New NAFTA takes effect July 1: Changes affecting agriculture products

Canadian producers of a wide range of agriculture products have been preparing for, and in some cases, bracing for change when the Canada-United States-Mexico Agreement (CUSMA)¹ comes into effect on July 1^st of this year. Many of the regulations and much of the guidance from the Canadian government, which forms the foundation for the implementation of CUSMA, are still to be released. COVID-19 pandemic restrictions are slowing progress not only on the regulatory front, but also for the approval of the financial support programs for the most affected producers. Despite this, producers must be prepared.

Key take-aways

• CUSMA comes into force July 1, 2020 - NAFTA will remain in effect until July 1, 2020;
• The dairy year under CUSMA means dairy producers will enter “year 2” of CUSMA implementation on August 1, 2020;
• Effective July 1^st the definition of “specially defined mixture” is changed to restrict its application;
• Canadian Grain Commission’s “Declaration of Eligibility for Delivery of Grain” will be statutorily required under CUSMA;
• More flexible rules on sugar should nearly double market access for Alberta sugar beets to the US; and
• Country-of-origin labelling prohibited for meat products.

Implementing legislation

Ending a nearly three-year process, CUSMA will enter into force on July 1, 2020, and replace the North American Free Trade Agreement (NAFTA). Consistent with protocol, CUSMA comes into force on the first day of the third month following the last notifications. Notifications were provided by Canada, Mexico and the US on April 2, April 4 and April 24, respectively. 

Canada’s implementing legislation, Bill C-4, An Act to Implement the Agreement between Canada, the United States of America and the United Mexican States, approves CUSMA and provides, among other things, for the payment of Canada’s share of administrative costs and amends certain federal acts, including the Export and Import Permits Act, Importation of Intoxicating Liquors Act, and Canada Grain Act, to conform them to Canada’s obligations under CUSMA. 

Producer support programs yet to be announced

Generally, CUSMA is expected to have a modest impact on Canada’s agri-food industry. This is partially because all agricultural products whose tariffs were eliminated under NAFTA will continue to have zero tariffs under CUSMA. While Canada will generally be preserving and maintaining its supply management system, it made a number of concessions that provide the US additional access to Canadian markets, particularly in the dairy, poultry and egg products sectors. That being said, changes in these sectors will be phased in over time and the impact is expected to be gradual, with Canadian products dominating the market in the near term. 

Even though impacts should be gradual, Canada has promised affected producers and processors full and fair compensation to help mitigate CUSMA’s impacts; however, specific CUSMA assistance has yet to materialize. 

The restrictions put in place to deal with the pandemic have indefinitely delayed tabling the 2020 federal budget, which is expected to have contained the compensation for sectors affected by CUSMA. In addition, both provincial and federal governments have recently announced support for agricultural producers in light of the impacts of COVID-19. 

On May 5, Canada announced its intention to amend the Canadian Dairy Commission Act and increase the Canadian Dairy Commission’s borrowing limit by $200 million to allow cheese and butter to be temporarily stored and prevent waste. On May 15, Parliament adopted these amendments, increasing the borrowing limit from $300 million to $500 million. It remains to be seen whether these measures, or other COVID-19 spending, will affect the timing and quantum of CUSMA assistance promised to the agricultural sector.  

Preparing for July 1

Dairy: July 1^st In-Force Date Causes Concern, Class 7 Pricing Eliminated

Canadian dairy producers, have made clear that the July 1 implementation date is unwelcome news, as they expected an August 1 in-force date. While one month does not seem problematic initially, under CUSMA, Canadian dairy producers must implement certain terms within one dairy production year, which pursuant to the terms of CUSMA, spans August 1 to July 31. 

As such, Canadian dairy producers will only have one month to plan and adapt to the new rules—rather than a full calendar year¬—as “year 2” of CUSMA will begin on August 1, 2020. This may have serious implications for the export surcharge on skim milk components and infant formula exports. By entering into force on July 1, the year-1 export cap of 55,000 metric tons will be reduced to 35,000 metric tons one month later as dairy year 2 begins on August 1, 2020. 

