A Proposal to Replace Chicken Imports

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Preamble

Since 1998, the 1.2% of the 7.5% chicken TRQ access set aside by the government in 1989 to offset the negative impact of the Canada/US Trade Agreement (CUSTA) has been used up and applications for the use of this special set-aside have exceeded the quantity of TRQ available. A variety of ad hoc temporary solutions have been used by Ministers to address the excess to keep further processors of chicken products not on the import control list (ICL) also known as FTA products, competitive. More formal steps were taken as a result of a consensus agreement reached by industry and the Chicken Farmers of Canada (CFC) in late August 2002. The agreement outlines a number of steps to reduce FTA quantities and a working group was formed to try and achieve a modification in the wording and/or application of the 13% rule. It was recognized by stakeholders that many of the efforts were only short term solutions and that the only significant long term solution would likely come from the working group.

It is now sixteen years later and a number of action items have been taken, including the following: putting in place a domestic dark meat program; exclusion of MSM, marination and added fat or skin; defining trim meat; and the creation of a meat-on-meat pool with a cap. All these actions reduced demand for chicken TRQ.

The efforts of the working group in achieving a long term solution have not been as successful since government officials have provided advice that changing the 13% rule in any way will be a long process and would require discussions with several government departments and trading partners. An effort to redraft the D-Memorandum was rejected by CBSA.  The 13% rule change by way of a section 28 action and perhaps other initiatives were the subject of an import committee formed by AAFC at the direction of Agriculture Minister Ritz. This working group also found solutions were not easy to come by.

One other opportunity to take pressure off the TRQ is to expand chicken production to supply competitive priced chicken meat for FTA products or replace imports. The trial program of using the CFC’s MDP for dark meat has proven successful in reducing excess demands by about 1.7 kt to 2.0 kt annually. Similar programs are in place for dairy and eggs to promote the use of dairy and egg ingredients by Canadian food manufacturers. The approach of providing the Canadian chicken growers with an opportunity to grow chicken for the domestic market is consistent with the supplementary import procedures set up for dealing with temporary supply shortages. Under the shortage procedure the chicken industry has an opportunity to supply needed chicken meat before supplementary permits are issued. Also, it fits in well with the effort to develop second generation supply management and capture the economic activity multiplier such as feed grains. Most of the chicken meat used for FTA products is breast meat, therefore, the potential uptake will likely exceed the current domestic dark meat program.

Objective:       To provide Canadian chicken growers and processors with an opportunity to supply domestic grown chicken meat to the fastest growing segment of the Canadian chicken market and eliminate or reduce the need for special supplementary permits to provide FTA manufacturers with competitively priced chicken meat.

Premise:          The foundation of this proposal is the assumption that the program will be accessed by chicken growers either individually or through their respective provincial chicken board and processors for whom participation is economically viable or when participation is expected to make a positive contribution to their business.

Approach:      The current CFC Market Development Program could be amended at Section 6.1.d to read, “chicken meat products” rather than “dark meat chicken products” as well as Section 8.1 should be examined to determine if the MDP use for FTA products is covered in the 14% or excluded. We would suggest the 14% be read to include any volume accounted for by ITCan confirmation letters for either dark or white meat.

Application:

  1. a) Is a domestic supply option possible?

So long as participation is voluntary, we expect there will be uptake by  both the producer and the primary processor, particularly given current dark and white meat prices. Participants have the opportunity to earn additional revenue on the incremental volume. Although the business case for dark meat is more transparent, we suspect the case for white meat also exists, but not all the time. Additional volume throughout the supply chain can capture economic value and contribute to covering overhead while meeting local supply and food safety requirements and avoiding border issues. If the economic contribution to the business is not positive, there will be no uptake. Market conditions may not be favourable at all times of the year for all producers and processors. In Ontario, it is estimated some 40% of producers participate in the current MDP at a lease rate of 42 cents per kilogram. Add to this cooperation from hatching egg producers another 10 cents per kilogram cost reduction could be achieved. The feed sector also would likely want to participate, creating more savings. We think it can work.

  1. b) Impact on the Domestic Market

As an example, the amount of additional live chicken allocation required to provide up to 5.9 kt of boneless chicken dark and white meat for FTA manufacturers by the MDP as proposed by the CFC in the 2002 agreement is about three (3) million birds. So long as the boneless white and dark meat are purchased by FTA manufacturers, the impact on the domestic market will be the additional supply of wings and by-products. Since wings are usually needed and are also a big import item, some further import replacement is possible and domestic market impact limited to the additional supply of by-products.

