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Empowering Farmers
The Canadian Supply Management Experience
Bruce Saunders1st Vice-President, Dairy Farmers of Canada
Chapeco, Brazil, January, 2005
Outline of the presentation
• Who we are?• History of supply management in
Canada• Determining production quota• Benefits of supply management• Expectations from the Doha Round of
negotiations• Conclusion
• 16,000 dairy producers • Milk sales: $4.2B • Adds a net $8.3 billion to the GDP• Processed products sales: over $10B• Supports $26 B of economic activity• Sustains more than 142,600 jobs:
– On-farm: 50,800– Farm suppliers: 25,200– Processing sector: 66,600
Economic Snapshot of the Canadian Dairy Industry
When Canada was a major exporter, producers received
low returns.
So…Canada turned its attention to the
domestic market.
Brief History
Objectives of the Canadian Dairy System
1) Ensure orderly marketing of milk by balancing supply with demand
2) Balance the negotiating power between stakeholders to obtain fair prices for the producer
3) Ensure that consumers have access to adequate supplies of high quality products
Pillars of Supply Management
Depends on three pillars:
1. Import controls
2. Producer pricing
3. Production discipline
All equally important
Producers Need Market Power
• Legislation is necessary
• Canada uses legislation for management of supply
Fundamentals of the Canadian System Balancing Supply With Demand
Balancing Supply with DemandCanadian Milk Supply Management Committee
ProvProv
ProvProv
ProvProv
ProvProv
ProvProv
ProvProv
ProvProv
ProvProv
ProvProv
Non-votingMembers
CDCChair
BoardBoard
BoardBoard
BoardBoard
BoardBoard
BoardBoard
BoardBoard
BoardBoard
BoardBoardBoardBoard
Balancing Supply with Demand
Prevents Market Price Volatility
Evolution of Farm Prices in Canada and the U.S. 1990 to 2004
60.00
80.00
100.00
120.00
140.00
160.00
180.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Ind
ex 1
990=
100
Canada Target Price Highest of Class III and IV Prices in the U.S.
Balancing Supply with Demand
Market Stability
Canadian Milk Production 1960, 1976, 2003
0.00
1.00
2.003.00
4.00
5.00
6.00
7.008.00
9.00
10.00
J F M A M J J A S O N D
milli
on h
l
1960 1976 2003
CMSMC estimates demand based on: milk consumption evaluation of stocks expected imports traditional exports possible change in
markets
Balancing Supply with Demand Step 1: Estimating Demand Requirements
CMSMC sets quota to meet demand
Balancing Supply with Demand Step 2: Setting Supply Target Requirements
Balancing Supply with Demand Step 3: Allocate MSQ - Historical Basis
Province % % 1982 2004
Newfoundland 0 0.14
PEI 1.9 1.74 Nouvelle-Écosse 1,3 1,16 Nouveau-Brunswick 1,3 1,35 Québec 48 45.48 Ontario 31,2 31,68 Manitoba 3,9 3,53 Saskatchewan 2,6 2,52 Alberta 6,7 6,55 C.-B. 3.1 5.86
Step 4- Allocation of Quota to Individual Producers
Producers
ProducersProducers
Producers
Producers
• Daily quota system: no year end
• Daily quota established on a kg of
butterfat per day
• Adjusted regularly to reflect market
demand fluctuation: upward or
downward
• Transferable
Production Quota
Balancing the Negotiating Power Marketing Agreements (MA)
• Terms negotiated between:
Provincial boards and Processors
Co-operative Private
enterprises
• A single sales agent (provincial board) negotiates: plant supply, milk quality, classes and prices, and payment terms
Balancing the Negotiating Power Domestic Price NegotiationsDomestic Price Negotiations
• The price of industrial milk sold in regular classes is set by the CDC following a consultation process and reflects a cost of production formula including return on investment and equity
• The price of fluid milk is set by the provinces• One price adjustment per year (February)• All processors pay the same price for a given
class
Balancing the Negotiating Power Distribution of Producer ReturnsDistribution of Producer Returns
Balancing the Negotiating Power
Increased Market Concentration
Farm level • 17,000 dairy farms
Processing level• 3 largest dairy processors have 70% of
sales of approximately $11 billionRetail level
• Largest retail chain has 35% of sales • Top 10 have 90% of sales
Producer Returns (Deductions)
Deductions per hL of monthly shipment:Transportation $2.32•Administration $0.45•Promotion $1.22•Research and DHI: $0.12
Total $4.11The operating costs of the system are therefore bourn by the producers.
Price of Milk
Milk Prices Paid to Producers:
2001-02 2002-03 2003-04 2004-05
Can $ per hl
58.52 61.07 61.19 63.65
US $/cwt 16.43 17.99 20.16 22.41
Ensuring Consumer Benefits
• A Canadian Paradox: Canada’s method of implementing supply management in the dairy industry results in benefits accruing to all stakeholders – not just to producers
Ensuring Consumer Benefits Comparison of Canada-U.S. Retail Prices
Cost of Dairy ProductsAAFC Nutritional Food Basket
6.48
%
0.66
%
0.09
%
18.7
6%
21.3
1%
27.2
1%
35.5
5%
44.7
6%
38.6
7%
37.9
5%
10.6
2%
22.3
6%
17.4
3%
-11.
45%
5.28
%
11.2
7%
32.3
7%
23.9
0%0
10
20
30
40
50
60
03/9
107
/96
01/9
706
/97
01/9
806
/98
11/9
806
/99
11/9
905
/00
11/0
005
/01
11/0
105
/02
12/0
205
/03
11/0
305
/04
$ C
anad
ian
Canada United States
Ensuring Consumer Benefits
No Cost to Government
Milk US Canada
Producer Prices $15/cwt $22.4/cwt
Government Payments1
Federal programmes
$6.75/cwt __
Government Payments1
State programmes
$1.45/cwt __
Total $23.20/cwt $22.4/cwt
1- US Agricultural Support, Grey, Clark & Shih, January 2005
All price in $US per cwt
A System Under Threat
Three Pillars:
• Import controls
• Price setting
• Production planning
A System Under Threat WTO – Impending Threat
Market ImportAccess Controls
Domestic ProducerSupport Pricing
Export Production
Competition Discipline
1-
2-
3-
Each Pillar Can Be Affected:
• Producers’ ability to get revenues from the market
• No cost to government
• Stable and reasonable prices for consumers
• Stable and steady supply for processors
• High quality products
Conclusion:Supply Management Benefits at Stake
Conclusion (continued):Supply Management Benefits at Stake
• Maintenance of family farms
• Benefits rural development and environmental sustainability
• Production discipline which prevents surplus production that distort both international and domestic markets