TPP needs to be perfected and openly debated, but supply management should not prevent Canada from negotiating it.

The Trans-Pacific Partnership (TPP) negotiations have recently come back to the front pages, triggering unsurprisingly calls in Canada to defend supply management from the dairy producers’ representatives, officials and politicians responding that they will never surrender supply management. However, I am deeply skeptical about that latter commitment if the federal government was to face a choice between being excluded from the negotiations and increasing access to the Canadian dairy market, if it came to that and in these terms.

First, a few words about the TPP itself. It is part a new set of regional economic and trade agreements that includes the Canada Europe Trade Agreement (CETA) and the Transatlantic Trade and Investment Partnership (TTIP).

These agreements intend to go beyond market access issues to set harmonized rules about trade and investment and are seen by the USA as core to their global strategy (This article in Foreign Affairs). These agreements are the subject of intense debate about their actual economic and strategic value  (Paul Krugman , The Economist, Martin Wolf, Lawrence Summers). Besides, their negotiations have been wrapped in secrecy, raising fear that corporate interests will be served first, especially in the light of the controversial Investor State Dispute Settlement (ISDS) clause. The latter may indeed contribute to define the balance of power between sovereign states and corporations (to get an idea of the debate on that subject, read this and this and this).

As a citizen, and considering the scope and reach of the TPP, I would like a more open debate on the principles and guidelines defining Canada’s position in the negotiations. So, I am not surprised that TPP and TTIP are encountering some resistance in the various countries involved in these negotiations. The completion of the TPP and its actual implementation are then still far from certain.

Back now to the recent headlines of US officials publicly requesting Canada to open its dairy market in order to stay in the TPP game. Canada might have some chips to bargain with (Keystone pipeline is one but a weakening one, apparent breach of NAFTA by US bank’s reform may have more traction) but I do not think they would be sufficient to avoid choosing between being part of the TPP and opening the dairy market.

Canada is not essential for the TPP’s success as far as the most important parties (The USA, Japan) are concerned. I do not think there would be too much procrastination about excluding Canada if it is politically more convenient to do so.

Now, is TPP essential to Canada?  Maybe not essential but not being part of a functioning TPP would be quite detrimental to Canada’s economy. Not that much because of market access issues but mostly because of the loss of attractiveness for investors and its ripple effect throughout our economy from R-D to infrastructures.

As far as the TPP negotiations are concerned, the most pressing issue is whether President Obama will be granted Trade Promotion Authority by the Congress. If not, the negotiation would probably stall if not die as the polarization of the US Congress is such that it brings too much unpredictability into the US negotiating position (This article in The Economist). The current politicking makes it hard to predict the outcome, with some simply asking for not hastening the negotiations. However, we cannot exclude the possibility that the Obama Administration will indeed be granted TPA and will look for accelerated negotiation rounds. So, if the USA keeps on asking Canada to open its dairy market as a condition to stay in the game, it will be very difficult for the federal government to elude a decision, and this even in the midst of an election campaign.

What would then be the most likely decision of our federal government?

On one hand, the Conservative government could be wary of opening the supply-management Pandora’s box. It is not a wedge issue. The privatization of the Canadian Wheat Board is not looking that beneficial to the farmers. The recent NDP victory in Alberta is challenging the Conservatives supremacy in the Prairies. The Conservatives need to make in-roads in rural Quebec where dairy producers are still seen as influential.

On the other hand, as outlined before, I do not think Canada can afford to be excluded of the TPP negotiations at this point. This government likes to present itself as a practical, result-oriented, reasonable government, working hard on ensuring Canada’s prosperity. Would it risk Canada being excluded from the TPP negotiations? Ultimately, I do not think so because that political inconsistency may come back to haunt the Conservative party.

Then, how would the government proceed? Most probably by committing to increase market access at a level acceptable by the US. The key elements to negotiate would be the class of products, the allocation process of the import quotas, and the time-frame of implementation. That would undoubtedly have consequences on the Canadian dairy industry, most of them detrimental in the short-term.

