OVERVIEW OF THE
CANADIAN DAIRY INDUSTRY
1
Gilles Froment, M.Sc., P.Ag.
COO
Canadian Dairy Commission, Ottawa
February 21, 2014
DM272659
OUTLINE
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The Canadian marketing system and its
component
3 pillars of supply management
Seasonality programs
Milk pools
Marketing and innovation initiatives
Current issues
2
THE CANADIAN MILK
MARKETING SYSTEM
AND ITS COMPONENTS
3
SNAPSHOT OF THE
CANADIAN 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*

* Source: EcoRessources
4
WORLD MILK PRODUCTION 2005-2012
(ALL SPECIES)
780
760
740
720
700
680
660
640
620
600
580
million t
2005
2007
2008
2009
2010
2011
2012
5
WORLD COW MILK PRODUCTION (2012)
6
6
Source: IDF World Dairy Situation 2013
CANADA’S MILK MARKETING SYSTEM
Producer
Marketing Board
(provincial)
Further
processor
Retailer
Processor
Consumer
Regulated market
Unregulated market
7
CMSMC
Canadian Milk Supply Management Committee
 Permanent body of signatories of the National
Milk Marketing Plan - NMMP (voting
members)
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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
The CMSMC directs the implementation of the National
Milk Marketing Plan (NMMP) to coordinate actions of
provincial marketing boards and governments
SK (3)
Quebec (4)
Non-voting
members
DFC
DPAC
P.E.I. (3)
CAC
CDC
chair
Ontario (4)
N.S. (3)
Alberta (3)
Newfoundland (3)
B.C. (3)
9
N.B. (3)
Manitoba (3)
NMMP
National Milk Marketing Plan
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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
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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: $7.75 million
Funded by government, dairy producers,
commercial operations, and the marketplace
11
LEGISLATED MANDATE

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Provide efficient producers of milk and cream
with the opportunity to obtain a fair return for
their labour and investment.
Provide consumers of dairy products with a
continuous and adequate supply of dairy
products of high quality.
12
OVERVIEW OF KEY ACTIVITIES
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Chair the CMSMC
Calculate Estimated Requirements (demand)
Recommend Market Sharing Quota
Establish Support Prices
Administer Revenue and Market Sharing
Agreements (pools)
Administer Special Milk Class Permit Program
Carry out external audits
Create and administer marketing programs
Remove surplus production
Administer Seasonality Programs
13
MILK CLASSES
 Fluid
(Class 1)
used in 1%, 2%, skim
milk, etc. and creams
 short shelf life
 provincial
responsibility –
historically made and
consumed in province of
origin

 Industrial
(Classes 2-4)
used in the manufacture
of butter, cheese, ice
cream, yogurt, milk
powders
 longer shelf life
 federal responsibility –
interprovincial trade of
product

14
3 PILLARS OF SUPPLY MANAGEMENT
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controlled prices
controlled imports
controlled production
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PILLAR 1: CONTROLLED PRICES
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Industrial milk prices
Are determined by provinces based on CDC
support prices and vary depending on the end
use of the milk
Support prices are the prices at which the
CDC buys and sells butter and skim milk
powder under its various programs.
Support prices are usually announced in
November or December by the CDC to be
effective February 1.
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2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
SUPPORT PRICES 1997-2014 ($/KG)
8
7,5
7
6,5
6
5,5
Butter
5
SMP
4,5
4
3,5
3
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PRODUCER MILK PRICES (2012)
Australia
India
US$/100kg
New Zealand
EU 27
China
Switzerland
Canada
Norway
Japan
0
20
40
60
80
100
120
18
EVOLUTION OF FARM PRICES
CANADA AND THE US 1998 - 2013
$90.00
$80.00
$CA per hl
$70.00
$60.00
$50.00
$40.00
$30.00
Canada Target Price
Feb-13
Feb-12
Feb-11
Feb-10
Feb-09
Feb-08
Feb-07
Feb-06
Feb-05
Feb-04
Feb-03
Feb-02
Feb-01
Feb-00
Feb-99
Feb-98
$20.00
Highest of Class lll and Class lV Prices in the US (converted to CA $ per HL)
DM#116898
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PILLAR 1: CONTROLLED PRICES
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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 MONTHS
ENDING 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
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
100.13
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PILLAR 2: CONTROLLED IMPORTS

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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
TRQ (’000 t)
Tariff (%)
0
201.5
Whey Powder
3.2
208.0
Butter
3.3
298.5
Cheese
20.4
245.5
Ice cream
0.484
277.0
Product
Skim Milk Powder
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PILLAR 3: CONTROLLED PRODUCTION
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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
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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 quota
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EVOLUTION OF MSQ
220
1% and 2% milk
more popular;
lower butter
consumption
million kg BF
200
180
160
140
Quota cut of 1976
120
Low butter
stocks
100
28
RESPECTING PRODUCTION TARGETS
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Provincial production targets:
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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
Forecast includes a 1% growth allowance
30
CDC SEASONALITY PROGRAMS
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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
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Becomes the
property of the
CDC
25 kg blocks
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Plan B
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Processors 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 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
 EXPORTS
 IMPORTS
 Subsidized
 According
exports
according to WTO
limits (none to USA)
 SMP (CDC exports to
Cuba and Mexico)
 Permits for private
exporters including
non-contingent classes
to WTO
(3,274 t)
 Butter: sold to further
processors
 Cheese: private sector
imports (20,412 t)
34
THE MILK POOLS
35
POOLS WERE ESTABLISHED IN THE
MID-1990’S IN RESPONSE TO…
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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
36
THE CDC ADMINISTERS 3 MILK POOLS
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The P10 (all 10 provinces)
The P5 (in the East)
The WMP (in the West)
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These pools allow dairy farmers to share and
balance revenues, markets and in some cases,
transportation costs.
37
WHAT IS POOLED?
Pool
Milk
Revenue
Market
P10
Special
Class
x
x
East
All
x
x
West
All
x
x
Promotion Transport
x
x
x
38
HOW POOLS ARE ADMINISTERED
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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.
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RESULTING IN HARMONIZATION OF…
Multiple component pricing
 Producer prices
 Milk classification
 Quota policies
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POOL = RISK MANAGEMENT TOOL
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CURRENT ISSUES
41
CURRENT ISSUES
Increased imports and cross-border shopping
 Harmonization issues within regional pools
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Quota management
 Audit rules
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National all milk pool
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Marketing/Innovation
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Milk allocation to plants
Special Classes, Dairy Marketing Program and CDC
Dairy Innovation Program
Trade negotiations
Focus market growth
42
SOME OBSERVATIONS ON TRADE

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 ?
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Producing milk in Northern hemisphere is more
costly than in the Southern hemisphere
43
INCREASED FOCUS ON ADDITIONAL
FLEXIBILITY TO GROW THE MARKET
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
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44
A NOTE OF INTEREST FOR
STUDENTS…
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CDC GRADUATE SCHOLARSHIPS
•
To ensure that Canada has
enough specialists in the areas
of
•
•
•
•
CDC commitment: $3 million
over 5 years
•
•
Food and dairy sciences
Economics and policy (supply
mgt.)
Animal science
70 M.Sc.’s and 25 Ph.D.’s
Renewed for the last time
2011-2016
46
QUESTIONS
www.cdc-ccl.gc.ca
www.dairyinfo.gc.ca
www.milkingredients.ca
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