The big squeeze

Canada’s international trade deal with Europe and an as-yet unapproved agreement with the Trans-Pacific Partnership have raised serious questions about the future of the supply management sectors in Canada. Dairy, poultry and egg producers have been protected by the system of production quotas and high tariffs for decades. These articles explore the dairy industry’s thinking and the way ahead.

When economists look at Canada’s dairy industry, they see a tightening vise that will keep squeezing farmers until few are left in business.

They also see no national plan to escape the vise.

“What I’m thinking is missing is a dairy farming strategy for Canada,” said Montreal analyst Bertrand Montel of Ceressys.

“Even if supply management was preserved in TPP negotiations, I’m still not thinking it’s enough to ensure that dairy farms will still be successful businesses over the next 10 to 15 years.”

Indeed, mere survival for most farmers is in jeopardy if the industry doesn’t relieve the crushing pressure of the vise they are now trapped in: That pressure comes from:

  • A stagnant domestic market.
  • Increasing imports of milk components for processing.
  • A ban on most exports of Canadian dairy products.
  • High debt on dairy farms from purchasing quota.
  • A significant need for capital for farms to modernize and expand so they can produce milk at world-competitive prices.

Related: Dairy farmers undaunted amid threats to supply management

Related: Dairy’s milky future

Those elements create a bedeviling equation that vexes economists who study the sector and are trying to find a simple way to escape the problems they see ahead.

They don’t believe Canada can continue protecting supply management as it is today because the decades-old system is already undermined by escalating imports of milk components that are not blocked by supply management regulations.

“If you did nothing, it would be crushed under the weight of non-fat solids,” said Al Mussell of Agri-Food Economic Systems in Guelph, Ont.

“Canadian dairy policy will have to evolve a little bit like other countries that … export freely. We’re going to have to go in their direction because the imports are just piling up.”

All Canadian farm sectors have been under pressure from world markets in recent decades, forcing producers to either produce their commodities at a world-competitive prices or leave the industry. There is only a small fraction remaining of the farmers who were active in Canada a few decades ago.

Most sectors responded by focusing on selling high quality products on world markets. As a result, the tiny domestic market is not a major issue.

Canadian pork, beef and crops are some of the world’s highest quality and most sought-after agricultural commodities. High-volume, low-margin sales allow free market farmers to survive.

However, the situation is starkly different for Canada’s supply-managed industries. They are almost entirely focused on the small Canadian market and generally produce food at higher than world prices.

The system has produced a relatively stable farm sector, but farmer numbers have still plummeted.

Supply managed sectors have not been ravaged by the periodic crises of the free market sectors, but the stagnant domestic market and an inability to grow through exports has forced farmers to expand within a tightly controlled system.

Some have sold out their quota at high prices and others have expanded by borrowing hundreds of thousands of dollars to buy quota.

Those investment mathematics worked as long as high quota prices could be covered by ongoing guaranteed profitability, but a series of setbacks have ruined the math.

Canadian dairy farmers tried to expand by exporting surplus milk products, but free market competitors such as the United States and New Zealand complained to the World Trade Organization, and Canada agreed to stop exporting most dairy products in exchange for being able to retain supply management.

At the same time, the industry discovered that some products, such as “milk protein isolates,” were not covered by Canada’s supply management import barriers, so processors began bringing in more from the U.S.

The Trans-Pacific Partnership trade agreement will now allow other countries to export them as well.

The flood of milk protein isolates has undermined Canada’s carefully balanced dairy system.

“Canada is exceptionally sensitive to access for non-fat solid products because our own market is so far out of balance now,” said Mussell.

Most dairy value and its pricing comes from butterfat content, but getting value from the leftover skim milk proteins and other elements is essential for farmer profitability.

The displacement of more expensive Canadian product by imported milk protein isolates has resulted in a build-up of surplus milk components, which are sometimes fed to animals rather than used for higher value food products.

Mussell said some people believe the MPI market is already saturated, but he doubts it will remain that way.

“What confidence do we have that (processors) won’t find a way to innovate?” said Mussell.

