1. Overview of the Canadian dairy industry
Gilles Froment, M.Sc., P.Ag.
Senior Director, Policy and Corporate Affairs
Canadian Dairy Commission, Ottawa
March 26, 2009
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2. Outline The Canadian marketing system and its component
3 pillars of supply management
Seasonality programs
Milk pools
Marketing and innovation initiatives
Current issues

3. The Canadian Milk Marketing System and its Components

4. Snapshot of the Canadian Dairy Industry
14,036 farms producing more than 80 billion litres of milk (8 million tonnes)
445 processing plants
Milk sales: $5.2 billion
Adds a net $9.7 billion to the GDP
Processed products sales: $11.6 billion
Supports $30 billion of economic activity
Sustains more than 160,600 jobs

6. Major Milk Producing Countries (cow milk, 2007)
Pale brown: EU 15
Green: 10 new EU member countries
dark brown: Bulgaria and Romania
Source: International Dairy Federation

7. Canada’s Milk Marketing System
Producer
Marketing Board (provincial)
Processor
Further processor
Consumer
Retailer
All producers sell their milk to their marketing board (mandatory) who then sells it to the processors (even coops).

8. CMSMC Canadian Milk Supply Management Committee
Permanent body of signatories of the National Milk Marketing Plan - NMMP (voting members)
– One vote per province
Dairy Farmers of Canada, Dairy Processors Association of Canada and Consumers’ Association of Canada (non-voting members)
Responsible for policy determination and supervision of the NMMP provisions
Meets 4 times a year
Virtually all decisions require unanimity
Signatories include : Federal gov, Provincial governments, provincial marketing boards
Establishes the Market Sharing Quota
Oversees the functioning of the agreement that allows the pooling of revenues from Special Classes.
Most decisions need to be unanimous.
The CDC chairs the CMSMC, provides Secretariat services as well as technical expertise and advice.

9. to coordinate actions of provincial producer boards and governments
The CMSMC directs the implementation of the National Milk Marketing Plan (NMMP)
to coordinate actions of provincial producer boards and governments
Sask (3)
Quebec (4)
Non-voting
members
DFC
DPAC
P.E.I. (3)
CAC
CDC
chair
Ontario (4)
N.S. (3)
Alberta (3)
Newfoundland (3)
B.C. (3)
N.B. (3)
Manitoba (3)

10. NMMP National Milk Marketing Plan Federal-provincial agreement
Regulates marketing of industrial milk
Balances supply and demand
Sets out the establishment, distribution and adjustment of industrial milk quota
The key document that regulates the milk marketing system since the 80s.

11. The Canadian Dairy Commission
Crown corporation created in 1966
Reports to Parliament through Minister
3 commissioners, 63 employees
Generally deals with industrial milk
Total budget for : $7.8 million
Funded by government, dairy producers and the marketplace

12. Legislated Mandate
Provide efficient producers of milk and cream with the opportunity to obtain a fair return for their labour and investment.
Provide consumers of dairy products with a continuous and adequate supply of dairy products of high quality.
These are the objects of the Commission as stated in The Canadian Dairy Commission Act.

13. Overview of Key Activities
Chair the CMSMC
Calculate Estimated Requirements (demand)
Recommend Market Sharing Quota
Establish Support Prices
Administer Revenue and Market Sharing Agreements (pools)
Administer Special Milk Class Permit Program
Carry out external audits
Create and administer marketing programs
Remove surplus production
Administer Seasonality Programs

14. Milk Categories Industrial (Classes 2-4) Fluid (Class 1)
used in the manufacture of butter, cheese, ice cream, yogurt, milk powders
longer shelf life
federal responsibility – interprovincial movement of product
Fluid (Class 1)
used in 1%, 2%, skim milk, etc. and creams
short shelf life
provincial responsibility – historically made and consumed in province of origin

15. 3 Pillars of Supply Management
controlled prices
controlled imports
controlled production

16. Pillar 1: Controlled Prices
Industrial milk prices
Are determined by provinces based on CDC support prices and vary depending on the end use of the milk
Support prices are the prices at which the CDC buys and sells butter and skim milk powder under its various programs.
Support prices are announced in December by the CDC to be effective February 1.
Support prices are adjusted annually.
In their deliberations on the establishment of support prices, the Commissioners consider cost of production results and other economic indicators as well as market impacts.
On February 1st, 2009, the support price for butter was $7.10/kg and $6.18/kg for skim milk powder.

17. Support prices 1997-2009 ($/kg)

18. World Prices for Cow Milk (2007, US$/100 kg)
Source: International Dairy Federation

19. Balancing Supply with Demand
prevents Price Volatility
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20. Pillar 1: Controlled Prices
Fluid milk prices
are determined by provinces according to a formula
40% indexed COP
30%CPI
30%PDI/capita
Valid until Jan 31, 2010
Currently negotiating a new formula with all 10 provinces
The Eastern formula kicks in once per year.
Western provinces are currently using the eastern formula twice a year.

