Overview of the Canadian Dairy Industry

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Overview of theCanadian Dairy Industry

• Gilles Froment, M.Sc., P.Ag.
• COO
• Canadian Dairy Commission, Ottawa
• February 21, 2014

DM272659
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Outline

• The Canadian marketing system and its component
• 3 pillars of supply management
• Seasonality programs
• Milk pools
• Marketing and innovation initiatives
• Current issues

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The Canadian Milk Marketing System and its
Components
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Snapshot of theCanadian Dairy Industry

• 12,234 farms producing approximately 8 billion
  litres of milk (315 million kg BF)
• 480 processing plants
• Farm receipts 5.9 billion
• Adds a net 10 billion to the GDP
• Processed products sales 14.7 billion
• Supports 15 billion of economic activity
• Sustains more than 215,000 jobs

Source EcoRessources
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World Milk Production 2005-2012(all species)
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World Cow Milk Production (2012)
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Source IDF World Dairy Situation 2013
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Canadas Milk Marketing System
Regulated market
Unregulated market
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CMSMC

• Canadian Milk Supply Management Committee
• Permanent body of signatories of the National
  Milk Marketing Plan - NMMP (voting members)
• One vote per province
• Dairy Farmers of Canada, Dairy Processors
  Association of Canada and Consumers Association
  of Canada (non-voting members)
• Responsible for policy determination and
  supervision of the NMMP provisions
• Meets 4 times a year
• Virtually all decisions require unanimity

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The CMSMC directs the implementation of the
National Milk Marketing Plan (NMMP) to coordinate
actions of provincial marketing boards and
governments
SK (3)
Non-voting members
Quebec (4)
DFC
DPAC
P.E.I. (3)

CAC
CDC chair
Ontario (4)
N.S. (3)
Alberta (3)
Newfoundland (3)
B.C. (3)
N.B. (3)
Manitoba (3)
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NMMP

• National Milk Marketing Plan
• Federal-provincial agreement
• Regulates marketing of industrial milk
• Balances supply and demand
• Sets out the establishment, distribution and
  adjustment of industrial milk quota

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The Canadian Dairy Commission

• Crown corporation created in 1966
• Reports to Parliament through Minister of
  Agriculture
• 3 commissioners, 60 employees
• Generally deals with industrial milk
• Total budget for 2013-2014 7.75 million
• Funded by government, dairy producers, commercial
  operations, and the marketplace

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Legislated Mandate

• Provide efficient producers of milk and cream
  with the opportunity to obtain a fair return for
  their labour and investment.
• Provide consumers of dairy products with a
  continuous and adequate supply of dairy products
  of high quality.

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Overview of Key Activities

• Chair the CMSMC
• Calculate Estimated Requirements (demand)
• Recommend Market Sharing Quota
• Establish Support Prices
• Administer Revenue and Market Sharing Agreements
  (pools)
• Administer Special Milk Class Permit Program
• Carry out external audits
• Create and administer marketing programs
• Remove surplus production
• Administer Seasonality Programs

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Milk Classes

• Industrial (Classes 2-4)
• used in the manufacture of butter, cheese, ice
  cream, yogurt, milk powders
• longer shelf life
• federal responsibility interprovincial trade of
  product

• Fluid (Class 1)
• used in 1, 2, skim milk, etc. and creams
• short shelf life
• provincial responsibility historically made and
  consumed in province of origin

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3 Pillars of Supply Management

• controlled prices
• controlled imports
• controlled production

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Pillar 1 Controlled Prices

• Industrial milk prices
• Are determined by provinces based on CDC support
  prices and vary depending on the end use of the
  milk
• Support prices are the prices at which the CDC
  buys and sells butter and skim milk powder under
  its various programs.
• Support prices are usually announced in November
  or December by the CDC to be effective February 1.

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Support prices 1997-2014 (/kg)
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Producer Milk Prices (2012)
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Evolution of Farm PricesCanada and the US 1998
- 2013
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Pillar 1 Controlled Prices

• Fluid milk prices
• are determined by provinces according to a
  formula
• 50 indexed COP
• 50 CPI
• Valid until February 1, 2016
• Applied once per year (in February)

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Milk Prices in last 12 monthsEnding December 2013

• Average in-quota revenues 77.99/hl
• Average price for fluid 94.78/hl
• Average price for industrial 66.63/hl

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Example - Prices per Component for February 2014
Class /kg BF /kg protein /kg other solids /hl standard _at_3.6 kg
Fluid milk 1(a) 7.15 74.39 /hl for SNF 74.39 /hl for SNF 100.13
Cheddar 3(b) 8.02 13.98 0.90 79.16
Butter 4(a) 8.02 5.55 5.55 78.31
Cheese as ingredient 5(a) 4.14 7.84 0.93 45.53
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Pillar 2 Controlled Imports

• Most dairy products are protected by Tariff Rate
  Quota (TRQs).
• Above TRQs, dairy products have a tariff of
  almost 300.

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Pillar 2 Controlled Imports

• Examples of TRQ and over-quota tariffs

Product TRQ (000 t) Tariff ()
Skim Milk Powder 0 201.5
Whey Powder 3.2 208.0
Butter 3.3 298.5
Cheese 20.4 245.5
Ice cream 0.484 277.0
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Pillar 3 Controlled Production

• Provincial milk marketing boards allocate
  production quota to their respective dairy
  farmers.
• This quota combines both fluid milk quota and
  industrial milk quota.
• Fluid milk quota is established by provincial
  marketing boards and equals demand.
• Industrial milk quota is established nationally
  by the CMSMC and is called Market Sharing Quota
  (MSQ).
• Quota is calculated and expressed in kg of BF.

