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Cheese battle a big threat to Canada’s cloistered dairy market

The innocuous sign on the hearing room door, reading "BalanceCo Canada vs. Canada Border Services Agency," offers no hint of the high-stakes showdown inside.

But this obscure case, now before the Canadian International Trade Tribunal, may be the most serious and imminent threat to Canada's farm supply management system.

The fight is about cheese – mozzarella, to be exact. And it has pitted Canada's politically powerful dairy farmers against the multibillion-dollar restaurant industry.

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The struggle epitomizes the strains of clinging to a protected domestic farm market when the food industry has gone global.

The case began when Pizza Pizza Ltd., working with an importer, figured out that it could buy mozzarella in conveniently packaged cheese-and-pepperoni pizza topping kits in the United States.

The importer, J. Cheese Inc. of Oakville, Ont., successfully won an advance ruling last year from the Canada Border Services Agency categorizing the imports as a "food preparation," rather than cheese. The decision means that boxes of the pizza topping – 80-per-cent cheese and 20-per-cent pepperoni – enter Canada duty free rather than being hit with a whopping 245.5-per-cent tariff on cheese.

BalanceCo, controlled by the country's 10 provincial milk marketing boards, wasn't amused. And the fight was on.

BalanceCo appealed the customs classification, alleging that labelling the kits pizza topping is a really "device to circumvent" the will of Parliament, which is to protect dairy farmers from foreign cheese.

The confluence of Canada's cloistered dairy market and the evolving global food industry has created huge incentives to beat the system, and, perversely, for Canadians to shun cheese.

"The temptation is so high to try not to use Canadian cheese," explained James McIlroy, a Toronto-based trade consultant. "So you put less of it on your pizza or you do an end run and get it from the U.S. in some kind of kit."

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Strict price and production controls keep wholesale cheese prices 30-per-cent higher in Canada than in the United States.

BalanceCo acknowledged in its submission to the trade tribunal that cheese is so valuable to restaurants that throwing away the pepperoni and keeping the mozzarella from the kits "would make economic sense."

As more consumers opt for processed foods, the cracks in the wall that protects supply management are undermining the system's integrity. Ice cream makers are shifting to imported milk-product concentrates over domestic cream. And last year, CBC reported that pizza restaurants in Ontario's Niagara region were buying blocks of cheese illegally smuggled across the Canada-U.S. border.

"Farmers feel that they can plug these holes in the dike," Mr. McIlroy said. "The minute you plug one, another springs open."

The hole in the cheese wall is growing dangerously large. Dairy farmers estimate that as much as 4,000 tonnes a year of U.S. mozzarella is now finding its way into Canada in duty-free kits, representing as much as 12 per cent of the fresh pizza cheese market. Roughly two-thirds of milk produced in Canada goes into the industrial market – to make cheese, yogurt, butter and the like. Mozzarella alone consumes 28 per cent of industrial milk.

Unless the pizza hole is plugged, dairy farmers warn it will have a ripple effect through the industry, resulting in significant lost output, sales and market share, according to a filing with the tribunal.

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Restaurants feel equally aggrieved. McCain Foods Ltd. and other frozen-pizza exporters won an exemption from Ottawa years ago that allows them to buy cheese at the cheaper world price. McCain had warned it wouldn't be able to survive without the concession.

The price gap didn't matter much when frozen pizzas tasted like cardboard. But new preparation methods and better ingredients mean frozen pizza is as good as fresh delivered pizza.

The Canadian Restaurant and Foodservices Association is lobbying Ottawa to get the same deal as their frozen-pizza rivals. "The Berlin wall has to come down," CRFA president Garth Whyte said.

Ottawa is trapped in an intellectual hall of mirrors. One arm of government wants to let in more cheap cheese, and yet the official policy is to defend a system that keeps mozzarella out, stifles consumer demand and invites flagrant circumvention.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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