 19,000 Canadian milk producers and 1.25% of all 8000 CEM producers. (Panel Report, paras. 3.70 and 5.55) Moreover, the export market represents only 3.62 percent, by volume, of the total Canadian milk production. (Canada's response to questioning at the oral hearing)

125 See, for instance, the Agreement on Commercial Milk Export between the British Columbia Milk Producers Association, the Mainland Dairymen's Association, and the British Columbia Dairy Council, p. 2, Exhibit US-21 submitted by the United States to the Panel.

126 Even if sales in the more remunerative market do not cover all of the shared fixed costs, they may bear a higher relative proportion of those costs, such that sales in the less remunerative market can be made at a price below the average total cost of production, because these sales do not need to cover their entire relative proportion of shared fixed costs.

127 Panel Report, para. 5.128.

128 In addition to the CDC Handbook, the Panel also referred to newspaper articles submitted by New Zealand to support its view that a significant proportion of producers covers their fixed costs through domestic sales. (Panel Report, para. 5.128; Exhibit NZ-7 submitted by New Zealand to the Panel) In the two newspaper articles, the President of Dairy Farmers Canada and the Chairman of Dairy Farmers Ontario asserted, respectively, that only 25 percent and 39 percent of producers would cover all their costs at the price fixed by the CDC. At the oral hearing, Canada cautioned that such newspaper opinions should be treated "carefully". In any event, we note that even these figures tend to indicate that a large proportion of producers covers most, if not all, of their fixed costs through in-quota domestic sales.

129 Canada's response to questioning at the oral hearing.

130 We recall that certain aspects of the supply and management of milk in Canada were examined in the original proceedings in this dispute. In those proceedings, we found that the agencies managing the supply of milk were "government" agencies. (Appellate Body Report, Canada - Dairy, para. 118)

131 For instance, in its Schedule, Canada has established a tariff quota of 64,500 tonnes for fluid milk (tariff headings 0401.10.10 and 0401.20.10) for cross-border purchases imported by Canadian consumers, with an in-quota tariff rate of 7.5 percent since 2001; outside this tariff quota, since 2001, Canada's bound tariff is 241.3 percent, but not less than C$34.5/hl. For yogurt (tariff heading 0403.10), the tariff quota is 332 tonnes and is limited to yogurt in retail-sized containers only; outside this quota, since 2001, the applicable bound tariff rate is 237.5 percent, but not less than 46.6�/kg. "Fresh (unripened or uncured) cheese" (tariff heading 0406.10) falls under a tariff quota of 20,411,866 tonnes; outside this quota, since 2001, the applicable bound tariff rate is 245.6 percent, but not less than 451.1�/kg.

132 Panel Report, paras. 5.133-5.135.

133 The Panel used this term to describe the fact that sales revenues from one market-the domestic market-finance a portion of the costs associated with sales made in another market-the CEM market. (Panel Report, paras. 5.127, 5.130, and 5.134)

134 Appellate Body Report, Canada - Dairy (Article 21.5 - New Zealand and US), para. 90.

135 Panel Report, para. 5.134.

136 Ibid., paras. 5.115-5.116.

137 Panel Report, paras. 5.117 and 5.134.

138 Supra, para. 144.

139 Panel Report, para. 5.130.

140 Canada's response to questioning at the oral hearing.

141 See supra, footnote 124.

142 See also Panel Report, paras. 5.174 and 6.1.

143 See ibid., para. 5.140, referring to Appellate Body Report, Canada - Dairy (Article 21.5 - New Zealand and US), para. 121.

144 See ibid., paras. 5.141 and 5.174.