The economic logjam has been broken and new money is flowing into Canadian dairy processing.
Winnipeg will be home to a new dairy processing plant, one that produces the sorts of specialized milk protein ingredients that have been flowing into Canada, damaging dairy farmer profitability, undermining the future of the dairy processing industry and leaving a bleak vision for the future.
However, new pricing models in Ontario and Manitoba — and possibly across Canada — have broken the bad economics.
“If you didn’t change the ground rules for Canadian dairy ingredients, there wouldn’t be this type of investment taking place,” said Michael Barrett of Gay Lea Foods, a dairy farmer-owned co-operative based in Ontario.
“We’re putting our money where our mouth is.”
Gay Lea and B.C.’s Vitalus Nutrition Inc. are converting an egg plant in Winnipeg into a facility that produces dairy ingredients.
Dairy Farmers of Manitoba chair David Wiens said his organization has been working closely with the companies to make the investment happen and agreed it wouldn’t have occurred without the milk pricing changes.
“It fits in well with our ingredients strategy,” said Wiens.
“What this plant will do is where the market is moving to.”
The companies did not release details on the amount of money they are investing or how the ownership of the operation will be divided.
Milk pricing in Canada has been an ongoing problem for the Canadian industry, creating shortages of butterfat products and massive surpluses of skim milk powder.
The powder is dumped into the animal feed market, while the shortages of butterfat occur because provinces such as Manitoba produce less milk than their national quota allows.
Manitoba is producing six percent less milk than it is allowed, yet it ships whole milk all the way to Quebec because provincial processors can’t use all of what is produced inside the province.
The crisis in pricing has occurred because foreign milk protein products can be imported into Canada and are generally priced well below equivalent domestic prices. That reduces the willingness of processors to invest in Canadian dairy processing and has seen Canadian companies invest in the United States rather than in Canadian production.
Ontario pioneered new milk component pricing this year that has allowed the elements of milk to be priced differently based on their use, which allows an ingredient maker to obtain milk proteins at globally competitive prices. A similar pricing model is being introduced in Manitoba.
Economist Al Mussell of Agri Food Economic Systems in Guelph, Ont., said the investment in new processing in Manitoba shows that the industry appears to be finding a solution to the pricing problem.
It allows investors to believe they can make money by producing dairy products in Canada, and the money flows to places that have embraced the new pricing.
“It gives you a sense of the urgency with which Manitoba seemed to follow the Ontario ingredients strategy,” said Mussell.
It also reveals the pressure on Canada’s processors to get bigger and serve the entire country.
“On the primary processing side, there has to be a lot of pressure to get to a national scale,” said Mussell.
“Their customers are national.”
Some dairy producer groups have opposed new pricing that lowers the average price of milk produced on their farms. However, most have now accepted that some compromise is necessary to eliminate the flow of American milk protein components into Canada, which is slowly strangling the industry.
The Canadian Dairy Commission is studying a proposal for a national ingredients strategy, which would be similar to the provincial models in Ontario and Manitoba.
Barrett said his co-operative, which Manitoba dairy farmers can join, is optimistic about the future now that a path forward has appeared.
“If you keep your principles correct, and you put trust on the table, you can negotiate something that has value for all of the parties,” said Barrett.
“There’s nothing without pain, but this was as painless as you can get.”
Manitoba is already increasing milk production to reach its six percent allowance and will be importing milk from its western neighbours to feed the new plant.
“There will be milk coming into the province, not leaving the province,” said Wiens.