Milk Supply Management:

Al Mussell

A Bird’s Eye View

2

Economic Research in the Canadian Agri-Food Sector

Bird’s Eye View

An independent view

Abstracts from detail of the system

Objects, structures, some outcomes, given context

View of the essentials of the situation

Perspective from which to observe system in its entirety

Initial ObservationsEvolution in milk supply management continues, at an accelerated pace, with greater urgency and contemplation of change

Still largely a technical discussion

Challenged by complexity; change in any one parameter requires diverse realignments in others

Obscures other, more fundamental changes to the context for milk supply management

Observations- Bird’s Eye View

Producers have

changed

Processors have

changed

Markets have

changed

Economic policy

direction has changed

Dairy Farms in Canada

Source: Statistics Canada

201412,219

Dairy Farms by Milking Facility/Type, 2012

BC AB SK MB ON QC NB NS PE NL

4.3% 10.3% 13.7%

40.7%

70.0%

91.2%

40.0% 42.6%

62.9%

20.0%

89.6%84.5% 81.4%

47.2%

26.7%

6.6%

57.1% 55.7%

37.1%

80.0%

6.0% 5.2%4.9%

12.1% 3.3% 2.1% 2.9% 1.7% 0.0%0.0%

Province

Proportion of Dairy Barns by Type

Robotic System

Free Stall

Tie Stall

Source: Herds on milk recording, Canwest DHI, Valacta. 8977 herds

Dairy Farm Asset Values

Source: Statistics Canada Cansim

Farm Operating Income/Assets

2005 2006 2007 2008 20092010Land-Based

Field Crops 0.02 0.02 0.03 0.04 0.04 0.03Cattle <$1

Million 0.02 0.02 0.02 0.02 0.02 0.02Horticultural 0.04 0.04 0.04 0.04 0.04 0.05

Margin-BasedCattle >$1

Million 0.01 0.01 0.04 0.04 0.03 0.01Hogs>$1 Million 0.05 0.03 0.04 0.02 0.02 0.04

Supply-ManagedDairy 0.03 0.03 0.03 0.03 0.03 0.04

Poultry and Eggs 0.04 0.03 0.03 0.03 0.03 0.03

Source: Statistics Canada FFS and TDP data, unauditedAssets at market value

Apparent Producer Interests in Dairy Policy

Retain revenue/ operating earnings

basis

Preserve capital

asset values

Market growth

(subset of producers)

Improved flexibility,

opportunity to expand operations (subset of producers)

ProcessorsConsolidated, highly competitive processors, operating at national or regional in scale (some multinational)

Confronted by highly concentrated retail/food service environment; increasingly assertive in dealing with suppliers

Rapidly shifting dairy manufacturing technology

Canadian investments in processing challenged by lack of domestic market growth, restricted export market access

Increasingly, Canadian dairy processors investing capital elsewhere

Dairy Markets

Overall, very slow growth

But, exceptional growth in segments; absolute decline in others

Proliferation of brands, product differentiation, more diverse dairy case

Increasing pressure of imports, binding exports caps, widening trade deficit

Increasing interest in linkages among production, processing, and product as elements of marketing

Promising international product market outlook

Slow Market Growth27

.93

28.0

4

27.9

5

27.8

8

28.1

7

28.2

6

28.2

2

27.8

3

29.1

0

29.4

5

29.4

9

29.3

3

29.3

6

29.1

3

28.6

6

161.

014

161.

014

165.

712

166.

23

164.

22

177.

036

177.

234

178.

945

173.

3

181.

58

181.

52

179.

04

183.

28

189.

7

187.

63

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13

Fluid Milk, Million Hectolitres MSQ, million kg

Growth in Product Categories Differs Sharply

3.26

8.29

11.44

5.61

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Litr

es p

er C

apita

Yogurt Ice Cream

Source: Statistics CanadaCalculations done by AAFC-AID, Dairy Section

Deepening Dairy Trade Deficit

Source: Statistics Canada

Strong Powder Prices

Source: USDA AMS

Expected to Remain Strong, Mid-term

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

17.50

18.00

18.50

19.00

19.50

20.00

20.50

21.00

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

$US/

Lb

$US/

cwt

All milk Nonfat dry milk

Source: USDA-ERS

Economic Policy Direction

Economic growth/industrial policy based on freer trade

Commitment, government track record on major FTA’s• CETA (complete)• TPP (in process)• Canada-South Korea (complete)• Canada-Japan (in process)• Canada-India (in process)

Reduced willingness to impose new regulation (mostly)

Reduced resources for regulatory implementation

Milk Supply ManagementPast Pressures

Reduction/control of milk, dairy product surpluses

Sustainable producer returns

Improved equity among producers, pooling of markets; homogeneity

Processor market power

Industrial policy amenable to protection of critical industries

New Pressures

Protection of producer capital

Growth, flexibility, linkages, export- processors, some producers

Trend in differentiation, brand/SKU proliferation; heterogeneity

Retail/food service market powerEfficiency gains in large scale plants

Industrial policy based on freer trade; ↑ imports , ↓ regulation

ConclusionsMilk supply management is a policy artifact of fundamental economic challenges in the dairy industry

Past evolution in SM has refined its policy approaches

Risk today is that the nature and rate of change overwhelms ability of SM to adjust effectively, even with major realignment of existing policy parameters

Suggests a more fundamental reconsideration of the contemporary objectives for dairy policy, instruments used in regulated marketing

Recommendations

• What is the robust, consensus vision of producers? Processors?

• Where are the market power pressures?• What new types of demands from markets?• What consistency with broad economic policy

direction?

Revisit the essence of system. What is the role of “orderly marketing” today?

• Needs process to identify purpose, build consensus, commitment to renewed dairy marketing system

• Case needs to be made• Not a search for more elegant solutions to

pressures on current system

Design instruments to implement contemporary

objectives, given external

constraints

Recommendations• Improve adjustment dynamics of system• Address apparent regulatory policy/resource

constraints• Explore alternative mechanisms/prospects to

orient system toward export market access

Consider expanded use of market

instruments within renewed SM system

• Many elements of SM have adjusted over time, others frozen in time

• Costs/benefits of provincial legacy plants vs. national scale market efficiencies

• New quid pro quo

Engage provincial governments

regarding their stake in milk SM

• Avoid path dependence in current system• Pitfalls of competitive dynamic in regulatory

reform• Need for independent research and analysis

Seek external input, analysis

www.georgemorris.org

Thank you