I do understand, however, that for the average consumer, dairy products are quite expensive, especially compared to the U.S. I'm not sure how that could be solved while the supply management system is in effect. I think ultimately, the consumer will decide by either continuing to purchase dairy at the current prices, or buying less and stocking up cross-border where that is an option. Personally, I will continue to make sure my dairy products have the little blue cow (100% Ontario) when I am shopping.
If you have comments I'd love to hear them!
Here is the full article:
Kenyon WallaceToronto Star
Published On Sun Nov 20 2011
Philip Armstrong walks through one of the spacious barns where his new calves are fed and gestures toward heifer 3097.
The 2-week-old black-and-white purebred Holstein stares back and inches forward, as if hoping the dairy farmer might have a bottle of milk at the ready.
Over the course of her production life, this little cow is expected to give about 36,000 litres of milk, representing $29,000 in revenue for Armstrong Manor Farm in Caledon.
And with 270 cows just like number 3097, the future of Armstrong’s dairy operation may seem secure.
But the growing perception that milk is over-priced, combined with shifting trade priorities, is putting unprecedented pressure on the Canadian dairy industry.
Armstrong says he’s worried Canada’s decades-old supply management system, which has allowed farmers like him to make a decent living, is under threat.
The Canadian Restaurant and Foodservices Association recently launched freeyourmilk.ca, urging consumers to demand lower milk prices, while Prime Minister Stephen Harper has hinted that Canada’s protected dairy and poultry farming sectors could be put up for negotiation in the country’s quest to join the Trans Pacific Partnership, a new free-trade agreement. Given the Conservatives’ recent success in killing the Canadian Wheat Board, some are worried the government is turning its sights on the dairy industry.
“If our current supply management system was dismantled, we simply couldn’t compete with the Americans,” says Armstrong, 53, who, along with his brother, Peter, and sister-in-law, Shirley, operates on the same 600-hectare plot of land farmed by his family for more than 150 years. “Some of us would keep trying to farm, but at that point you’d be just at that break-even point, just trying to stay alive.”
The way milk prices are determined in Canada is complicated. First, it’s not up to the free market. Prices are determined by the federal Canadian Dairy Commission and provincial marketing boards based on the cost of producing milk, consumers’ ability to pay and the Consumer Price Index. Farmers must have a quota — essentially a license — to produce milk. And they aren’t paid for the volume of their milk, but rather for the amount of butter fat, protein, lactose and other solids in it, and what it is used for.
On Monday, the Canadian Dairy Commission will begin its annual consultations in Ottawa with the industry as a prelude to setting next year’s target prices for dairy components used to make things like ice cream, yogurt and cheese. This year, prices aren’t expected to change, as a potential economic downturn approaches, another reason for farmers to worry.
But many say farmers’ concerns are overblown and that opening Canada’s dairy market would force producers to become more efficient and competitive, resulting in cheaper prices for consumers.
“The fact is, the price is determined by people in the industry, and as consumers we have to take that given price,” says Garth Whyte, president of the restaurant association. He argues the high tariffs imposed on imported dairy products — anywhere from 200 to 300 per cent — to prevent foreign producers from undercutting domestic prices, means Canadians are overpaying for dairy products.
“This is a 40-year-old system that was written on a typewriter. That typewriter is gone, but the system remains.”
Citing Statistics Canada numbers that show milk consumption in Canada has declined by 18 per cent over the last 20 years, Whyte argues consumers are opting for other beverages because of the price.
A 2009 Conference Board of Canada study found that Canadian farmers consistently receive double or triple the world price for their milk and butter, while consumers regularly pay more than world prices for the same products. For example, the study found that in 2009, a one-litre carton of whole milk cost Canadians 59 cents more on average than the same carton in the United States, and 64 cents more than in Australia.
At the heart of Canada’s dairy pricing structure is the industry’s 40-year-old supply management system, set up to protect farm incomes.
To produce and sell milk, farmers must have a quota, which is purchased on an exchange. A quota gives the farmer the right to produce one kilogram of butter fat every day — roughly 25 litres of milk per day per cow. The Armstrongs, for instance, have 270 cows on their farm, representing about $6,750,000 in quotas accrued over decades. The average price for a quota in Canada is about $27,000, prompting critics to complain of high barriers to entry.
Bill Mitchell, a spokesperson for the Dairy Farmers of Ontario, acknowledges that becoming a dairy farmer in Canada is costly, but he says farmers can’t be blamed for the prices that supermarkets and restaurants set. The amount farmers get for their milk is only a small part of the final price of dairy products, he says.
