Inclusion in the TPP May Come at a Cost for Canada

Contributors: Ed Farrell, Jerry Chapin

As President Obama signed Trade Promotion Authority into law he removed a major stumbling block to completion of the Trans-Pacific Partnership (TPP) trade negotiation when chief negotiators, and then Ministers, meet in Maui July 24-31.  However, a sticking point for many of the countries in the negotiation may be Canada’s reluctance to nix their protectionist supply management system for dairy and poultry.

With respect to dairy, the system dates back seventy years to when Canada faced significant surpluses following World War II, as the strong profits realized by Canadian dairy farmers from their trade with the U.K during the war evaporated with the normalization of trade within Europe after the war. In an attempt to align production with demand, Canada adopted a system that established floor prices for certain dairy products, which in turn supported on-farm milk prices. In further pursuit of price stabilization, the government established a supply control system that targeted specific dairy products.  These policies eventually gave way to Canada’s current supply management system.  While this system has propped up Canada’s milk producers, it could now exclude Canada from the largest trade deal since NAFTA.

The Canadian system is best understood as comprised of three parts: Price setting, control of supply, and protection from foreign competition. Prices are set by the Canadian Dairy Commission and ultimately result in significant income for dairy farmers. To avoid overproduction, farmers are allotted a production quota, which is a transferable asset currently valued at about $28,000.00 per dairy cow. Thus, an average Canadian dairy farm of around 70 cows has about $2,000,000 worth of quota. The final component to Canada’s supply management system is protection from foreign competition, which brings us to the TPP.

Canada’s ability to regulate their market is dependent on keeping competitively priced imports out, and to this end Canada has very restrictive tariff rate quotas on dairy products, with over quota tariffs ranging from 246% for cheese to 300% for butter. The result of these supply management policies is that Canadians are currently paying just over C$7.87 for a gallon of milk, or nearly twice as much as the average U.S. consumer.

There is no question that as negotiators meet in Maui, all eyes will be on Canada, which is under pressure to open their dairy market to imports from TPP countries such as Japan, Australia and New Zealand, as well as the U.S. Some believe this pressure will be enough to bring the nation out of its protectionist mind set. However, Canada has long stood behind their supply management program and is not showing much indication that they plan on bending to foreign pressure, regardless of whether the pressure is coming from powerhouse neighbors such as the U.S. or allies half way around the world. As recently as last month, a spokesman for Canadian Trade Minister Ed Fast said Canada would defend dairy supply management in its negotiations.

Faced with elections in October, will the Harper administration de-regulate the dairy and poultry industry as they did their wheat industry in 2011, or will they hold firm in support of their unique and dated regulatory system? And if they hold firm on dairy and poultry, will the US and others take a hard line and exclude Canada altogether? Or will some middle ground be found? Whether preserving Canada’s regulatory system for dairy and poultry is worth losing inclusion in the TPP — a deal that will ultimately benefit Canada in a wide range of sectors — may ultimately be a decision the Harper administration has to make.

Can EPA Regulate Animal Operations as Landfills? 1

By John G. Dillard

Four Washington State dairies are the targets of environmental activists in lawsuits that could have far-reaching consequences for animal agriculture in the United States. In these cases, the environmentalists assert that the dairies’ manure storage and application practices violate the Resource Conservation and Recovery Act (RCRA), the federal statute that regulates the disposal of solid and hazardous waste. The crux of the environmentalists’ argument is that manure is a “solid waste” under RCRA if it is not strictly used as a fertilizer applied at agronomic nutrient uptake rates.

The Case

The plaintiffs, Community Association for the Restoration of the Environment (“CARE”) and Center for Food Safety (“CFS”), brought suit against the dairies under RCRA’s “citizen suit” provision. RCRA is generally enforced in the context of sanitary landfills and industrial waste disposal, not agricultural operations. However, the plaintiffs allege that the dairies are violating Section 7002(a) of RCRA by storing, handling, and disposing of manure in a manner that endangers health and the environment. Furthermore, the plaintiffs contend that the dairies’ manure handling activities amount to “open dumping” of solid waste, which violates Section 4005(a) of RCRA.

