1

Overview of theCanadian dairy industry

Gilles Froment, M.Sc., P.Ag.Senior Director, Policy and Corporate Affairs

Canadian Dairy Commission, OttawaMarch 26, 2009

DM146846

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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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14,036 farms producing more than 80 billion litres of milk (8 million tonnes)

445 processing plants Milk sales: $5.2 billion Adds a net $9.7 billion to the GDP Processed products sales: $11.6 billion Supports $30 billion of economic activity Sustains more than 160,600 jobs

Snapshot of theCanadian Dairy Industry

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6

Major Milk Producing Countries(cow milk, 2007)

020406080

100120140160

EU 27

India

USACh

ina

Russia

German

yBr

azil

Fran

ce

New

Zealan

dUK

Mexico

Austr

alia

Cana

da

(Mill

ion

tonn

es)

Source: International Dairy Federation

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Canada’s Milk Marketing System

Producer

Marketing Board (provincial)

Processor

Further processor

Consumer

Retailer

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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 producer boards and governments

Non-votingmembers

CDCchair

DPAC

CAC

DFC

Sask (3)

Quebec (4)

P.E.I. (3)

Ontario (4)

N.S. (3)

N.B. (3)

Newfoundland (3)

Alberta (3)

B.C. (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 3 commissioners, 63 employees Generally deals with industrial milk Total budget for 2007-2008: $7.8 million Funded by government, dairy producers

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 Categories

Industrial (Classes 2-4) used in the manufacture of

butter, cheese, ice cream, yogurt, milk powders

longer shelf life federal responsibility –

interprovincial movement 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 announced in December by the CDC to be effective February 1.

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Support prices 1997-2009 ($/kg)

3

3,5

4

4,5

5

5,5

6

6,5

7

7,5

ButterSMP

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World Prices for Cow Milk (2007, US$/100 kg)

India; 26

Mexico; 35

USA; 42

Metro China; 37

NZ; 49

EU 15; 44

Norway; 65

Switzerland; 58

Canada; 64

Japan; 67

Source: International Dairy Federation

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Evolution of Farm Prices in Canada and the US1999 to 2009

$20,00

$30,00

$40,00

$50,00

$60,00

$70,00

$80,00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CA

$ p

er

HL

Canada Target Price Highest of Class III and Class IV Prices in the US (converted to CA$ per HL)

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Pillar 1: Controlled Prices

Fluid milk prices are determined by provinces according to

a formula 40% indexed COP 30%CPI 30%PDI/capita

Valid until Jan 31, 2010 Currently negotiating a new formula with

all 10 provinces

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Milk Prices in last 12 monthsFebruary 2008 – January 2009

Average in-quota revenues : $72.20

Average price for fluid: $85.41

Average price for industrial: $63.53

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Example - Prices per component

Class $/kg

BF

$/kg protein

$/kg other solids

$/hl standard

@3.6 kg

Fluid milk 1(a) 7.37 66.01 $/hl for SNF 92.53

Cheddar 3(b) 7.65 13.31 0.85 75.51

Butter 4(a) 7.65 5.27 5.27 74.66

Cheese as ingredient 5(a)

3.54 9.36 0.0001 43.05

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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 (t) Tariff (%)

Skim milk powder 0 201.5

Dry whey 3.2 208.0

Butter 3.3 298.5

Cheese 21.4 245.5

Ice cream 0.484 277.0

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Landed Price vs Domestic Price (Butter)2001-2009

0,00

5,00

10,00

15,00

20,00

25,00

2001 2002 2003 2004 2005 2006 2007 2008 2009

CA

$ /

Kg

Landed Price (Low) Domestic Price

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Landed Price vs Domestic Price (Skim Milk Powder)

0,00

2,00

4,00

6,00

8,00

10,00

12,00

14,00

16,00

2001 2002 2003 2004 2005 2006 2007 2008 2009

CA

$ /K

g

Landed Price (Low) Domestic Price

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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 - ECR (demand) on a monthly basis.

ECR= Production + Opening Stocks + Imports – Closing stocks – exports – DDPIP – 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 10:90 rule

3 PEI’s share

4 DDPIP

5 Growth allowance

6 Exports

7 Fluid quota

30

100

120

140

160

180

200

220

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

'2008

mill

ion

kg

BF

Evolution of MSQ

Quota cut of 1976

1% and 2% milk more popular; lower butter consumption

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 Under production: lost opportunity to produce

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Evolution of production, demand and stocks