However, it is sterile to claim that Canada has to defend supply management at all cost. It is sterile, and it may even backfire. If a narrative can be built that says the dairy industry is weakening Canada’s position in the negotiations while a lot is to be gained, then it will bring a lot of scrutiny on supply management. Its shortcomings will be exposed and open for debate… which would be good in itself. Supply management is a public policy and as such should be submitted regularly to a thorough assessment of the relevance of its objectives and consistency of the underlying system. Its continuation should be publicly debated, beyond dogmas and opinion polls.

Finally, if the dairy market was more open to imports, that would not mean an overnight collapse of the dairy industry contrary to what is implied by the current use of a study on the economic contribution of the Canadian dairy industry (report available here). This report clearly demonstrates the extent of the contribution of the dairy industry to the Canadian industry and it is undeniably significant. It does not say though what share of this economic contribution is at risk, assuming an open dairy market in Canada. Is anyone really thinking that Saputo and Agropur would close down all their Canadian operations because of more open markets? Has supply management prevented any consolidation and rationalization in the dairy industry? It would be even more interesting to evaluate and compare different scenarios, under supply management and under open market, based on the economic contribution of the dairy industry at the 2025 horizon.

The significant contribution of the dairy industry to the Canadian economy, and its apparent reliance on a public policy to prosper oblige it to engage in a more sophisticated public discussion about its future than the current ‘’for or against supply-management’’ argument. Supply-management is a sound policy, but not always and surely not forever.

A lesson from the 2006-2010 Canadian hog crisis : ASRA, efficiency, vertical integration and the cash flow which saved the Quebec hog industry

Quebec hog producers have been long benefiting from an income stabilization program called ASRA (Assurance Stabilisation du Revenu Agricole) and launched in 1975. This program is an income insurance program that guarantees a compensation to farmers when the market price is below a benchmark cost of production. The farm’s contribution is partly subsidized by the provincial government. The ASRA program covers among other products hog, sows, corn and soya.

By its design, the ASRA program tends to overcompensate the most efficient producers. In 2010, a controversial change was introduced to the calculation of the benchmark cost of production (exclusion of the bottom quartile, the least efficient farms of the sample), but it was subsequently abrogated. Changes were also introduced, at this time, to modulate the level of the farm’s contribution according to the size of its operations relative to the benchmark model (The subsidy decreases from two third to half of the contribution when the operation is at least thrice larger than the benchmark model).

Quebec hog farmers have always strategically optimized their legal structure in order to maximize the level of income stabilization. Initially, it was by separating all production activities in order to get ASRA for crops (corn and soya), even though they may be used as feed for hogs, as well as ASRA for hogs and sows by doing farrowing and finishing in separate legal entities. Then, when the level of subsidy was indexed to the size of the operations, it was time again to adapt the legal structure to the new environment.

Disaggregating farming operations in different legal entities was the backbone of the business model of the main vertically-integrated groups but it was also chosen by medium to large independent farrow-to-finish farms. During the period 1995-2006, when hog production boomed in Quebec, this allowed the most efficient producers to greatly benefit from the ASRA program while the financial position of the program itself was deteriorating.

Some of the hog producers invested that excess cash outside agriculture (say residential real-estate, sometimes in Florida). Others were focusing on developing their business, especially among what would become the main family-owned vertically-integrated hog groups, which then were then able to consolidate the scope of their activities from feedmills to meat processing.

From 2006 to 2010, the Canadian hog industry went through a series of crisis – porcine reproductive and respiratory syndrome, porcine circovirus, H1N1 (‘’swine flu’’), appreciation of the Canadian dollar, COOL legislation in the US, all ending up in severe margin squeeze. They had the cumulative effect of eating away the equity of many hog farms. This culminated in 2009 when the federal government had to intervene drastically through two federal emergency programs (Hog FarmTransition Program and Hog Industry Loss Loan Program). Yet, in Quebec, these programs were not widely used.

During that time, I held different positions in banks involved in financing hog production, positions which gave me a privileged insight into some of the dynamics underlying the restructuring of the Canadian hog industry. Statistics and business news showed that the Quebec hog value-chain weathered quite well this string of crisis, without having to reduce significantly its herd nor going through major bankruptcies, contrary to the Western provinces.