“We have a transparent, regulated price and that’s the part that people can see and focus on. The retailers don’t talk about what they pay versus the price at which they sell.”
For example, for a 250-mL glass of milk at a restaurant that costs $1.95, Mitchell says the dairy farmer’s share would be about 22 cents, with the remainder going to processors and retailers.
He argues that milk prices are set so that only efficient farmers will get a fair return on their investments, and that the current system allows farmers to focus on making high-quality milk rather than spending time looking every day for a buyer. Mitchell says the supply management system also prevents farmers from overproducing and destabilizing milk prices.
Others fear that if the dairy industry is opened up, the collective value of quotas in the country — close to $30 billion — would plummet, leaving farmers with assets worth less than what they paid for them.
Bruce Cran, president of the Consumers’ Association of Canada, says those arguments don’t stand up when one looks at the successes of New Zealand and Australia, both of which operate unregulated dairy industries. He argues that Canada will miss out on a growing world export market, especially in Asia, under the new Trans Pacific Partnership if farmers continue to insist on protection.
New Zealand now exports more than 90 per cent of its dairy products, while Australia exports nearly half of its dairy production. By contrast, Canada’s dairy exports are limited by the World Trade Organization because it views our domestic farm prices as subsidizing our exports.
“The processing industry is becoming increasingly aware that it’s being made uncompetitive in export markets,” Cran says. “Similarly, we should have the choice as consumers whether we want to buy American milk at their price, or our milk. What’s happening here is that 20,000 dairy farmers have a bigger voice than 30 million consumers. We’re too nice in Canada.”
While it’s easy to criticize Canada’s dairy supply management system, fairness is a relative term, says Rakhal Sarker, a professor of food agriculture and resource economics at the University of Guelph.
“If you consider the system from the farmer’s point of view, they tend to think of it as fair — they’re producing only the amount of milk that is needed,” he says. “Dairy products may look cheaper south of the border, but that was not the case when our dollar was worth 80 cents U.S. We are imposing a cost on consumers, but it’s important to remember the benefits in terms of the stability of income of flow of goods, as well as the high quality of Canadian milk.
“As far as gains and losses are concerned, the jury is still out.”
Determining the price of milk
Canada’s dairy supply management system has two classifications for milk: fluid milk (drinking milk and cream) and industrial milk (used to make other dairy products, such as ice cream, cheese and yogurt).
Currently, the price of fluid milk is determined by a mathematical formula developed by the National Fluid Milk Price Committee, in consultation with provincial governments and provincial marketing boards. The formula takes into account the cost of producing milk as well as the Consumer Price Index, and the price is set once a year based on these factors. The current price for fluid milk is about 90 cents per litre.
This price is set by the provincial marketing boards based on target prices from the Canadian Dairy Commission. The commission determines these target prices on an annual basis, following consultations with farmers, processors, consumers, retailers and restaurant operators. The Consumer Price Index, elasticity of demand for various dairy products and the cost of production at the farm level are also taken into account. Three senior commission executives take this information and decide the target prices for butter and skim milk powder, which are then used to calculate the prices of other dairy components.
How the farmer gets paid
Farmers are paid for the composition of their milk and how it is to be used, rather than its volume. A sample is analyzed for butter fat content, protein and other solids. Based on the results, and whether the milk was used for fluid milk or industrial milk, the farmer is paid a weighted average from a pool of revenue collected on behalf of all farmers by provincial marketing boards.
How milk prices are set in the U.S.
Farm prices for milk in the United States are determined by free-market wholesale prices for cheddar cheese, butter and non-fat dried milk.
These prices are plugged into mathematical formulae, set by federal milk marketing regulations, that calculate the amount dairy farmers are paid for the various components in their milk (butter fat, protein and other solids). There are no quotas for milk production in the United States.
U.S. farmers are also guaranteed a safety net in the form of the Commodity Credit Corporation (CCC) if wholesale prices fall to certain levels. The CCC, a federal agency funded by taxpayers, will offer to buy these products from farmers, essentially becoming the “demander of last resort.”
Such a system means the U.S. dairy market is not entirely free, contrary to what many opposed to Canada’s supply management system say, argues University of Guelph food agriculture professor Rakhal Sarker.
“Most of the time, farmers in the U.S. produce more than the market can absorb, yet they are guaranteed these support prices no matter how much they produce,” Sarker said. “Consumers get to buy at lower prices, but producers get a cheque directly from the government that gives them the difference between the guaranteed price and the sale price. Who pays for this system? The taxpayers.”