46,00

47,00

48,00

49,00

50,00

51,00

52,00

Nov/n

ov 2

006

Dec/d

éc 2

006

Jan/

janv 2

007

Feb/fé

v 200

7

Mar

/mar

s 200

7

Apr/a

vril 2

007

May

/mai

2007

Jun/

juin

2007

Jul/ju

ill 20

07

Aug/a

oût 2

007

Sept/s

ept 2

007

Oct/oc

t 200

7

Nov/n

ov 2

007

Dec/d

éc 2

007

Jan/

jan 2

008

Feb/fé

v 200

8

Mar

/mar

s 200

8

Apr/a

vril 2

008

May

/mai

2008

Jun/

juin

2008

Jul/ju

ill 20

08

Aug/a

oût 2

008

Sept/s

ept 2

008

Oct/oc

t 200

8

Nov/n

ov 2

008

Pro

du

ctio

n a

nd

CR

(m

il h

l)

10 000

15 000

20 000

25 000

30 000

35 000

40 000

Sto

cks

(t)

CDC + Private Butter Stocks Industrial production. Canadian requirements

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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 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 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 mt) Butter : sold to further

processors Cheese: private sector

imports (21,800 mt)

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-1990’s 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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Market Shares – All Milk

Fluid Industrial Pool

Region A (hl) 1,000 1,000 2,000

Region B (hl) 2,800 5,200 8,000

Total (hl) 3,800 6,200 10,000

Region A 50% 50% 20%

Region B 35% 65% 80%

Pool (%) 38% 62% 100%

How does pooling work?Revenue Sharing

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Average Revenue ($/hl)

Fluid Industrial

Region A $74.00 $66.00

Region B $79.00 $69.00

Total Revenue (average revenue x market share)

Fluid Industrial Total

Region A $74,000 $66,000 $140,000

Region B $221,200 $358,800 $580,000

Total $295,200 $424,800 $720,000

How does pooling work? Before pooling

Average Pool Price (hl) = $72.00

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Revenue needed (market share x average pool revenue)

All Milk

Region A 2,000 $72.00 $144,000

Region B 8,000 $72.00 $576,000

Resulting Cash Transfers (Equalization Pool Payments)

Total $/hl

Region A $4,000 $2.00

Region B ($4,000) ($0.50)

Total ($0.00)

How does pooling work? After pooling

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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

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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 allocations 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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Marketing and Innovation Initiatives of the CDC

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Some of the CDC initiatives The Dairy Marketing Program The Domestic Dairy Product Innovation Program The Special Milk Class Permit Program

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Strong market growth sectors

The finished products: - Sports recovery drinks/powders- Meal replacement products (bars, beverages)- Meal / dietary supplements- Organic products- Pet food

The dairy components:- Organic milk protein concentrates and isolates, casein,

caseinates, peptides The challenges:

- Ingredients that are still relatively new or not available from our industry (MPC,MPI)

- World market priced/ highly competitive market- Manufacturers/users looking for level playing field conditions

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Current Issues

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Current challenges Growing structural surplus of SMP - Finding

new markets for solids non fat current stocks of 35 million kgs

Evolving demand from consumers – substitution from non-dairy ingredients Soy-based products (imitation cheeses) frozen desserts

The market for dairy products is fairly mature Effect of the economic crisis on dairy

consumption?

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Current challenges World Trade Organization: an unknown but so

far nothing to help supply management Increase market access? Lower tariffs? Sensitive products?

Harmonization issues Milk allocation in the East (P2) and Maritimes Quota policies Transportation Audit rules

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Fragility of tariff wall The world prices for dairy products have dropped

significantly in 2008 with butter, SMP and cheese trading near support price levels in the US.

US milk prices at record low: below $10/cwt Price decline mainly driven by falling consumer

demand due to the current economic weakness and to an over supply situation from high prices in 2007.

 At current world prices for butter and SMP (both at $1,600 US per tonne), the landed price plus the tariff exceeds the domestic support prices by $1.28/kg and $0.13/kg respectively. 

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Cheese Compositional Standards

Canadian Food Inspection Agency (CFIA) is responsible

Came into force in December 2008 The use of milk protein concentrate and milk

protein isolates is limited Processors warn of an increase in production

costs which will translate in an increase in retail price

Challenged in court by Saputo, Kraft and Parmalat

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Future Pricing Issues Impact of current tariff protection Impact of future trade agreements Price sensitivity of particular classes Differential impact of fluid vs industrial pricing Expansion of Special Milk Class Permit Program Should support prices continue to drive industrial

milk pricing? Methodology for future price changes Difficulty to reach an agreement with dairy

industry stakeholders

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A note of interest for students…

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CDC Graduate Scholarships (2006-2011) To ensure that Canada has

enough specialists in the areas of Food and dairy science Economics and policy (Supply mgt) Animal science

M.Sc. and Ph.D.

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QUESTIONS

www.cdc-ccl.gc.ca

www.dairyinfo.gc.ca

www.milkingredients.ca