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Canada’s dairy supply management can offer farmers a stable pay price

Canada’s dairy supply management can offer farmers a stable pay price

DAIRY FARMERS OF ONTARIO Board Chair Ralph Dietrich (left), and Vice Chair Murray Sherk (right) explain Canada’s Dairy Suppy Management System to farmers at a meeting in Westby, sponsored by the Wi...

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POSTED April 20, 2018 4:14 p.m.

VERNON COUNTY - The Wisconsin Farmers Union (WFU) recently conducted a five-city tour through Eau Claire, Edgar, Fond du Lac, Dodgeville, and Westby, featuring Ralph Dietrich, Dairy Farmers of Ontario (DFO) Board Chairperson, and Murray Sherk, DFO Board Vice Chairperson. The purpose of the tour was to educate Wisconsin producers about Canada’s dairy supply management program.

At the Westby event on Thursday, March 15, almost 100 dairy farmers and interested citizens gathered in the basement of the Nordic Lanes Bowling Alley to hear the two Canadians speak.

The event took place the night before the ‘Farm Discussion’ in Seneca, organized by Tammy Olson of Seneca Feed Services. That event gathered farmers with Wisconsin State Senator Jennifer Shilling, State Representative Lee Nerison, aides of U.S. Senators Tammy Baldwin and Ron Johnson, and U.S. Representative Ron Kind, as well as Darrin Von Ruden, President of Wisconsin Farmers Union, Kevin Walleser of the Wisconsin Milk Marketing Board, Al Hass of Organic Valley and many more.

At the ‘Farm Discussion,’ easily as many or more questions were addressed to Von Ruden as to the assembled politicians. Interest in Canada’s dairy supply management system was of keen interest to farmers present, who are currently laboring under extremely low pay prices caused by an oversupply ofmilk..

When asked at the Seneca meeting what the current level of oversupply in the U.S. is, Kevin Walleser of the Wisconsin Milk Marketing Board responded that it is about 15 percent.

At the end of the presentation in Westby, WFU Government Relations Director Kara O’Connor asked the audience a few question to which they were asked to respond by a show of hands.

One question was “Do you think there are elements of Canada’s system for managing dairy markets that would make sense in the U.S.?” In Westby, as at the other four meetings held, 70 to 80 percent of participants raised their hands.

When asked, “How many people think that Canada is the cause of the challenges dairy farmers in the U.S. are experiencing?” there were no hands raised at any of the five meetings.

Supply management

Dietrich and Sherk of DFO explained to the crowd the system of supply management that the dairy farming sector uses in Canada. They were quick to point out that the system is farmer-controlled, and the government supports the supply management system through tariffs.

“In Canada, the politicians love the dairy industry because we are stable, and never ask them for subsidies,” Sherk explained. “The grain and hog farmers don’t do things the way dairy and poultry farmers do in Canada, and they experience fluctuations in price, and wind up asking for subsidies.”

The objectives of Canada’s dairy supply management are:

• to ensure farmers receive a fair returm, derived completely from the marketplace, on their capital and labor costs;

• provide processors with a stable supply of milk so they can properly plan their production year after year; and

• provide consumers with a consistent supply of milk and milk products of the highest and safest quality, at a fair price.

Sherk explained that the system achieves these objectives by enabling Canadian dairy farmers to collectively negotiate prices and adjust milk production to meet consumer demand. By doing this, pay prices to Canadian dairy farmers remain relatively stable and are less subject to the volatility of the global market.

Sherk shared a model of the Canadian system depicted as a three-legged stool. The three legs of the stool are:

1. Producer Pricing

2. Production Discipline

3. Import Control

Sherk explained that the pricing and quota in Canada is driven by the level of demand for butterfat. Changes in demand will trigger a change in pricing, shared equally among all producers, if there is a 50 percent change in the average cost of production or a 50 percent change in the consumer price index. Today in Canada, the average blend price is $27/cwt. in U.S. dollars.

Retail pricing is not controlled by the farmers. Typically a gallon of milk in Canada costs $3.26 U.S. dollars, and a pound of butter $2.40-$3.20.

