Al Mussell - Ontario Dairy Council

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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
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