In additional to seeking recovery of their attorneys’ fees, CARE and CFS are seeking an injunction that would require the dairies to undertake several remedial and preventive actions. Some of these actions include installing synthetic liners in all existing storage lagoons, undertaking an extensive soil and water quality monitoring program, funding independent study to develop a remediation plan, and providing an alternative drinking water source for neighbors within a three-mile radius of the dairies.

Is Manure a Solid Waste?

Manure is generally not considered a “solid waste” for the purposes of RCRA. RCRA defines solid waste as “garbage, refuse . . . and other discarded materials” resulting from commercial and community activities. Manure is not typically discarded, but is instead a useful by-product of animal agriculture. In fact, EPA regulations specifically exempt manure from RCRA if it is “returned to the soil as fertilizers and soil conditioners.”

While recognizing the exemption for manure as a fertilizer, the plaintiffs alleged that manure is a solid waste if it is applied at levels beyond agronomic uptake rates or leaks into groundwater. In other words, the plaintiffs’ case rests on the theory that any manure that is not strictly used as a fertilizer is “discarded” and thus, a solid waste. Using this theory, the plaintiffs alleged that the dairies violated RCRA due to excessive application of manure to agricultural fields that resulted in runoff or leaching into the soil. Furthermore, the plaintiffs alleged that millions of gallons of liquid manure leaked out of the dairies’ lagoons and entered groundwater supplies.

This is not the first time a case has been litigated under this theory. In 2006, EPA sought to hold a swine operation liable under RCRA on the basis that manure applied in excess of agronomic uptake rates was a “solid waste” for RCRA purposes. However, EPA and the swine producer entered into a consent decree, which avoided establishing precedent on the matter. In a separate matter, Oklahoma v. Tyson Foods, Inc., the state of Oklahoma applied the same theory to poultry litter. In that case, the court held that manure applied as a useful fertilizer did not transform into solid waste simply because its entire contents were not absorbed by crops as nutrients. 2010 WL 653032 at *10.

Plaintiffs Have Cleared a Hurdle

The dairies sought to have the cases dismissed on the basis that manure intended for use as fertilizer is not transformed into solid waste in the event it is over-applied to fields or leaked from lagoons. However, in a setback to the dairies, the court rejected this argument. The court did acknowledge that Congress did not intend for manure that is applied as fertilizer to be regulated as a solid waste under RCRA. However, the Court held that it was “untenable” that manure could never transform into solid waste through unintentional excess application or leaking from lagoons.

By surviving the motion to dismiss, the plaintiffs cleared a substantial legal hurdle. The case now rests on whether the plaintiffs can demonstrate that the dairies’ manure storage and application activities actually led to manure runoff and leaching as well as leakage into the groundwater. Whether the facts of the case match the plaintiffs’ claims remains to be seen. For instance, USDA’s Natural Resources Conservation Service was highly critical of EPA’s methodology and conclusions in a study of the dairies’ impact on drinking water; the plaintiffs rely, in part, on this study for their own claims.

Parallel EPA Enforcement

These Washington state dairies are also the subjects of EPA enforcement actions under the Safe Drinking Water Act. EPA targeted the dairies because it believed they were the cause of elevated nitrate levels in drinking water in the vicinity of the operations. EPA initially served Notices of Violation to five Yakima Valley dairies. Rather than face enforcement, one dairy decided to cease operations and sell off its herd. The other four entered into onerous consent decrees, which require the dairies to provide alternative drinking water sources for neighbors within a one-mile radius, install multiple monitoring wells on the property, and conduct a comprehensive assessment that identifies ways to reduce or minimize the impact of the dairies on surrounding water quality.

Implications for Agriculture

Activists often seek to bring ordinary agricultural practices under the purview of RCRA. For instance, in Safe Air for Everyone v. Meyer, several of my OFW Law colleagues represented a group of Idaho bluegrass farmers in another RCRA citizen suit brought by activists over the practice of “open burning” fields, which promotes regeneration of bluegrass and maintains yields after seeds are harvested. In Meyer, the Ninth Circuit held that an agricultural “waste,” such as grass residue, is not a solid waste under RCRA if the generators of the residue (farmers) reuse it  in a continuous system that improves crop yields and is in accordance with established farming practices.

