Glut of non-fat milk solids creating market price instability

Canadian dairy consumption is growing slowly, but price pressures are challenging producers, says a Farm Credit Canada sector report.

FCC chief economist J.P. Gervais said the surplus of non-fat milk solids in the supply chain is the biggest issue facing producers.

The problem prompted Dairy Farmers of Ontario to launch a new Class 6 category as of April 1. Manitoba plans to follow suit in August, and talks continue for a national strategy to tackle the problem.

The new class would increase the competitiveness of skim solids, which are used to make cheese and other products, and help resist cheaper imports.

Gervais said the growing demand for butterfat has created a surplus of non-fat milk solids, such as skim powder, which are typically sold for livestock feed.

That has resulted in an increase of cheaper imports for processing. As of January 2016, these imports were 10.4 times higher than they were in 2011.

The Class 6 ingredients’ prices are based on the world price for milk, which makes them more competitive with imports.

Gervais said milk revenues aren’t as stable as many outside the supply-management system think.

“As much as 20 percent of the price they get is a function of world market conditions,” he said.

“It’s not 100 percent, like a grain farmer, for example, but right now the price of dairy products in the world market is kind of weak.”

World prices began dropping in 2014 as demand in emerging markets began to slow, and the Organization of Economic Co-operation and Development expects prices to pick up only slightly this year.

Milk revenues in the Western Pool, which includes the four western provinces, have been better than in the P5 Pool of Ontario, Quebec, Nova Scotia, New Brunswick and Prince Edward Island. Still, profitability will be tight, the FCC said.

Much attention has been paid to how trade agreements will affect dairy producers. Gervais said the Comprehensive Economic and Trade Agreement with the European Union and the Trans-Pacific Partnership will affect producers because they allow unrestricted entry of milk proteins into Canada.

However, he said the domestic imbalance between butterfat and non-fat milk solids is a bigger immediate concern.

The industry is doing the right thing by trying to solve that, he added.

“In the meantime, what matters to producers is that they are getting a price that is lower than what they are used to and in some cases lower than the cost of production,” Gervais said.

Producers should be looking at costs and efficiencies throughout their operations.

“They really have to look at management, just like any other sector,” he said.

The FCC report said the most efficient dairy producers earn $1 for every 55 cents spent on operating costs.

Gervais said both small and large producers have room to be more efficient, which could include the use of new technology or expansion.

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