Dairy producers should also prepare for the elimination of Class 7 milk pricing. By January 1, 2021, Class 7 products must be reclassified according to their end use and priced based on a formula that uses US pricing adjusted for the cost of converting raw milk into specific products. Class 7 comprises skim milk components, primarily milk protein concentrates and skim milk powder used to process dairy products. Eliminating Class 7 pricing is expected to have a significant impact on dairy producers and provide an opportunity for importers. 

Poultry: Sauces Out, Cooking Required

Of note to poultry producers and processors, CUSMA restricts the use of the “specially defined mixture” tariff item classifications that exclude certain chicken-based products from import restrictions. Canada Border Services Agency has issued a notice stating that, effective July 1, 2020, sauces will not be considered “other ingredients” when determining whether a product is a “specially defined mixture.” The new definition also requires goods be par-fried, partially or fully cooked to be classified as a “specially defined mixture.” Importers who received past tariff classification opinions are encouraged by the Canada Border Services Agency to have the classification advice affirmed.   

Wheat: Grading Equivalency In, Declarations Mandated

As to wheat, each party will be afforded “treatment no less favorable than it accords to like wheat of domestic origin with respect to the assignment of quality grades.” Under NAFTA, US wheat exports to Canada are graded as feed wheat, and thus generally attract a low price. Under CUSMA, US wheat exports will receive the same treatment and price as equivalent Canadian wheat. To take advantage of this treatment, there must be a predetermination that the two wheat varieties are similar. While Canada has a list of registered wheat varieties, the US does not. Therefore, US wheat exporters need to have their varieties registered in Canada before they can benefit from this provision of CUSMA. Accordingly, it may take several years for this equivalency process to be fully functional.

The legislation implementing CUSMA contains measures to protect Canada’s grain quality assurance system. This includes mandatory requirements for all producers to declare information on the variety of grain when delivering to an elevator. These declarations are commonly required by elevator operators as a matter of industry practice, but will now be statutorily required in the form of the Canadian Grain Commission’s “Declaration of Eligibility for Delivery of Grain.” 

The declaration must be provided at least once every crop year for every kind and class of grain to the person who receives the grain delivery. The declaration must be made no later than the date of the first delivery of grain to which the declaration applies and no earlier than the start of the crop year during which the grain is harvested. 

Sugar: Market Access Expanded

CUSMA increases access to the US market for Canadian beet sugar and sugar-containing products, as the amount of sugar-containing products allowed to enter the US duty free will increase by 9,600 tonnes. Under NAFTA, 59,250 tons of Canadian sugar-containing products have duty-free access to the US market, but the quota has been under-utilized. This is due to restrictive rules that require sugar-containing products that are more than 65% sugar to be retail-ready and that prevent the use of cane sugar refined in Canada in some beverage mixes. 

The additional market access provided by CUSMA for sugar-containing products provides more flexible rules, as all products can be shipped to US retail, food service or food processing operations and all products can use refined cane sugar. As a result, market access for beet sugar processed in Canada, which comes largely from Alberta sugar beets, is expected to nearly double.

Beef and Pork: Country-Of-Origin Labelling Banned

Of great importance to Canadian meat producers, CUSMA expressly prohibits labelling regulations that treat imports less favorably than like domestic goods or otherwise create unnecessary obstacles to North American trade. The US repealed country-of-origin labelling laws that impose stringent requirements on Canadian beef and pork producers in 2015 after the World Trade Organization ruled they violated international trade law. Despite that ruling, Congressional Democrats sought to revive the country-of-origin meat-labelling program in 2019 after regaining control of the US House of Representatives. Estimates suggest the country-of-origin labelling laws cost Canadian cattle and hog producers more than $8 billion while they were in effect between 2009 and 2015.

As detailed above, CUSMA’s impact on the Canadian agriculture sector is widespread and coming fast. Once Canada finalizes its regulations and guidance, Canadian producers must act quickly to establish the policies, procedures, and protocols required to ensure compliance with CUSMA and its related annexes and with new legislative provisions, regulations, rules and guidance adopted by the federal government to implement the terms of CUSMA.

The full text of CUSMA is available here.

The authors wish to thank Ryan Taylor, articling student, for his help in preparing this legal update.