The Washington dairy cases could have major implications for livestock, dairy and poultry operations in the United States. Manure is a valuable by-product and a critical component for ecological and economic sustainability in animal farming operations. Animal agriculture is accustomed to regulation under the Clean Water Act. However, shoehorning livestock, dairy and poultry operations into RCRA, a statute intended to regulate waste storage and sanitary landfills, has the potential to create confusion and possibly duplicative regulations.

I will be following this case and will provide updates as necessary.

Farm Bill Redefines Dairy and Trade Activities

By Nathan Fretz

On February 7, the President signed the Agricultural Act of 2014 (the “Farm Bill”) into law.  Over a series of blog posts, we will focus on various provisions within the Farm Bill, with a particular focus on some of the provisions that may not have received the level of media attention as others, yet are important nonetheless.  Today’s post focuses on the changes to the dairy safety net, which has certainly received media attention, and the creation of the position of Under Secretary for Trade and Foreign Agricultural Affairs within USDA, which has not.

New Dairy Safety Net

The Farm Bill brought a sea-change in the safety net for dairy producers.  Gone are the Milk Income Loss Contract (MILC) Program (which will be repealed once the new dairy program is implemented), Dairy Product Price Support Program, and Dairy Export Incentive Program, and in their place, the Farm Bill establishes the Margin Protection Program (MPP) for dairy producers and the Dairy Product Donation Program.  The changes in the dairy safety net parallel the broader movement in agriculture programs over the past several farm bills towards risk management programs in which producers must choose coverage levels and make premium payments.

The Margin Protection Program will provide payments to dairy producers during times in which dairy margins, defined as the difference between the all-milk price and the average feed cost, fall below the coverage level chosen by a producer for a consecutive two-month period.  The payment amount will be based on the producer’s production history, the difference between the actual dairy margin and the margin level at which the producer chooses to be covered (ranging from $4.00 to $8.00), and the coverage percentage that the producer chooses to cover (from 25% to 90% of the producer’s production history).

Importantly, the Farm Bill sets a producer’s production history for the five years of the program as the highest level of production that the dairy operation had during 2011, 2012 or 2013, plus a small, annual allowance for the normal increase in the national average milk production.  Thus, if a producer decides to increase the size of his or her dairy herd, the additional milk production would not be covered under the program.  Finally, it is worth noting that the stabilization program, which was frequently highlighted during the dairy debate over the past several years, was not included in the MPP.

The Dairy Product Donation Program (DPDP) is designed to supplement the MPP when margins are at extremely low levels.  When dairy producer margins fall to $4.00 or less for two consecutive months, the Secretary must immediately purchase dairy products at market prices, until the date that is the soonest of the following:  1) the program has been in effect for three consecutive months; 2) margins rise above $4.00 for the immediately preceding month; or 3) world prices for dairy products are such that the statute requires the Secretary to terminate the program.

The Secretary must distribute the dairy products purchased under the program to low-income groups through the use of public and private nonprofit organizations.  One essential aspect of the program prohibits the Secretary from either storing the dairy products or selling them back into the commercial market.  No longer will USDA fill caves with dairy products, as done under past dairy purchase programs, because under the donation program the products must be delivered immediately to the appropriate organizations for distribution.

On its face, the Dairy Product Donation Program may seem similar to the now-repealed Dairy Product Price Support Program; however, in practice, the two operate very differently.  Most importantly, the DPDP gives the Secretary discretion as to which dairy products to purchase.  In fact, the Secretary is required to consult with public and private nonprofit organizations that are organized to provide food to low-income individuals to determine the types and quantities of dairy products to purchase – in other words, the Secretary is directed to determine which products people need and want, and then purchase them.  With this consultation, the Secretary, in theory, will be able to make purchases more quickly, without requiring processors to meet unwieldy product specifications, and the donations will have a more immediate, focused impact.  This purchasing discretion will bring far more products into the program that under the old price support program, and dairy processing companies be aware of the consultations between the Secretary and the public and private nonprofit institutions regarding which products to purchase.

As with any new program, the Margin Protection Program and the Dairy Product Donation Program come with both opportunities and questions.  How many dairy producers will participate in the margin program, and at what coverage levels?  What, if any, impact will the program have on the volume of milk produced over the next five years?  Will the program help to end the devastating price volatility in the dairy market?  Will the Dairy Product Donation Program work in tandem with the margin program to prevent long periods of low margins?  Or, if there is a prolonged period of low margins, what will be the cost of the MPP to the government?  Finally, will there be a market impact – and if so, to what degree – as a consequence of moving from the detailed specifications and limited products of the old price support program to the much more flexible, product-inclusive donation program?  These are just a few of the many questions that warrant attention as the rules for the new programs are promulgated and the programs are implemented.

