Milk Supply Management: A Bird’s Eye View Al Mussell Economic Research in the Canadian Agri-Food Sector 2 Bird’s Eye View Perspective from which to observe system in its entirety View of the essentials of the situation Objects, structures, some outcomes, given context Abstracts from detail of the system An independent view Initial Observations Evolution 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 Economic policy direction has changed Processors have changed Markets have changed Dairy Farms in Canada 2014 12,219 Source: Statistics Canada Dairy Farms by Milking Facility/Type, 2012 Proportion of Dairy Barns by Type 4.9% 6.0% 5.2% 2.1% 3.3% 12.1% 2.9% 0.0% 0.0% 1.7% 6.6% Robotic System 37.1% 26.7% 57.1% 55.7% 47.2% Free Stall 89.6% 84.5% 80.0% 81.4% 91.2% 70.0% Tie Stall 62.9% 40.0% 40.7% 4.3% BC 10.3% AB SK 42.6% 20.0% 13.7% MB ON QC Province NB Source: Herds on milk recording, Canwest DHI, Valacta. 8977 herds NS PE NL Dairy Farm Asset Values Source: Statistics Canada Cansim Farm Operating Income/Assets 2005 2006 2007 2008 2009 2010 Land-Based Field Crops Cattle <$1 Million Horticultural 0.02 0.02 0.04 0.02 0.02 0.04 0.03 0.02 0.04 0.04 0.02 0.04 0.04 0.02 0.04 0.03 0.02 0.05 0.03 0.02 0.01 0.04 0.03 0.03 0.04 0.03 Margin-Based Cattle >$1 Million Hogs>$1 Million 0.01 0.05 0.01 0.03 0.04 0.04 0.04 0.02 Supply-Managed Dairy Poultry and Eggs 0.03 0.04 0.03 0.03 0.03 0.03 Source: Statistics Canada FFS and TDP data, unaudited Assets at market value 0.03 0.03 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) Processors Consolidated, 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 Growth 200.00 180.00 160.00 140.00 120.00 161.014 161.014 165.712 166.23 164.22 177.036 177.234 178.945 173.3 181.58 181.52 179.04 183.28 189.7 187.63 27.93 28.04 27.95 27.88 28.17 28.26 28.22 27.83 29.10 29.45 29.49 29.33 29.36 29.13 28.66 100.00 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 80.00 60.00 40.00 20.00 - Fluid Milk, Million Hectolitres MSQ, million kg Growth in Product Categories Differs Sharply 14.00 Litres per Capita 12.00 11.44 10.00 8.29 8.00 6.00 4.00 5.61 3.26 2.00 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Yogurt Source: Statistics Canada Calculations done by AAFC-AID, Dairy Section Ice Cream Deepening Dairy Trade Deficit Source: Statistics Canada Strong Powder Prices Source: USDA AMS Expected to Remain Strong, Mid-term 21.00 2.00 1.80 20.50 1.60 20.00 1.40 1.20 1.00 19.00 0.80 0.60 18.50 0.40 18.00 0.20 17.50 0.00 2012 2013 2014 2015 2016 All milk Source: USDA-ERS 2017 2018 2019 Nonfat dry milk 2020 2021 2022 2023 $US/Lb $US/cwt 19.50 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 Management Past Pressures New Pressures Reduction/control of milk, dairy product surpluses Protection of producer capital Sustainable producer returns Growth, flexibility, linkages, exportprocessors, some producers Improved equity among producers, pooling of markets; homogeneity Trend in differentiation, brand/SKU proliferation; heterogeneity Processor market power Industrial policy amenable to protection of critical industries Retail/food service market power Efficiency gains in large scale plants Industrial policy based on freer trade; ↑ imports , ↓ regulation Conclusions Milk 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 Revisit the essence of system. What is the role of “orderly marketing” today? • 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? Design instruments to implement contemporary objectives, given external constraints • 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 Recommendations Consider expanded use of market instruments within renewed SM system • Improve adjustment dynamics of system • Address apparent regulatory policy/resource constraints • Explore alternative mechanisms/prospects to orient system toward export market access Engage provincial governments regarding their stake in milk SM • 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 Seek external input, analysis • Avoid path dependence in current system • Pitfalls of competitive dynamic in regulatory reform • Need for independent research and analysis Thank you www.georgemorris.org