1. Navigating the Future Canadian Dairy Industry Al Mussell

2. Initial Observations Evolution in milk supply management continues, at an accelerated pace, with greater urgency and contemplation of change The Ingredient Strategy signals prospect of deeper changes, and true significance of milk protein surpluses, imports Credible threats associated with trade agreements exacerbate these A need for creative thinking on the future of the dairy industry

3. Our Situation Profitable farms for efficient producers Profitable processors, investing elsewhere In aggregate, a mature market Worsening dairy trade balance Export restraints New and pending trade agreements Sobering challenges

4. Dairy Farms in Canada Source: Statistics Canada 2014 12,219

5. Dairy Farms by Milking Facility/Type, 2013 Source: Herds on milk recording, Canwest DHI, Valacta. 8899 herds

6. Apparent Producer Interests in Dairy Policy Retain revenue/ operating earnings basis Preserve capital asset values Market growth (some producers) Improved flexibility, opportunity to expand operations (some producers)

7. Processors Consolidated, highly competitive processors, operating at national or regional in scale (some multinational) Confronted by highly concentrated retail/food service environment; increasingly assertive in dealing with suppliers Rapidly shifting dairy manufacturing technology Increasingly, Canadian dairy processors investing capital elsewhere, rather than in Canada

8. Dairy Markets Mature market But, exceptional growth in segments; absolute decline in others Proliferation of brands, and products Increasing interest in linkages among production, processing, and product as elements of marketing Increasing pressure and presence of imports

9. Slow Market Growth Source: Canadian Dairy Information Centre

10. Growth in Product Categories Differs Sharply Source: Statistics Canada Calculations done by AAFC-AID, Dairy Section

11. Economic Policy Direction Economic growth/industrial policy based on freer tradeCommitment, government track record on major FTA’s CETA (complete) TPP (in process) Canada-South Korea (complete) Canada-Japan (in process) Canada-India (in process) Reduced willingness to impose new regulation (mostly)Reduced resources for regulatory implementation

12. Deepening Dairy Trade Deficit Source: Statistics Canada

13. New HS tariff lines 2008: MPC and MPI HS 3504.00.11 and HS 3504.00.12 Source: AAFC 13

14. Imports of other milk-based product not subject to TRQ Source: AAFC Includes whey powders, casein, lactose, albumin 14

15. Source: USDA/GATS 15

16. Dairy Ingredients Strategy Other aspects to be developed, such as new price mechanism for Classes 1 to 3, allocation, growth allowance Elements: World pricing on SNF in Class 4 Protection of revenues in other classes New regulation to identify product origin Phase out of CDC surplus removals Purpose- recover markets from imported MPC and MPI’s, encourage processing investment

17. Non-Fat Milk Solids Trap Butterfat quota system, with SNF in fixed proportion Structural surplus of skim Increasing imports of SNF products; expected to increase further still Capacity at limit to process SNFHard caps on dairy exports

18. Diversions into Class 4(m), Canada Source: Canadian Dairy Information Centre

19. Discounted Pricing in Class 4(m) Source: Canadian Dairy Information Centre

20. Threats Price spread between Class 4(m) and other pricing is financed by producers Left alone, costs of diversion may become increasingly onerous, few options to mitigate US has free access to Canada on MPC/MPI, also EU when CETA comes into force Significant developments in TPP US-Japan TPA for President Obama Prospect of major pressure on Canada in SM products

21. TPP- Potential Implications With Japan onside with US (apparently), door is open to deal Canada out Possible TPP deal spring 2015 SM-5 have no friends left at home Expect requests for large increases in dairy market access (TRQ’s or tariffs) for TPP countries Phase-ins shorter now- 5 years (?)

22. Potential Gloomy Scenario Increased imports/decreased protectionCapped exportsShrinking dairy industryLower milk pricesLower quota values

23. Navigating a Better Course: Juggling Act Get out from under export caps Create a growth environment for processors Accommodate those disadvantaged by imports Must, simultaneously:

24. Conclusion Today’s situation could come to a head quickly Dairy industry leaders, governments face difficult environment for dairy policy Farmers may be asked to make sacrifices to adjust; need to understand the context for this

25. Conclusion Should not simply accept a future with a shrinking dairy industry Delicate path forward Coordinated with processors More export focused, understanding risks Pricing closely oriented with world prices Lower quota values Reasonable accommodation for those disadvantaged Just scratching the surface Much more creativity, analysis required