California Potentially Joining the Federal Milk Marketing Order System

No discussion of dairy and the Farm Bill can be complete without mentioning the possibility of changes for the nation’s largest milk producing state, California.  Section 1410(d) of the bill authorizes the Secretary to begin the hearing process to issue an order, subject to a vote of California dairy producers, to designate California as a Federal milk marketing order.

New Under Secretary for Trade

Over the past 50 years, trade in agricultural products has grown tremendously, becoming not only an engine for growth of the agricultural economy, but for the U.S. economy in general.  The agricultural trade surplus is a bright-spot in the country’s balance of trade, providing growth opportunities for fruits and vegetables, dairy, meat and poultry, grains, wine and other agricultural products.  USDA’s Economic Research Service recently released its agricultural projections for the next decade, and emphasized that low- and middle-income countries will drive growth in consumption of meat, grains, and oilseeds (access the full report here).

In a move that emphasizes the critical importance of trade to the agriculture industry, the Farm Bill directs the Secretary to establish the position of Under Secretary for Trade and Foreign Agricultural Affairs.  The position would be created as part of a reorganization of the international trade functions within USDA.  The farm bill provision provides that the Secretary, in proposing the reorganization and creating the Under Secretary position, consider how the Under Secretary “would serve as a multi-agency coordinator of sanitary and phytosanitary issues and nontariff trade barriers” in agricultural trade (sec. 3208(b)(2)(B)).

As the bill language implies, many of today’s agricultural trade issues require multiple agencies – frequently including agencies outside of USDA – to work together to reach resolution.  Given the all-too frequent and negative impact that nontariff trade barriers and phytosanitary issues have on U.S. agriculture exports, it is essential that the Department have a central trade authority that can react quickly with input from across multiple agencies to resolve disputes.

While the Under Secretary for Trade position is critical, determining the position’s authority will be challenging.  For instance, the Animal and Plant Health Inspection Service and Agricultural Marketing Service, which currently fall under the Under Secretary for Marketing and Regulatory Programs, and the Food Safety and Inspection Service, currently under the Under Secretary for Food Safety, all have critical functions working every day to ensure the efficient and safe trade in agricultural products.  Will the trade functions of these agencies be moved from their current agencies and placed under the new Under Secretary for Trade?  Or, will the trade offices remain housed in their current agencies, but be subject to the new Under Secretary for the purpose of coordinating trade functions?  As the reorganization unfolds, it will be essential to monitor whether and how agency jurisdictions are affected.

The Secretary has 180 days from the date of the farm bill’s enactment to send a report to Congress with a detailed proposal for reorganizing the trade functions at USDA and creating the new Under Secretary for Trade and Foreign Agricultural Affairs.  It is incumbent on the food and agriculture industry to weigh-in on that proposal to ensure that USDA is organized to effectuate safe, predictable, and efficient trade on a daily basis, while also having the ability to respond quickly and authoritatively when challenges arise.

Nathan Fretz joined OFW Law on Monday, February 3. Prior to joining OFW Law, Nathan was counsel for the House Agriculture Committee.  He previously worked at the U.S. Department of Agriculture’s Food Safety and Inspection Service.

California’s Prop 37 — A Prop Too Far?

By Robert A. Hahn

On election day, California voters will decide on another food labeling ballot initiative, one that is being watched intently by the food industry.  If it passes, the California Right to Know Genetically Engineered Food Act, popularly known as “Prop 37” (short for Proposition 37), would require genetically engineered foods to be labeled as such.

Specifically, Prop 37 would:

  • Require genetically engineered raw agricultural commodities to be labeled “genetically engineered” on the front label;
  • Require processed foods with genetically engineered ingredients to be labeled “[May be] partially produced with genetic engineering” on the front label;
  • Prohibit any processed food from being labeled “natural,” even if the food is not genetically engineered;
  • Exempt several categories of foods, including restaurants foods, alcoholic beverages, and meat and poultry, from the labeling requirement; and
  • Authorize private plaintiffs to sue to enforce the law.