21. Milk Prices in last 12 months February 2008 – January 2009
Average in-quota revenues : $72.20
Average price for fluid: $85.41
Average price for industrial: $63.53
Average price for industrial milk includes Special Classes. Canadian price is standardized for 3.6 kg butterfat/hl.

22. Example - Prices per component
Class
$/kg BF
$/kg protein
$/kg other solids
$/hl standard
@3.6 kg
Fluid milk 1(a)
7.37
66.01 $/hl for SNF
92.53
Cheddar 3(b)
7.65
13.31
0.85
75.51
Butter 4(a)
5.27
74.66
Cheese as ingredient 5(a)
3.54
9.36
0.0001
43.05
These prices are the prices charged by the FPLQ in February The prices per component and per class may vary from province to province.

23. Pillar 2: Controlled Imports
Most dairy products are protected by Tariff Rate Quota (TRQs).
Above TRQs, dairy products have a tariff of almost 300%.

24. Pillar 2: Controlled Imports
Examples of TRQ and over-quota tariffs
Product
TRQ (t)
Tariff (%)
Skim milk powder
201.5
Dry whey
3.2
208.0
Butter
3.3
298.5
Cheese
21.4
245.5
Ice cream
0.484
277.0
66% cheese TRQ is allocated to the EU
2000 t of the butter TRQ allocated to New Zealand. The CDC imports the TRQ for butter.

25. DM147046
Blue – water in the tariff

26. DM147046

27. Pillar 3: Controlled Production
Provincial milk marketing boards allocate production quota to their respective dairy farmers.
This quota combines both fluid milk quota and industrial milk quota.
Fluid milk quota is established by provincial marketing boards and equals demand.
Industrial milk quota is established nationally by the CMSMC and is called Market Sharing Quota (MSQ).
Quota is calculated and expressed in kg of BF.
Newfoundland still has separate quotas for fluid and industrial milk.

28. Establishing MSQ
The CDC calculates the Estimated Canadian Requirements - ECR (demand) on a monthly basis.
ECR= Production + Opening Stocks + Imports – Closing stocks – exports – DDPIP – Class 4(m)
MSQ is adjusted every two months when ECR increase or decrease.

29. The 7 steps in sharing quota adjustments among provinces1
Skim-off 2
The 10:90 rule 3
PEI’s share 4
DDPIP 5
Growth allowance 6
Exports 7
Fluid quota

30. Evolution of MSQ 1% and 2% milk more popular; lower butter consumption
Low butter stocks
Quota cut of 1976
The curve is MSQ on July 31.
Current MSQ= million kg BF (March 2009)

31. Respecting production targets
Provincial production targets:
Upper limit: 0.5%
Lower limit: 1.5%
Provinces are free to have their own policies to adjust their farm quota or not, however, provinces will be penalized if they over or under produce their share of quota.
Over production: no payment for the milk
Under production: lost opportunity to produce

33. CDC Seasonality Programs
While milk production is quite stable year round, people consume more dairy products in the fall/winter and less in the spring.
To offset this, the CDC buys and stores butter and skim milk powder in the spring and puts those products back in the market in the fall/winter.
These transactions are done at support prices.

34. Seasonality Programs - Butter
Plan A
Becomes the property of the CDC
25 kg blocks
Plan B
Must buy back within one year of production of the product
One-pound prints ready for retail sales.
The marketplace pays the carrying charges (storage, insurance) for “normal” butter stocks (12 million kg).
Carrying charges for any stock above “normal” level are paid by producers through the pools.

35. Managing Surpluses Production is managed on butterfat basis.
Surpluses of milk solids non fat (SNF) arise because consumers want the fat portion of the milk more than the SNF portion.
The CDC buys the surplus SNF and disposes of it by exporting it or selling it for animal feed.
Both these markets yield a lower return to producers than regular sales.
The CDC continuously strives to find new markets for SNF surplus on the domestic market and to develop new WTO compliant ways to sell it on the export and domestic markets.

36. CDC Import / Export EXPORTS
Subsidized exports according to WTO limits (none to USA)
SMP (CDC exports to Cuba and Mexico)
Permits for private exporters including non-contingent classes
IMPORTS
According to WTO (3,274 mt)
Butter : sold to further processors
Cheese: private sector imports (21,800 mt)
CDC administers the butter TRQ of 3,274 tonnes
NAFTA prohibits to export subsidized products to the US

37. The Milk Pools

38. Pools were established in the mid-1990’s in response to…
Increased concentration at the retail and processing levels
New trade rules (FTA, NAFTA, WTO)
Differing provincial policies (for ex. Milk allocation to plants)
Fluid milk moving between provinces
Inequities in producer returns
3 national committees recommended the creation of a national all milk pool. In the end, the results was somewhat different, and more complex.

