9 February 2010

9 minute read

Some of the named benefits of supply management include stable and consistent prices for producers, processors and consumers, no reliance on subsidies, and ensures a constant and certain supply of milk.

However recent criticism has suggested that the system discourages competition, stops producers taking up opportunities and risks not securing market access abroad for other Canadian products.

Background

By the early 1970's dairy became the first commodity in Canada to operate a national supply management system, it is managed by the Canadian Dairy Commission. The system was adopted to address the unstable markets, uncertain supplies and highly variable producer and processor revenues (which were common in the 50's and 60's).

Early farm organisation groups lacked leverage and so turned to provincial governments to create marketing boards.

Only able to implement programmes at provincial or regional levels, and with no regulations the groups were ineffective. Surpluses from other areas could easily disrupt marketing strategies and undermine attempts to regulate prices. This led to calls for a coordinated marketing plans and national marketing boards.

Canada dairy producers supply two main markets:

• the fluid milk market, which includes flavoured milk and creams.
• the industrial milk market, which uses milk to make products such as cheese, butter, yoghurt, ice cream and milk powders.

In 2008-09 the fluid market accounted for 40 per cent of total milk, or 33 million hectolitres at 3.6 kg of butterfat per hectolitre. The industrial milk accounted for the remaining 60 per cent, or 49.9 million hectolitres.

Controlled prices

The price the producer receives depends on what is set by the provincial body. Dairy Farmers of Ontario are the milk board in Ontario. It is their responsibility to market fluid milk on behalf of all Ontario dairy farmers to the processing industry. They also licence producers, allocate milk quotas and establish and negotiate the prices or accounting values charged to processors, according to the milk's end use.

When determining the price to be paid, they will take into account the Canadian Dairy Commission's annual study of production costs. Revenue from milk sales are then pooled. The end value of the milk and the price the processor pays depends on the final use of the raw milk, which is set out in the Harmonised Milk Classification System. Click here to see the classes.

Farmers receive the price the processor pays less costs for marketing, advertising, administration and transportation of milk from farm to dairy. Five provinces, Ontario, Quebec, New Brunswick, Nova Scotia, and Prince Edward Island, have formed a regional pool known as the P5. Producers in each of these five provinces all share one large market and pay the same amount per hectolitre for transportation and promotion. In this pool deductions amount to about six per cent of the price paid.

The other milk pool is the Western Milk Pooling Agreement.

Support prices are established for butter and skimmed milk powder by the Canadian Dairy Commission. Support prices are based on the following elements: results of the cost of production study, arguments presented by various stakeholders, an evaluation of the processors' margin, economic indicators such as the consumer price index as well as their own experience and knowledge of the industry.

Controlled production

A federal/provincial agreement, the National Milk Marketing Plan, sets out the structure for the calculation of the national industrial milk production target (Market Sharing Quota) required to meet the demand for domestic and export markets. The Plan also provides for the allocation of this quota to the provinces.

The Market Sharing Quota (MSQ) is the national milk production target for industrial milk in Canada. The National Milk Marketing Plan establishes each province's share of the MSQ, and provides for the sharing of any quota increase or decrease. Each province allocates its respective share of the MSQ to its producers according to its own policies, and in accordance with pooling agreements. The Canadian Dairy Commission monitors trends in Canadian requirements (demand) and production (supply) on a monthly basis. Producers can buy and sell quota as they please.

Controlled imports and exports

Prior to 1995 Canadahad a range of restrictions in place on imports to maintain stability of the milk supply management system. However these changed signifincantl as a result of the World Trade Organisation (WTO).

The Canadian dairy trade balance has been negative since 1999. The Canadian dairy trade deficit was $337 million in 2007 which represented an increase of $79 million or 31 per cent in trade deficit on the previous year. The ongoing deficit position was due in part to the appreciation of the Canadian dollar combined with the dairy industry price structure, which was designed to mainly serve the domestic market. Moreover, the continuing increase in the use of the Import for Re-Export Programme (IREP) has been a key driver of strong import numbers. However, dairy products imported under IREP are totally exported in form of further processed food products and also other dairy products.

Criticism of supply management

A recent report by the Conference Board of Canada has suggested that dairy supply management prevents producers from capatalising on opportunities, reduces competitiveness and does not allow long term challenges to be addressed.

Restricts ability to seize global opportunities

The report says that as the global demand for dairy products increases, the higher prices of Canadian products limits its competitiveness in these expanding markets. It also suggests that defending supply management in trade talks compromises Canada's ability to secure market access for other Canadian goods and services.

Reduce competitiveness

With little incentive to improve competitiveness and efficiency, there are concerns that if or when Canada liberalises its dairy policies, producers will be at a disadvantage.