Putting aside the question of whether Prop 37 is sound public policy, there is a good chance it will be struck down as unconstitutional if it passes, and the entire exercise will have been a waste of time and money.

While other constitutional challenges to Prop 37 (e.g., dormant Commerce Clause) are possible, a lawsuit alleging that Prop 37 violates the First Amendment appears all but certain.  Generally, a law that seeks to regulate (i.e., restrict or compel) commercial speech must pass the test enunciated by the U.S. Supreme Court in Central Hudson Gas & Elec. Corp. v. Public Service Commission, 447 U.S. 557 (1980).  Under the Central Hudson test, a law compelling commercial speech must involve a substantial government interest, must directly advance that government interest, and must be no more extensive than is necessary.  If the Central Hudson test is applied to Prop 37, it’s difficult to see how a court could find it constitutional.

(1)  Is there a substantial government interest in mandatory labeling of genetically engineered foods?

The proponents of Prop 37 say that there is a consumer “right to know” which foods are genetically engineered.  The Statement of Purpose in section 2 of Prop 37 states that its purpose is “to create and enforce the fundamental right of the people of California to be fully informed about whether the food they purchase and eat is genetically engineered.”  Is satisfying that consumer right to know a substantial government interest?

In the closest precedent available, the consumer’s right to know was held not to be a substantial government interest.  In 1994, the State of Vermont enacted a law mandating labeling of milk produced from cows treated with recombinant bovine growth hormone (rbGH), also knows as recombinant bovine somatotropin (rbST).  In International Dairy Foods Association v. Amestoy, a case brought by a dairy industry trade association, the Second Circuit Court of Appeals held that the Vermont labeling requirement violated the First Amendment.  The court acknowledged a strong interest in this information among Vermont consumers, but held that “consumer concern is not, in itself, a substantial interest.”  According to the Second Circuit, “were consumer interest alone sufficient, there is no end to the information that states could require manufacturers to disclose about their production methods.”

The U.S. Food and Drug Administration’s (FDA) position also undercuts any argument that there is a substantial government interest in labeling genetically engineered foods.  FDA considered requiring special labeling of all bioengineered foods, but decided against it.  The agency concluded that the fact that a food has been genetically engineered is not a material fact.  If the genetically engineered food is significantly different from its traditional counterpart (e.g., in terms of nutritional value, safety, or functionality), then it must be labeled to indicate the difference, but the fact that a food was produced using bioengineering, by itself, is not a material fact.  The American Medical Association has similarly stated that there is no scientific justification for special labeling of biotech foods.

(2)  Does mandatory labeling of genetically engineered foods directly advance that government interest?

Even if there is a substantial government interest in labeling all foods produced using genetic engineering, Prop 37 arguably fails to directly advance that government interest, because it exempts so many categories of food from its labeling requirement.  Exempt categories include all foods served in restaurants and other food facilities primarily engaged in sale of food for immediate consumption; food derived entirely from animals such as meat, poultry, and milk (unless the animal itself has been genetically engineered); and alcoholic beverages.  Prop 37 also contains a large loophole: a food is exempt if there is a sworn statement from the food’s supplier that it has not been knowingly or intentionally genetically engineered or commingled with genetically engineered foods.  Even if there is a substantial government interest in satisfying the consumer right to know which foods are produced using biotechnology, with so much of the food supply exempt from its labeling requirement, it is not clear that Prop 37 would directly advance that government interest.

(3)  Is a law mandating labeling of genetically engineered foods more extensive than is necessary to advance the government interest?

Stated otherwise, is there a way to advance the consumers’ right to know which foods are genetically engineered without mandating a new labeling requirement?  A reasonable case could be made that there is, and it is already in place.  It’s called the National Organic Program, administered by the U.S. Department of Agriculture.  The right to know which foods have been genetically engineered is clearly motivated by a desire to avoid those foods.  Consumers who want to avoid genetically engineered foods can already do so by purchasing certified “organic” foods, which are prohibited from using genetic engineering.  If a food is not labeled “organic” and it contains ingredients derived from corn, soybeans, or other crops commonly known to be genetically engineered, an educated consumer can assume it has genetically engineered ingredients.

If the ballot initiative passes, the battleground will shift to the courts.  It will no doubt be intensely fought.