Overview of the Canadian dairy industry

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Overview of the Canadian dairy industry

• Gilles Froment
• Senior Director, Policy and Corporate Affairs
• Canadian Dairy Commission
• April 1, 2008

DM127302
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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

• 14,660 farms, 450 processing plants
• Milk sales 4.8 billion
• Adds a net 8.3 billion to the GDP
• Processed products sales over 13.0 billion
• Supports 26 billion of economic activity
• Sustains more than 142,600 jobs

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Major Milk Producing Countries(cow milk, 2006)
Source International Dairy Federation
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Canadas Milk Marketing System
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CMSMC

• Canadian Milk Supply Management Committee
• Permanent body of signatories of the 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 5 times a year
• Most 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
Sask (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
• 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
• long 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 1997-2008 (/kg)
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World Prices for Cow Milk (2006, US/100 kg)
Source International Dairy Federation
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Pillar 1 Controlled Prices

• Fluid milk prices
• are determined by provinces according to a
  formula
• In BC, Alberta and Saskatchewan one formula
  (AUC)
• In Manitoba another
• In the Eastern Provinces (40 indexed COP
  30CPI 30PDI/capita) until Jan 31, 2010

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Milk Prices in last 12 monthsMarch 2007
February 2008

• Average in-quota revenues 71.11
• Average price for fluid 81.28
• Average price for industrial 64.32

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Example - Prices per component
Class /kg BF /kg protein /kg other solids /hl standard _at_3.6 kg
Fluid milk 1(a) 6.76 6.67 6.67 83.91
Cheddar 3(b) 7.41 12.72 0.83 72.60
Butter 4(a) 7.40 5.10 5.10 72.20
Cheese as ingredient 5(a) 3.17 9.83 0.60 46.69
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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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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 (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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Evolution of MSQ
1 and 2 milk more popular lower butter
consumption
Low butter stocks
Quota cut of 1976
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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
5 Growth allowance
6 Exports
7 Fluid quota
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Respecting production targets

• Provincial production targets
• August-January Minimum 97
• Dairy year between 99.5-100
• Provinces are free 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 quota pre-filled for the next
  year

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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 (20,400 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-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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How does pooling work?Revenue Sharing
Market Shares All Milk Market Shares All Milk Market Shares All Milk 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
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How does pooling work? Before pooling
Average Revenue (/hl) Average Revenue (/hl) Average Revenue (/hl) Average Revenue (/hl)
Fluid Industrial
Region A 74.00 66.00
Region B 79.00 69.00

Total Revenue (average revenue x market share) Total Revenue (average revenue x market share) Total Revenue (average revenue x market share) 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
Average Pool Price (hl) 72.00
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How does pooling work? After pooling
Revenue needed (market share x average pool revenue) Revenue needed (market share x average pool revenue) Revenue needed (market share x average pool revenue) Revenue needed (market share x average pool revenue) Revenue needed (market share x average pool revenue)
All Milk
Region A 2,000 72.00 72.00 144,000
Region B 8,000 72.00 72.00 576,000
Resulting Cash Transfers (Equalization Pool Payments) Resulting Cash Transfers (Equalization Pool Payments) Resulting Cash Transfers (Equalization Pool Payments) Resulting Cash Transfers (Equalization Pool Payments) Resulting Cash Transfers (Equalization Pool Payments)
Total Total /hl
Region A 4,000 4,000 2.00
Region B (4,000) (4,000) (0.50)
Total (0.00) (0.00)
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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

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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

• Finding new markets for solids non fat
• Evolving demand from consumers substitution
  from non-dairy ingredients
• World Trade Organization an unknown but so far
  nothing to help supply management
• Harmonization issues (Example price of fluid
  milk in the West, milk allocation in the East)
• Pricing methodology for industrial milk

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Article 28

• Growing concern over imports of MPC 85 not
  protected by the Chapter 4 TRQ
• Federal Minister decided to invoke Article 28
  (Feb 2007)
• A WTO rule that allows the introduction of new
  TRQs in exchange for compensation to exporting
  countries
• A pre-established compensation that reflects the
  highest historical imports 10
• On-going negotiations between Canada and 3
  countries (Switzerland, New Zealand, EU) -
  Australia and US rejected)

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Cheese Compositional Standards

• CFIA is responsible
• Will come 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
• Who will enforce these standards and how?

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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

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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 science
• Economics and policy (Supply mgt)
• Animal science
• Agreements signed with 6 Canadian universities
  and research organizations.

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QUESTIONS

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