39. The CDC administers 3 milk pools
The P10 (all 10 provinces)
The P5 (in the East)
The WMP (in the West)
These pools allow dairy farmers to share and balance revenues, markets and in some cases, transportation costs.
The P5 and the WMP agreements have been in operation for over a decade and have harmonized the dairy policies within their respective regions.

40. How does pooling work? Revenue Sharing
Market Shares – All Milk
Fluid
Industrial
Pool
Region A (hl)
1,000
2,000
Region B (hl)
2,800
5,200
8,000
Total (hl)
3,800
6,200
10,000
Region A
50%
20%
Region B
35%
65%
80%
Pool (%)
38%
62%
100%
Total production: 10,000 hl
No over quota production

41. How does pooling work? Before pooling
Average Revenue ($/hl)
Fluid
Industrial
Region A
$74.00
$66.00
Region B
$79.00
$69.00
Total Revenue (average revenue x market share)
Total
$74,000
$66,000
$140,000
$221,200
$358,800
$580,000
$295,200
$424,800
$720,000
Average pool price = total revenue/total production
Average Pool Price (hl) = $72.00

42. How does pooling work? After pooling
Revenue needed (market share x average pool revenue)
All Milk
Region A
2,000
$72.00
$144,000
Region B
8,000
$576,000
Resulting Cash Transfers (Equalization Pool Payments)
Total
$/hl
$4,000
$2.00
($4,000)
($0.50)
($0.00)

43. What is pooled? Pool Milk Revenue Market Promotion Transport P10
Special Class x
East
All
West
When revenues are pooled, each producer gets an average price per unit produced.
When markets are pooled, a growth or reduction in market size in any region is felt across the pool.
Pooled transportation costs means that all producers pay the same transportation cost no matter how far from the plant they live.

44. How pools are administered
Provinces report production and sales data (by milk class) monthly to the CDC.
The CDC calculates money transfers between members to equalize returns.
The CDC calculates quota allocations when demand changes.
The CDC keeps a bank account for pool operations.
The CDC chairs the supervisory bodies of the pools, provides secretariat services as well as technical advice.

45. Resulting in harmonization of…
Multiple component pricing
Producer prices
Milk classification
Quota policies
POOL = RISK MANAGEMENT TOOL

46. Marketing and Innovation Initiatives of the CDC

47. Some of the CDC initiatives
The Dairy Marketing Program
The Domestic Dairy Product Innovation Program
The Special Milk Class Permit Program

48. Strong market growth sectors
The finished products:
- Sports recovery drinks/powders
- Meal replacement products (bars, beverages)
- Meal / dietary supplements
- Organic products
- Pet food
The dairy components:
- Organic milk protein concentrates and isolates, casein, caseinates, peptides
The challenges:
- Ingredients that are still relatively new or not available from our industry (MPC,MPI)
- World market priced/ highly competitive market
- Manufacturers/users looking for level playing field conditions

49. Current Issues

50. Current challenges
Growing structural surplus of SMP - Finding new markets for solids non fat
current stocks of 35 million kgs
Evolving demand from consumers – substitution from non-dairy ingredients
Soy-based products (imitation cheeses)
frozen desserts
The market for dairy products is fairly mature
Effect of the economic crisis on dairy consumption?

51. Current challenges
World Trade Organization: an unknown but so far nothing to help supply management
Increase market access?
Lower tariffs?
Sensitive products?
Harmonization issues
Milk allocation in the East (P2) and Maritimes
Quota policies
Transportation
Audit rules

52. Fragility of tariff wall
The world prices for dairy products have dropped significantly in 2008 with butter, SMP and cheese trading near support price levels in the US.
US milk prices at record low: below $10/cwt
Price decline mainly driven by falling consumer demand due to the current economic weakness and to an over supply situation from high prices in 2007.
 At current world prices for butter and SMP (both at $1,600 US per tonne), the landed price plus the tariff exceeds the domestic support prices by $1.28/kg and $0.13/kg respectively. 

53. Cheese Compositional Standards
Canadian Food Inspection Agency (CFIA) is responsible
Came into force in December 2008
The use of milk protein concentrate and milk protein isolates is limited
Processors warn of an increase in production costs which will translate in an increase in retail price
Challenged in court by Saputo, Kraft and Parmalat

54. Future Pricing Issues Impact of current tariff protection
Impact of future trade agreements
Price sensitivity of particular classes
Differential impact of fluid vs industrial pricing
Expansion of Special Milk Class Permit Program
Should support prices continue to drive industrial milk pricing?
Methodology for future price changes
Difficulty to reach an agreement with dairy industry stakeholders

55. A note of interest for students…

56. CDC Graduate Scholarships (2006-2011)
To ensure that Canada has enough specialists in the areas of
Food and dairy science
Economics and policy (Supply mgt)
Animal science
M.Sc. and Ph.D.
For agricultural economics in Quebec, the program is managed by Université Laval but available to McGill students.

57. QUESTIONS