Economists suggest overhaul of dairy system

They recommend replacing provincial boards with western and eastern ones and ending use of higher-than-market prices

With the growing external pressures on Canada’s dairy industry, the dairy system needs internal flexibility to avoid constant crisis management.

That’s what a number of economists say as they consider dairy farming’s future as new trade agreements bite off chunks of the domestic market.

Problems with quota pricing, quota portability, milk pricing formulas and cost of production assessment are making it difficult for farmers and the rest of the industry to positively adapt, some say.

“There’s no stable equilibrium here where there’s no growth,” said Al Mussell of Agri-Food Economic Systems about the situation facing farmers now that trade deals with the European Union, the Asia Pacific region and the rest of North America have seen significant pieces of the domestic market given away.

“If we’re not able to find any way to do that, we’re going to find ourselves in serious trouble.”

Not only have pieces of the protected domestic market been given away, but a pricing structure that fended off U.S. milk protein imports appears to have been eliminated or reduced, and the export market is being further restricted.

Those hits are happening to an industry that produces a glut of milk protein and that has provincial and regional restrictions on quota portability, areas with relatively primitive production methods and many farmers already in financial stress.

“More than a third of dairy farms may have a very limited capacity to invest in their operations in the near future,” said Bertrand Montel, an economist who has studied Canadian dairy farms’ profitability and debt sustainability.

“In my view, the primary role of government support should be to help farmers reducing their debt load and facilitate an orderly restructuring of the dairy production (system) in Canada to avoid any risk of disruption of the milk supply at the processing level.”

Montel said that about 25 percent of Canadian dairy farms “faced a high level of financial stress (in 2015), mostly due to tight debt repayment capacity and cash flow…. More than a third of dairy farms may have a very limited capacity to invest significantly in their operations in the near future.”

The financial squeeze on farmers trying to expand is exacerbated by the problem of quota not being easily able to obtain, said Bruno Larue of Laval University.

“Herd expansion cannot be done quickly,” said Larue.

That is slowing the move of some farmers, including much of the industry in Quebec and Ontario, from small, tie-stall operations to larger free-stall systems. Larger and more modern approaches can produce milk for almost one-third less cost, according to U.S. research.

The Canadian system needs to be changed so that farmers can reach for the efficiencies they know they want to achieve.

“Regulations governing provincial exchanges must be changed to encourage more trades and allow farmers to expand their herds,” said Larue.

“The price-ceiling (in Eastern Canada) should be removed as well as regulations preventing a dairy farmer from buying someone else’s dairy farm and exploiting the combined quota in one location.

“Provincial boards should be replaced by a western board and (an eastern) board. Production costs must go down. Moving away from tie-stall milking systems would also quiet down animal welfare advocates.”

James Rude, an agricultural economist with the University of Alberta, said the industry will continually face pressure as long as its domestic market prices don’t reflect international market values. Relying on higher-than-market prices encourages an industry that focuses on blocking imports, rather than producing milk at competitive prices. If Canadian milk production costs were as good as those of foreign competitors, there wouldn’t be too much to fear.

“I think they’re going to have to use other formulas,” said Rude, who is frustrated by the industry’s slow pace of adaptation.

“I don’t think there is a strategy.”

The biggest danger Rude sees for the industry is an unwillingness to move beyond attempting to block or replace imports, rather than maximizing efficiencies and improving costs-of-production.

“I suspect they’ll do patches as long as they can. There’s too much at risk in terms of quota value,” said Rude.

“They never do a complete analysis of what’s going on. They’re very much in a defensive mode and will do whatever fix they can to plug the problem at the moment, not consider any other implications.”

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