The resilience of the Quebec hog industry can be, at least partly, explained by the fact that the major players of the industry had enough cash reserve going into the crisis. Because of the business model I have described above, vertically-integrated groups had benefited from large ASRA payments over the years, especially since their hog-producing operations were generally much more efficient that the benchmark model used by the ASRA program to calculate compensation. When the businesses were well-managed, that extra cash was used to shore-up their financial position and develop their activities along the whole value-chain. Hence, at the time of the crisis, they were able to keep cash flowing into the system, offering much needed liquidities by contracting with farmers who were otherwise considering exiting the hog production altogether. It is worth noting also that the high prices for grain and oilseeds, while squeezing hog margins, were facilitating this restructuring as many farmers could thus divest only partly their hog operations (usually giving up on farrowing to focus on finishing).

What greatly contributed to save Quebec hog industry during the crisis were not that much ASRA payments to small to medium-sized independent farrow-to-finish hog farms, but the large payments that many thought were unduly received by integrated groups. Therefore, I am wondering whether the hog industry in Quebec would have been in such a good position at the outset of the crisis should the vertically-integrated groups have been excluded from the ASRA program along the line proposed by the working group on income security in agriculture (See report here, in French).

La politique québécoise de sécurité du revenu en agriculture se dirige-t-elle vers une impasse ?

Cette question s’est imposée à la suite de la lecture du rapport final du groupe de travail sur la sécurité du revenu en agriculture au Québec, des premières réactions qu’il a suscitées, et des résultats obtenus lors de récents mandats de recherche.

Pourquoi cette impression d’impasse ? Parce que l’évolution des politiques agricoles de soutien au revenu ne semble pas répondre aux enjeux réels induits par la complexité croissante à laquelle doivent faire face les agriculteurs, les entreprises agricoles, les filières agroalimentaires et agro-industrielles, ainsi que les territoires ruraux où se déploient les activités agricoles et où vivent les agriculteurs. Cette complexité rend totalement caduc le concept de ferme familiale où un ménage fournit la majorité du travail et du capital, vit sur la ferme et entend transmettre son patrimoine à la génération suivante.

Je ne développerai pas ici l’ensemble de mon analyse et les conclusions que j’en tire quant à l’évolution des politiques agricoles et des stratégies d’affaire des entreprises liées au monde agricole. Je mentionnerai uniquement quelques éléments factuels qui nourrissent mes réflexions.

Tout d’abord, un détail qui me semble révélateur. L’introduction de ce rapport mentionne : ‘’ 28,000 exploitations agricoles qui génèrent des revenus de marché de l’ordre de 8 milliards de dollars’’. Or, selon le recensement agricole de 2011, nous aurions pu écrire qu’un peu plus de 8,500 exploitations agricoles génèrent de l’ordre de 7 milliards de dollars de revenus de marché, ou qu’environ 4,100 exploitations contribuent au chiffre d’affaires de l’agriculture québécoise à hauteur de 5 milliards et demi de dollars. Les politiques de soutien au développement de la production agricole concernent à toutes fins utiles moins de 10,000 entreprises, dont certaines ont des propriétaires communs, accentuant ainsi l’effet de concentration économique.

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On retrouve un effet de concentration au niveau territorial. Ainsi, en 2011, 60% du chiffre d’affaires agricole était généré sur 35% de la surface agricole, 80% sur 58% de la surface agricole (selon les données au niveau des sous-divisions du recensement agricole). Par contre, nous pouvons constater que la surface agricole est répartie de manière relativement égale entre les diverses classes de taille économique des entreprises agricoles. Ainsi, les politiques de préservation et d’orientation de l’utilisation du territoire agricole devraient toucher toutes les entreprises agricole. Le découplage des aides à vocation territoriale de la contribution à l’économie agricole semble donc tout indiqué.

