Overview of the Canadian Dairy Industry

1. Overview of theCanadian Dairy Industry Gilles Froment, M.Sc., P.Ag. COO Canadian Dairy Commission, Ottawa February 21, 2014 DM272659

2. Outline • The Canadian marketing system and its component • 3 pillars of supply management • Seasonality programs • Milk pools • Marketing and innovation initiatives • Current issues

3. The Canadian Milk Marketing System and its Components

4. Snapshot of theCanadian 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

5. World Milk Production 2005-2012(all species)

6. World Cow Milk Production (2012) 6 Source: IDF World Dairy Situation 2013

7. Further processor Producer Marketing Board (provincial) Retailer Processor Consumer Canada’s Milk Marketing System Regulated market Unregulated market

8. CMSMC Canadian Milk Supply Management Committee • Permanent body of signatories of the National Milk Marketing Plan - NMMP (voting members) • 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

9. 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) N.B. (3) Manitoba (3)

10. NMMP National Milk Marketing Plan • Federal-provincial agreement • Regulates marketing of industrial milk • Balances supply and demand • Sets out the establishment, distribution and adjustment of industrial milk quota

11. The Canadian Dairy Commission • 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

12. Legislated Mandate • 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.

13. Overview of Key Activities • 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

14. Milk Classes • 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 • 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

15. 3 Pillars of Supply Management • controlled prices • controlled imports • controlled production

16. Pillar 1: Controlled Prices • 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.

17. Support prices 1997-2014 ($/kg)

18. Producer Milk Prices(2012)

19. Evolution of Farm PricesCanada and the US 1998 - 2013

20. Pillar 1: Controlled Prices • 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)

21. Milk Prices in last 12 monthsEndingDecember 2013 • Average in-quota revenues : $77.99/hl • Average price for fluid: $94.78/hl • Average price for industrial: $66.63/hl

22. Example - Prices per Component for February 2014

23. Pillar 2: Controlled Imports • Most dairy products are protected by Tariff Rate Quota (TRQs). • Above TRQs, dairy products have a tariff of almost 300%.

24. Pillar 2: Controlled Imports • Examples of TRQ and over-quota tariffs

25. Pillar 3: Controlled Production • 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.

26. Establishing MSQ • 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.

27. The 7 steps in sharing quota adjustments among provinces

28. Evolution of MSQ 1% and 2% milk more popular; lower butter consumption Quota cut of 1976 Low butter stocks

29. Respecting Production Targets • Provincial production targets: • 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

30. Evolution of Milk Supply and Demand Forecast includes a 1% growth allowance

31. CDC Seasonality Programs • 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.

32. Seasonality Programs - Butter • Plan A • Becomes the property of the CDC • 25 kg blocks • Plan B • Processors must buy back within one year of production of the product • One-pound prints ready for retail sales.

33. 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.

34. CDC Import / Export • IMPORTS • According to WTO (3,274 t) • Butter: sold to further processors • Cheese: private sector imports (20,412 t) • EXPORTS • Subsidized exports according to WTO limits (none to USA) • SMP (CDC exports to Cuba and Mexico) • Permits for private exporters including non-contingent classes

35. The Milk Pools

36. Pools were established in themid-1990’s in response to… • 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

37. The CDC administers 3 milk pools • The P10 (all 10 provinces) • The P5 (in the East) • The WMP (in the West) • These pools allow dairy farmers to share and balance revenues, markets and in some cases, transportation costs.

38. What is Pooled?

39. How Pools are Administered • 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.

40. Resulting in harmonization of… • Multiple component pricing • Producer prices • Milk classification • Quota policies • POOL = RISK MANAGEMENT TOOL

41. Current Issues

42. Current Issues • Increased imports and cross-border shopping • Harmonization issues within regional pools • Quota management • Audit rules • National all milk pool • Milk allocation to plants • Marketing/Innovation • Special Classes, Dairy Marketing Program and CDC Dairy Innovation Program • Trade negotiations • Focus market growth

43. 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 ? • Producing milk in Northern hemisphere is more costly than in the Southern hemisphere

44. 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

45. A note of interest for students…

46. CDC GraduateScholarships • To ensurethat Canada has enoughspecialists in the areas of • Food and dairy sciences • Economics and policy(supplymgt.) • Animal science • CDC commitment: $3 million over 5 years • 70 M.Sc.’s and 25 Ph.D.’s • Renewed for the last time 2011-2016

47. QUESTIONS www.cdc-ccl.gc.ca www.dairyinfo.gc.ca www.milkingredients.ca