“I worry that over time people will just get better and better at using this stuff, and this could be a big deal.”

Ontario’s farmers responded this year by developing a milk products strategy that preserves the high prices for butterfat but offers processors non-fat ingredients at world prices.

The intention is to displace imports of foreign MPIs to preserve as much value as possible in domestic milk.

Some farmers and dairy industry players are trying to develop this approach as a national strategy. It might even be possible to export more Canadian dairy products if they are sold at world prices.

However, Montel said fissures are appearing between provincial industries, and he worries a culture clash is coming.

Quebec’s industry is much less technologically advanced, with tie-stall barns still dominant, and farmers there appear to be resolutely opposed to compromises such as the Ontario approach.

“That tension will only grow in Quebec,” Montel said.

“At one point it won’t be sustainable, and the need for investment will be huge and I don’t know how it will play out without any collective strategy for dairy farmers.”

He said producers in Alberta and British Columbia appear to be more progressive, so they might follow the Ontario lead, but that will just exacerbate the culture clash between Quebec and the major English Canadian dairy industries.

“If dairy farmers do not engage in some kind of long-term vision, it may lead to the opposite (of what uncompromising farmers want),” he said.

“Instead of having a thriving business, especially in Quebec, it would be to have a stagnating or declining business.”

Sylvain Charlebois, a professor with the University of Guelph’s Food Institute, thinks supply management is unraveling slowly, but change might become unstoppable.

“The shift has already started.… There seems to be an underground shifting,” he said, noting the Ontario development.

“I don’t see how dairy producers actually would have a choice but to change.”

Charlebois said he sees supply management at least weakening, and perhaps disappearing, as world pressures come to bear even more and as farmers try to find a way out. Even with the supply management system in place, elements such as quota will begin to lose value if they can’t offer profitability.

“The quota system will start to erode slowly as we move forward because of that external pressure,” said Charlebois.

He thinks Canadian dairy farmers can evolve under the protection of supply management for a few years and hopefully emerge if it disappears in a way that allows them to survive in the free market.

Milk prices have already fallen in the past year because of Ontario’s milk products approach, and that’s not necessarily bad. Farmers need to expose themselves to world prices and place more importance on the industry’s top producers.

“Instead of looking at averages (when setting milk prices), you might want to look at top performers and use them as a benchmark as an incentive for farmers to become more competitive,” said Charlebois.

“We’re not competitive. We need to address that right away because if we are to open up our borders, we’re just not ready.… If you really provide incentives to dairy farmers to become more competitive, they’ll move. Some won’t and some will leave because they can’t keep up, and that’s totally fine.”

Montel said he sees no reason why Canadian dairy producers can’t be as efficient and low-cost as any producers in the world.

He believes some already are.

“My guess is that at least 60 percent of milk production is already produced by farmers that could easily be competitive with the U.S.,” he said.

“Maybe 75 percent (is produced) by farms that could become competitive with adequate support” for debt-load reduction and new capital for expansion and modernization.

Mussell said he also believes Canadian producers can become as efficient as foreign farmers, but they need to begin working on it now if they want to avoid losing everything. Ontario has made good steps, but others need to consider following the province’s lead. If they do, perhaps even the fundamentals of supply management can be saved.

“If we do this effectively, we can continue to have a milk supply management system and it could provide for somewhat higher returns and greater stability than some of our competitors, but we have to do this right,” said Mussell.

“It’s something we must do, but there shouldn’t be any pretence here that this will be a pleasant process. It won’t.”

Montel said time is critically short, and changes need to begin now or farmers will be hit by shocks in the future.

Canada’s system is provincially based and federally defined, so sorting through provincial complications while formulating a national strategy isn’t going to be easy.

“What is missing (right now) is a long-term goal for the dairy farmers, such as in 10 to 15 years that we are cost-competitive with the U.S.,” said Montel.

“A vision and a strategy to advance that vision — as long as this is not in place, I think the fate of supply management is in question when we look 10 to 15 years ahead.”

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