Organization

“The supply is organized by province, and is largely divided into an Eastern (Ontario, Quebec, Maritime Provinces) and Western (British Columbia, Alberta, Saskatchewan, Manitoba) Pools,” Sherk said. “Ontario produces about 32 percent of Canada’s milk, and Quebec about 42 percent, with the rest coming from the other provinces.”

In Canada, each province has a farmer-controlled milk marketing board, which derives its authority from provincial legislation. All milk produced in the province is sold to the provincial board, which manages all logistics of milk pick up and delivery to processing plants.

At the national level, market requirements are determined that meet domestic consumer demand and avoid overproduction of butterfat, by the Canadian Dairy Commission (CDC). Each province is represented on the commission. The national production quota is issued to the provinces on a percentage basis. The provinces then issue the quota to producers in their provinces.

Under the Canadian Dairy Commission Act, the CDC’s objectives are to:

• provide efficient producers of milk and cream with the opportunity to obtain a fair return for their labor and investment; and

• provide consumers of dairy products with a continuous and adequate supply of dairy products of high quality.

The CDC’s charge is to balance and serve the interests of all dairy stakeholders – producers, processors, exporters, consumers and  governments.

The Canadian Milk Supply Management Committee is composed of farmers from each of the provincial boards, representatives of processors, and a representative from the CDC. Oversight is provided by the Ministries of Agriculture of the provinces.

Then, there is Dairy Farmers of Canada (DFC), which sets national policy, and pays for lobbying and promotional programs. All of the provincial boards send members to DFC.

Quota system

The quota system was the source of lively questioning from members of the audience.

One question was about who can be a dairy farmer in Canada? The answer was that in Canada, the farmers of the provincial boards review each and every application. They demand to see “behind the corporate veil,” and the owners listed must be farmers and must live within 10 kilometers of the farm. No foreign corporations can be dairy farmers in Canada.

Another question was about transferring the quota between generations on a family farm. The answer was that succession of the family’s quota was encouraged and supported. All the family has to do is to apply to the provincial board for a change in ownership of the license, adding the next generation to the ownership.

If another producer or a new producer completes the farm license process, they can buy an ongoing farm operation, but the provincial board takes 10 percent of the quota base and puts it into the “quota exchange” in order to provide entry into the system for new farmers. Priority access to quota is for new farmers – 12 new farmers are brought on each year, with a waiting list of about 90. The attrition rate is about 2.5 percent per year, mostly as farmers retire.

Another question asked about what happens to milk that is produced over the quota amount. The answer is that there is a ‘sleeve’ around the quota, which allows for periodic, slight over- or underproduction. The province will pick up any extra milk, but will not pay for it when it is ‘over the sleeve.’ Under and over is calculated monthly, and checks are issued to producers bi-monthly. If a producer under produced, they receive credits, which allow them to produce more later, for instance during the spring flush.

One participant asked how the quota is valued from a finance perspective. The answer was that at first, the quota had no value. This changed later because essentially the ‘value of the quota’ came to be seen as identical to the ‘value of the Canadian dairy industry.’ About 10 years ago, Canada put a cap on the value of the quota.

During the last few years, with growth in consumer demand for butterfat, each producer was given their fair share of the increase in quota. If demand were to shrink, then the decrease would also be equal across the board. As in the U.S., Canadian consumers have increasingly responded to new research which documents the health benefits of full-fat dairy. This has led to growth in sales, but also a problem with an excess supply of low-fat powder.

Most farms in Canada are transferred to the next generation of the family. Bankers in Canada like the industry because of its stability. The quota, along with all the other real assets of the farm can be used as collateral. The stability of the industry in Canada facilitates adoption of new technology very quickly as well.

Dietrich pointed out that the stability of the dairy industry in Canada has also been very good for rural economies. When the hog and grain prices crashed in the 1990s, the stability in dairy kept the rural communities going. He said that overall, dairy farming is less stressful in Canada, and this also helps support stability in marriages and optimal childhoods.

The quota system operates the same for the conventional, organic and grassfed producers, but pick up is separated. The organic milk share in Canada is smaller than in the U.S., and new organic producers are prioritized. As in the U.S., organic prices in the store are two times greater than conventional prices.

