Navigating the Future
Canadian Dairy Industry
Al Mussell
Initial Observations
Evolution in milk supply management continues, at an
accelerated pace, with greater urgency and
contemplation of change
The Ingredient Strategy signals prospect of deeper
changes, and true significance of milk protein
surpluses, imports
Credible threats associated with trade agreements
exacerbate these
A need for creative thinking on the future of the dairy
industry
Our Situation
Profitable farms for efficient producers
Profitable processors, investing elsewhere
In aggregate, a mature market
Worsening dairy trade balance
Export restraints
New and pending trade agreements
Sobering challenges
Dairy Farms in Canada
2014
12,219
Source: Statistics Canada
Dairy Farms by Milking
Facility/Type, 2013
Source: Herds on milk recording, Canwest DHI, Valacta. 8899 herds
Apparent Producer Interests
in Dairy Policy
Retain
revenue/
operating
earnings
basis
Preserve
capital
asset values
Market
growth
(some
producers)
Improved
flexibility,
opportunity
to expand
operations
(some
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
Increasingly, Canadian dairy processors investing capital elsewhere,
rather than in Canada
Dairy Markets
Mature market
But, exceptional growth in segments; absolute decline in others
Proliferation of brands, and products
Increasing interest in linkages among production, processing, and
product as elements of marketing
Increasing pressure and presence of imports
Slow Market Growth
200.00
180.00
160.00
140.00
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
190.44
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
28.30
120.00
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
13/14
100.00
80.00
60.00
40.00
20.00
-
Fluid Milk, Million Hectolitres
Source: Canadian Dairy Information Centre
MSQ, million kg (Aug 1)
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
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
Deepening Dairy Trade
Deficit
Source: Statistics Canada
New HS tariff lines 2008: MPC and MPI
HS 3504.00.11 and HS 3504.00.12
Source: AAFC
13
Imports of other milk-based product not subject
to TRQ
Includes whey powders, casein, lactose, albumin
Source: AAFC
14
Source: USDA/GATS
15
Dairy Ingredients Strategy
Purpose- recover markets from imported MPC and MPI’s, encourage
processing investment
Elements:
World pricing on SNF in
Class 4
Protection of revenues
in other classes
New regulation to
identify product origin
Phase out of CDC
surplus removals
Other aspects to be developed, such as new price mechanism for
Classes 1 to 3, allocation, growth allowance
Non-Fat Milk Solids Trap
Butterfat quota system, with SNF in fixed
proportion
Structural surplus of skim
Increasing imports of SNF products; expected to
increase further still
Capacity at limit to process SNF
Hard caps on dairy exports
Diversions into Class 4(m), Canada
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
2010/11
2011/12
2012/13
Milk, Hectolitres
Source: Canadian Dairy Information Centre
2013/14
Protein kg
2014/15 YTD
Discounted Pricing in Class 4(m)
12
10
$/kg
8
6
4
2
0
2010/11
2011/12
4(m) Protein
2012/13
2013/14
Class 2-4 Blended Protein
Source: Canadian Dairy Information Centre
2014/15 YTD
Threats
Price spread between Class 4(m) and other pricing is financed by
producers
Left alone, costs of diversion may become increasingly onerous,
few options to mitigate
US has free access to Canada on MPC/MPI, also EU when CETA
comes into force
Significant developments in TPP
US-Japan
TPA for President Obama
Prospect of major pressure on Canada in SM products
TPP- Potential Implications
With Japan onside with US (apparently), door is open to
deal Canada out
Possible TPP deal spring 2015
SM-5 have no friends left at home
Expect requests for large increases in dairy market
access (TRQ’s or tariffs) for TPP countries
Phase-ins shorter now- 5 years (?)
Potential Gloomy Scenario
Increased imports/decreased protection
Capped exports
Shrinking dairy industry
Lower milk prices
Lower quota values
Navigating a Better Course:
Juggling Act
Must, simultaneously:
Accommodate
those
disadvantaged
by imports
Get out from
under export
caps
Create a
growth
environment
for processors
Conclusion
Today’s situation could come to a head quickly
Dairy industry leaders, governments face
difficult environment for dairy policy
Farmers may be asked to make sacrifices to
adjust; need to understand the context for this
Conclusion
Should not
simply accept
a future with a
shrinking dairy
industry
Delicate path
forward
• Coordinated with processors
• More export focused,
understanding risks
• Pricing closely oriented with
world prices
• Lower quota values
• Reasonable accommodation for
those disadvantaged
Just scratching
the surface
• Much more
creativity,
analysis required