 

Since the needs of FTA manufacturers for chicken meat in excess of the TRQ will be known in early January or late December, it is possible each year to place an upper limit within the MDP equal to the sum in the confirmation letter issued by ITCan. Also, Section 7.1 of the CFC’s policy puts a limit in place. Again, using 5.9 kt as an example, this means adding about 1 kt to 2 kt of production per period to the MDP (providing the 14% limit is not breached by a province) and could be less since some exiting volumes of MDP may be redirected to the domestic market rather than the export market.

  1. c) Impact on the International Market

Since the only change that needs to be made to the CFC’s MDP is to allow white meat sales to FTA manufacturers to qualify similar to dark meat and exports, any additional production should not result in any significant increase in chicken exported. Indeed, some processors may elect to market both the dark and white meat portions to FTA manufacturers, meeting the conditions of the program without exporting.

Conclusion:

Only by expanding the eligibility of the MDP will we be able to determine the uptake and impact of a white meat component. As an industry, we have nothing to lose by giving growers and processors an opportunity to supply a growing segment of the chicken market. Even a pick up of only 1 kt more than the 1.8 kt dark meat currently is 1 kt less of special supplementary permits plus 2 kt or 3 kt of additional Canadian-grown chicken and the economic gains associated with this production.

Financial Option:

Another alternative, similar to the breaking egg supply program, is that the CFC could consider letting FTA manufacturers purchase Canadian chicken meat at regular prices and provide a rebate to achieve competitive input costs. Based on the 5.9 kt (evisc.) and current prices, the estimated cost of the program could range from a low of $2 million to a high of $9 million depending on market conditions in the U.S. relative to Canada. Such a program would avoid completely any international or domestic market impact by using the existing quota allocation approach to ensure the market is supplied. It also avoids the need to adjust live prices to achieve competitive pricing.

Uptake:

Like the current dark meat program, once the white meat alternative has been added to the FTA program, a portion of the certificates may not be used for a variety of reasons. Just having the program in place, therefore, can reduce FTA requirements. Any MDP production used will reduce the amount of supplemental imports issued to satisfy the needs of FTA manufacturers by the same amount.

Proposed Administrative Procedure

  • ITCan receives application for shares of the non-ICL portion of the TRQ and determines the volume of uncooked white chicken meat required by FTA manufacturers that is in excess of the portion provided by the TRQ, the reserve pool and the current dark meat component of the MDP. (The to-compete within the year component would not be included because it would not be known.)
  • The opportunity to grow live chicken to cover the excess quantity of uncooked white chicken meat determined by DFATD will be provided to chicken growers through the existing CFC Market Development Program.
  • As with the current dark meat program, DFATD will inform applicants, as part of their annual notification, that they qualify for chicken white meat under the Domestic Market Development Program and set out the quantity of chicken white meat which qualifies, in a certificate. This certificate becomes the key document for the program.
  • The CFC is notified of the total of the uncooked white chicken meat certificate issued each year by DFATD to qualified FTA manufacturers. This quantity each year can become a limit within the MDP.
  • The successful FTA applicant, using the certificate issued by DFATD, negotiates with their primary processor of choice for the quantity, quality and price of the uncooked chicken dark or white meat or both. In some cases, the applicant may be able to negotiate an acceptable payment for the certificate issued by DFATD similar to the way some small FTA TRQ users currently operate using TRQ.
  • The primary processor, in turn, negotiates with chicken growers, hatcheries, feed manufacturers and relevant provincial marketing board an arrangement to grow the additional live chickens at agreed upon live prices.
  • The primary processor and/or grower will send a copy of the DFATD letter and the documentation supporting the placement by the grower of the appropriate quantity of live chickens to the respective provincial board for auditing purposes and as required by the MDP section 9.3.
  • Similar to the current dark meat MDP, if the uncooked white chicken meat requested is not available from a primary processor at a price which makes FTA manufacturing competitive, the manufacturer will document this information and provide it to DFATD who, in turn, will request the CFC to proceed with the supplementary import sourcing procedure. This gives the chicken industry a second opportunity to supply the needed white meat domestically.
  • Only if the CFC fails to source white meat supply at a international competitive price may an FTA supplementary like-for-like permit be issued by DFATD. As is the case for dark meat, a U.S.-based price series may be used to develop at competitive price reference in consultation with interested parties before the program is initiated.

 

CARI, September 2014

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