History of system

At the ‘Farm Discussion’ in Seneca, there was much discussion of the current evolving crisis in dairy. The motivation Tammy Olson of Seneca Feed had in calling the meeting was two articles she saw on Facebook. One regarding the fact that Western Wisconsin led the nation in farm bankruptcies in 2017, and other by ‘The Guardian’ about the rise in farmer suicides.

In Seneca, meeting participants grilled the politicians present about solutions to the low pay price, and seemed very interested to hear more from WFU President Darrin Von Ruden about the Canadian supply management system. There was much discussion about the current U.S. oversupply, and the plunge in dairy pay prices, where net farm income for U.S. farmers has declined by more than 50 percent since 2013. Dairy price volatility is contributing to the loss of 500 dairy herds per year in Wisconsin, according to DATCP license records.

There were a variety of opinions in the audience about how realistic it would be to move toward a supply management system like Canada has.

“The time to have moved toward supply management would have been in the 1970s, during the dairy buyout,” Wisconsin Assemblyman and Chair of the Assembly Committee on Agriculture Lee Nerison told those present for the ‘Farm Discussion.’ “Now it would be a lot harder.”

Others in the audience in Seneca, in what were at times very emotional comments, seemed to express that “something has to be done.”

Von Ruden talked to meeting participants about the history of how Canada put their system in place. It wasn’t always a smooth road, but it began with a crisis similar to the one shaping up now in the U.S.

In 1960, in the Canadian Province of Ontario, milk producer organizations were very fragmented and lacked unity of purpose. Producers were not seeing an adequate profit off their dairy operations and the system was inefficient.

Because of the situation, the Ontario government commissioned a study to determine how to solve what appeared to be an ever-increasing problem. Out of this process, a solution came in 1965 in the form of the ‘Milk Act.’

The Milk Act called for an intermediate body, the Ontario Milk Marketing Board (OMMB) that would buy all the milk produced on Ontario dairy farms and sell the milk to the processors.

In 1970, the National Milk Marketing Plan came into effect to control supply, with the federal government and the governments of Ontario and Quebec, the two largest provinces, signing on. By 1974, every province except Newfoundland had joined.

Following dairy, a national supply management system was implemented for eggs in 1972, turkey in 1974, chicken in 1978 and chicken hatching eggs in 1986. Concurrently with the domestic controls on supply and price, the high tariffs on imported products were put in place to protect Canadian producers from competition, and keep foreign imports to very low levels.

At the meeting in Westby, Sherk explained that 15 percent of dairy sales in Canada come from imported products.

The transition was at times difficult. Dietrich recounted memories shared with him by an old-timer who lived through the transitional period in the 1970’s, who told him that at times the farmer-members of the board were confronted with anger and even required armed protection in some situations.

“How can we work to make something like your system happen here in the U.S.?” a meeting participant in Westby asked.

“It takes local champions who have what it takes to stick with it and enlist other farmers,” Dietrcih responded. “You also need to enlist long-sighted politicians with gumption.”

One of the biggest challenges in Canada was in getting the government to understand that the system needed to be farmer-led. Another critical factor is to enlist the processor community, and to make them your partners.

Dietrich explained that creation and defense of the system requires the major players to each make a commitment to doing their part to create stability, ensure reasonable profits, and play their role in preventing the system from spiraling out of control. Consumers also have a role in supporting a system which ensures them a safe, plentiful food supply, and values stability for farmers.

Some might say that this “social contract” could be expanded to ensure that farmers use ecologically sustainable practices and maintain high standards of animal welfare in return for society ensuring that a supportive legal framework is maintained.

At the Westby meeting, Sherk discussed the increasing importance of environmental concerns in Canada. He reported that all dairy farms in Canada are required to have nutrient management plans, and have manure storage structures built for 240 days per year of storage. And while some dairy herds, especially in the west part of the nation are as large as 3,000 head, most are much smaller. In Ontario there are only about four dairy herds that are larger than 1,000 cows. In Canada, the average herd size is 86.

“Similar to trends in the U.S., environmental concerns have become increasingly important in our industry,” Sherk explained. “Ultimately, I think that it is environmental issues that will limit the size of Canadian dairy farms.”

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