Si nous nous déplaçons maintenant au niveau du revenu des agriculteurs et des ménages agricoles, nous pouvons observer l’importance de la pluriactivité dans l’économie des ménages agricoles. Ainsi, dans de nombreux ménages agricoles, le revenu total des agriculteurs est essentiellement composé de revenus non agricoles. En outre, à partir de données de Statistiques Canada, on constate que les paiements directs au titre des politiques de sécurité du revenu agricole contribuent peu au revenu total dans les petites fermes (moins de $100,000 de chiffre d’affaires agricole).

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Si l’enjeu est le revenu des agriculteurs, alors les politiques de sécurité du revenu devraient privilégier les petites exploitations. Cependant, dans le cas de ces petites fermes, qui représentent tout de même plus de 50% des fermes québécoises, nous pourrions dire que la pluriactivité est bien plus efficace pour gérer le risque agricole au niveau de l’économie des ménages que les programmes de sécurité du revenu. Or, il me semble que c’est bien au niveau de l’économie des ménages que se joue l’enjeu de la sécurité du revenu pour ces agriculteurs. Peut-être que la meilleure politique de sécurité du revenu pour ces entreprises-là est une politique de développement des territoires ruraux, dont la composante agricole serait centrale, mais pas unique. En particulier, un soutien accru à l’industrie agroalimentaire pourrait permettre le développement de filières permettant une meilleure valorisation des produits agricoles, notamment dans les régions périphériques.

Un autre élément qui motive mes réflexions est la diversité et la complexité des structures et des projets sous-jacents aux activités agricoles déployées sur le territoire québécois. La multiplicité des structures des entreprises agricoles se retrouve, par exemple, dans les statuts juridiques des entreprises agricoles, dans les formes de diversification des productions, ou, comme nous l’avons vu, dans la diversification des revenus des ménages agricoles, ou encore dans les modes de coordination des activités de production agricole aux activités connexes dans les filières agroalimentaires et agroindustrielles. Elles traduisent ainsi la diversité des modes de mobilisation du travail, du capital et du foncier, ainsi que les arbitrages vis-à-vis de leur coût d’opportunité respectif.

Bien que son interprétation ait de nombreuses limites, une typologie des entreprises agricoles individuelles proposée par Statistiques Canada donne une idée de la diversité des projets des agriculteurs – entre la ferme d’agrément et la grande ferme commerciale – et de leur importance relative (voir tableaux ci-dessous).

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Ces projets pourraient se regrouper dans plusieurs grandes catégories. Par exemple : maximisation du profit à divers niveaux (entreprise, holding, filière), maximisation du bien-être du ménage, maximisation des bénéfices fiscaux des statuts des entreprises agricoles, maximisation de la viabilité patrimoniale (transmission intergénérationnelle intrafamiliale), etc.

Cet aspect m’a amené à m’interroger sur la manière dont la fiscalité des entreprises agricoles détermine les projets et les structures de ces dernières. En particulier, il me semble que l’outil fiscal pourrait être utilisé pour répondre aux enjeux soulevés par le marché du foncier agricole. À ce titre, la révision du programme de crédits de taxes foncières agricoles par la Commission permanente de révision des programmes me semble une excellente occasion de repenser la fiscalité du foncier agricole dans le contexte des évolutions récentes des rapports entre exploitants et propriétaires agricoles, et notamment de leurs conséquences sur l’installation de la relève agricole.

Revenant  à la politique québécoise de sécurité en agriculture,  de quel revenu cette politique cherche-t-elle à garantir la sécurité : Le revenu net des entreprises agricoles ? Le revenu des ménages agricoles ?

Et dans quel but : Pour créer les conditions économiques favorables à la continuité de l’approvisionnement des activités de transformations agroalimentaires ou agroindustrielles ? Pour  promouvoir le développement durable des territoires ruraux à travers le Québec ?

Finalement, au-delà des actualisations, développements et simplifications proposés dans le rapport, il me semble que l’hétérogénéité et la complexité du monde agricole québécois appellent à un changement de paradigme, et donc à l’élaboration de politiques publiques véritablement nouvelles, construites à partir d’une approche systémique reconnaissant et intégrant la diversité des projets, des structures, des échelles géographiques et des horizons temporels.

Bertrand Montel ©, 2015.