OVERVIEW OF THECANADIAN DAIRY INDUSTRY

Gilles Froment, M.Sc., P.Ag.COO

Canadian Dairy Commission, OttawaFebruary 21, 2014

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DM272659

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*

4* Source: EcoRessources

WORLD MILK PRODUCTION 2005-2012(ALL SPECIES)

580600620640660680700720740760780

2005 2007 2008 2009 2010 2011 2012

million t

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WORLD COW MILK PRODUCTION

(2012)

Source: IDF World Dairy Situation 20136

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CANADA’S MILK MARKETING SYSTEM

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Producer

Marketing Board (provincial)

Processor

Further processor

Consumer

Retailer

Regulated marketUnregulated market

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 8

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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

Non-votingmembers

CDCchair

DPAC

CAC

DFC

SK (3)

Quebec (4)

P.E.I. (3)

Ontario (4)

N.S. (3)

N.B. (3)

Newfoundland (3)

Alberta (3)

B.C. (3)

Manitoba (3)

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

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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

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)

3

3,5

4

4,5

5

5,5

6

6,5

7

7,5

8

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Butter

SMP

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PRODUCER MILK PRICES (2012)

0 20 40 60 80 100 120

Japan

Norway

Canada

Switzerland

China

EU 27

New Zealand

India

Australia

US$/100kg

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EVOLUTION OF FARM PRICESCANADA AND THE US 1998 - 2013

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

@3.6 kg

Fluid milk 1(a) 7.15 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 0.484 277.024

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. 25

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 10:90 rule

3 PEI’s share

4 DDPIP + DIP

5 Growth allowance

6 Exports

7 Fluid quota27

EVOLUTION OF MSQ

100

120

140

160

180

200

220

mil

lio

n k

g B

F

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Quota cut of 1976

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

Low butter stocks

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

30Forecast includes a 1% growth allowance

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

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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.

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

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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

THE MILK POOLS35

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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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. 39

RESULTING IN HARMONIZATION OF…

Multiple component pricing Producer prices Milk classification Quota policies

POOL = RISK MANAGEMENT TOOL

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CURRENT ISSUES41

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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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

SOME OBSERVATIONS ON TRADE

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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

INCREASED FOCUS ON ADDITIONAL FLEXIBILITY TO GROW THE MARKET

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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.cawww.dairyinfo.gc.ca

www.milkingredients.ca47