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Establishing MSQ

• The CDC calculates the Estimated Canadian
  Requirements or ECR (demand) on a monthly basis.
  
• ECR Production Opening stocks Imports -
  Closing stocks - Exports - DIP- Class 4(m)
• MSQ is adjusted every two months when ECR
  increase or decrease.

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The 7 steps in sharing quota adjustments among
provinces
1 Skim-off
2 The 1090 rule
3 PEIs share
4 DDPIP DIP
5 Growth allowance
6 Exports
7 Fluid quota
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Evolution of MSQ
1 and 2 milk more popular lower butter
consumption
Quota cut of 1976
Low butter stocks
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Respecting Production Targets

• Provincial production targets
• Upper limit 0.5
• Lower limit 1.5
• Provinces are free to have their own policies to
  adjust their farm quota or not, however,
  provinces will be penalized if they over or under
  produce their share of quota.
• Over production no payment for the milk
  penalty
• Under production lost opportunity to produce

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Evolution of Milk Supply and Demand
Forecast includes a 1 growth allowance
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CDC Seasonality Programs

• While milk production is quite stable year round,
  people consume more dairy products in the
  fall/winter and less in the spring.
• To offset this, the CDC buys and stores butter
  and skim milk powder in the spring and puts those
  products back in the market in the fall/winter.
• These transactions are done at support prices.

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Seasonality Programs - Butter

• Plan A
• Becomes the property of the CDC
• 25 kg blocks

• Plan B
• Processors must buy back within one year of
  production of the product
• One-pound prints ready for retail sales.

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Managing Surpluses

• Production is managed on a butterfat basis.
• Surpluses of milk solids non fat (SNF) arise
  because consumers want the fat portion of the
  milk more than the SNF portion.
• The CDC buys the surplus SNF and disposes of it
  by exporting it or selling it for animal feed.
• Both these markets yield a lower return to
  producers than regular sales.

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CDC Import / Export

• IMPORTS
• According to WTO (3,274 t)
• Butter sold to further processors
• Cheese private sector imports (20,412 t)

• EXPORTS
• Subsidized exports according to WTO limits (none
  to USA)
• SMP (CDC exports to Cuba and Mexico)
• Permits for private exporters including
  non-contingent classes

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The Milk Pools
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Pools were established in themid-1990s in
response to

• Increased concentration at the retail and
  processing levels
• New trade rules (FTA, NAFTA, WTO)
• Differing provincial policies (for ex. milk
  allocation to plants)
• Fluid milk moving between provinces
• Inequities in producer returns

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The CDC administers 3 milk pools

• The P10 (all 10 provinces)
• The P5 (in the East)
• The WMP (in the West)
• These pools allow dairy farmers to share and
  balance revenues, markets and in some cases,
  transportation costs.

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What is Pooled?
Pool Milk Revenue Market Promotion Transport
P10 Special Class x x
East All x x x x
West All x x x
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How Pools are Administered

• Provinces report production and sales data (by
  milk class) monthly to the CDC.
• The CDC calculates money transfers between
  members to equalize returns.
• The CDC calculates quota allocation when demand
  changes.
• The CDC keeps a bank account for pool operations.

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Resulting in harmonization of

• Multiple component pricing
• Producer prices
• Milk classification
• Quota policies
• POOL RISK MANAGEMENT TOOL

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Current Issues
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Current Issues

• Increased imports and cross-border shopping
• Harmonization issues within regional pools
• Quota management
• Audit rules
• National all milk pool
• Milk allocation to plants
• Marketing/Innovation
• Special Classes, Dairy Marketing Program and CDC
  Dairy Innovation Program
• Trade negotiations
• Focus market growth

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Some observations on Trade

• Several countries still have high budget
  expenditure for the milk sector
• EU - 3,5 billion on average 2008-2011
• US approx. 4 billion per year (40 billion in
  the last decade) New Farm Bill?
• These subsidies contribute to depressed Pw
• Trade agreements
• WTO
• CETA (additional cheese imports)
• TPP ?
• Producing milk in Northern hemisphere is more
  costly than in the Southern hemisphere

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Increased focus on additional flexibility to grow
the market

• 1 permanent growth allowance for added
  flexibility in supply
• Dairy Innovation Program
• Skim Milk Redirection Program
• Mozzarella market and fresh pizza - Class 3(d)
• More flexible allocation policies (yogurt and
  fine cheeses)
• On-going development of market of SNF
• Reduce structural surplus
• Opportunity to add value and increase returns to
  producers without increasing price to consumers

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A note of interest for students
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CDC Graduate Scholarships

• To ensure that Canada has enough specialists in
  the areas of
• Food and dairy sciences
• Economics and policy (supply mgt.)
• Animal science
• CDC commitment 3 million over 5 years
• 70 M.Sc.s and 25 Ph.D.s
• Renewed for the last time 2011-2016

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QUESTIONS

• www.cdc-ccl.gc.ca
• www.dairyinfo.gc.ca
• www.milkingredients.ca