Discourages from addressing long-term challenges

The system relies on price increases or new regulations rather than addressing long-term challenges, such as declining milk consumption per capita.

Industry thoughts

Producer

Albert Hinrichs milks 70 cows in Whitemouth, Manitoba. He says he would not change a thing about the current supply management system.

"I believe I am paid a fair price for my milk because it is based on a cost of production formula. I wouldn't be paid what I am now on a free market."

Asked whether he thought supply management allowed uncompetitive farmers to stay in the market, Mr Hinrichs said he felt he was as competitive as he could be, filling his quota with the lowest number of cows possible. However, he did doubt whether he would be in production in a free market, as farmers in Canada receive no subsidies.

He said he was very satisfied with the marketing of Canadian milk and milk products. "I believe that our marketing board does the best job possible with the lowest amount of money spent."

Mr Hinrichs believes that the benefits of supply management are reasonably stable prices for the producer and a stable volume of milk for the processor. He says that the major disadvantage is that it is hard for a young person to make a start in the dairy industry.

Mr Hinrichs strongly promotes supply management saying that producers get a bigger share of the profit, whilst consumers still pay a reasonable price.

Processor

Speaking with Mr Réjean Ouimet, General Manager of St Albert Cheese in Ontario, he believes that the dairy supply management is the "best thing in Canada".

"For a small co-op it makes life a lot easier, as we don't have to deal directly with producers, worry about transportation or even quality control standards on farms."

Processors pay the provincial dairy board, in Mr Ouimet's case - Dairy Farmers of Ontario, directly for milk. For fluid milk producers are paying about 92 cents per litre and for industrial milk the prices vary depending on the classes and finished product. Mr Ouimet pays 80 cents per litre for cheese.

When asked whether he feels supply management restricts his business in any way, for example through lack of access to the export market, Mr Ouimet explains that should St Albert Cheese wish to access the export market they could do so but would need to require a special permit to export. He said that been a small co-operative they would potentially be interested in selling to the US - but not overseas.

"St Albert Cheese is produced with 100 per cent milk, there are no modified ingredients added - this obviously adds to our cost of production and so we would not be able to compete on a world market against companies who add over 17 per cent of modified ingredients to their cheddar cheese."

St Albert processes two million litres of milk per month and generates a profit of CA$ two million. It is owned by 40 local farmers. Dividends are returned to the farmer at 25 per cent cash and 75 per cent re-investment. The benefit of this is that no money is needed to be borrowed to invest in the business.

Their annual milk quota is 24 million litres, which Mr Ouimet said could be increased should they wish. "However if you are increasing production - you must also be sure that there is demand for the product."

Dairy Farmers of Canada

Mr Jacques Laforge is the President of Dairy Farmers of Canada. Mr Laforge believes that the system in place benefits the whole supply chain.

"I would be surprised if more than 0.25 per cent of producers were unhappy with the supply management."

He explained that provincial dairy boards meet every month, whilst producers are consulted three times a year and the national board meet to discuss annual policy twice a year.

"Should producers feel they would be better off in a free market then they can sign a petition and present it to their provisional board who would then hold a vote. However since the system has been in place, a petition has never been presented to a provincial board."

Mr Laforge said that the current price which the producer receives is 70 cents/ litre. This equates to 40 pence per litre, 50 Euro cents per litre, 66 US cents per litre and 73 Aus cents per litre. The producer gets a share from all fluid/ industrial milk returns.

The average cow herd in Canada is about 70 cows, however the supply system provides a fair price based on the cost of production for all producers.

Mr Laforge says that whilst it is inevitable that there will be different levels of efficiency and recognises that some producers do struggle - it is not because they do not receive a fair price.

"We could always argue that more marketing and advertising could be done. Currently CA$ 65-80 million are put back into marketing through the promotion marketing levy.

Less than two per cent of total milk production is exported. Mr Laforge feels that Canadian milk and milk products would not be able to compete on a global market as they are not based on the lowest cost of production, so for example couldn't compete against New Zealand. If they were too access the global market it would have be through a niche market.

He said that Canada are nearly completely self sufficient in milk and milk products with only five to eight per cent of total dairy consumption been imported into Canada.

Mr Laforge said that producers are encouraged to diversify should they wish. For example to produce cheese, they must apply for a processing licence.

He says that the Canadian system functions so well that he has had US and German producers contact him asking how they could establish a similar system in their countries.

"In Canada we have found a system where the farmer gets a fair share of the retail price - if the price increases then the farmers share goes up!" concluded Mr Laforge, whilst pointing out that the retail price in Europe was higher than in Canada.