Canadian dairy giant Saputo Inc. has been clear about why it wants to buy a much smaller Australian dairy.
It's not just about selling milk and cheese to the Aussies. It's about creating a platform to feed the exploding market for dairy products in China and the rest of Asia.
To get that toehold, Saputo is willing to endure a politically charged and hostile takeover of Warrnambool Cheese & Butter (WBC), Australia's oldest dairy.
The question no one bothers to ask is why Montreal-based Saputo, which has two dozen dairy plants in Canada, wouldn't use its home base as a launching pad to tap the Asian market. Reorienting Canadian exports to the region is, after all, one of the top foreign policy goals of the federal government.
The distressing answer is that Saputo can't export – at least not easily or profitably – because of Canada's closed and tightly regulated domestic dairy market. Canadian milk is deemed to be subsidized under World Trade Organization rules, limiting dairy exports to a relatively small amount of grandfathered products.
Everyone in the dairy industry is aware of the problem. Few other Canadians are.
Absent supply management, Saputo would be a Canadian export champion. It's a $7.3-billion company with global operations, extensive technological know-how and deep pockets.
But instead of investing in Canada, creating good-paying jobs at home and generating exports, Saputo is putting its money offshore.
Saputo has been investing outside Canada for years – in the United States, Argentina and Europe. It now has more foreign plants than domestic ones (28 versus 24) and it generates more than half its revenues outside the country. That share now stands at roughly 55 per cent, and would be even larger with a successful acquisition of WBC.
Buying WBC could prove lucrative for Saputo and its shareholders. But Canada's economy would gain far more if Saputo invested here, expanded its dairies and hired more people.
Saputo isn't alone. Quebec-based Agropur, which is owned by Quebec dairy farmers, has also invested heavily in the United States. It has six cheese and milk-ingredient plants in Wisconsin and Minnesota.
A rare few companies are finding quirks in the system to get into the export market. Upstart Canadian Dairy Manufacturing Inc. is currently building a 30,000-tonne infant-formula plant in Scarborough, Ont., with plans to ship to China. The venture, backed by Chinese investors, is only viable because the company plans to buy Canadian skim milk powder, not at the high domestic price, but at a much lower exempt price reserved for infant food.
The dairy industry is rapidly going global, and Canada is being left behind. Liquid milk doesn't often cross national borders. But there is a large and growing trade in readily exportable milk powder, various protein concentrates and cheese.
The world price of milk powder, which can be turned into infant formula and various other products, has more than doubled since 2009. A key driver is Chinese demand for milk, which is rising by double digits every year – much of it imported from Australia and New Zealand.
China simply can't produce enough itself. And many Chinese do not trust the quality of what the country does produce in the wake of numerous tainted food scandals.
That would give Canadian milk a huge marketing advantage in China.
In a world of soaring demand, Canadian milk production stagnates. The country's dairy farmers produce less milk now than they did in the early 1960s, in spite of a near doubling of the population.
The industry produces significant surpluses of milk protein and skim milk powder, which could be exported at premium prices. Instead, it often winds up in low-margin animal feed.
Phase out supply management and the export conundrum goes away.
But Ottawa refuses to go there because of the staunch opposition of Canadian dairy farmers, and their powerful lobby, who continue to believe in the protected profits of the status quo even.
The federal government talks a good line about wanting to make Canada a food-export powerhouse and of making inroads in China.
Sad, then, that its agricultural policies discourage both.