1. Milk Supply Management: Al Mussell A Bird’s Eye View

2. Economic Research in the Canadian Agri-Food Sector 2

3. Bird’s Eye View An independent view Abstracts from detail of the system Objects, structures, some outcomes, given context View of the essentials of the situation Perspective from which to observe system in its entirety

4. Initial Observations Evolution in milk supply management continues, at an accelerated pace, with greater urgency and contemplation of change Still largely a technical discussion Challenged by complexity; change in any one parameter requires diverse realignments in others Obscures other, more fundamental changes to the context for milk supply management

5. Observations- Bird’s Eye View Producers have changed Processors have changed Markets have changed Economic policy direction has changed

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

7. Dairy Farms by Milking Facility/Type, 2012 Source: Herds on milk recording, Canwest DHI, Valacta. 8977 herds

8. Dairy Farm Asset Values Source: Statistics Canada Cansim

9. Farm Operating Income/Assets 200520062007200820092010 Land-Based Field Crops 0.02 0.030.04 0.03 Cattle <$1 Million 0.02 Horticultural 0.04 0.05 Margin-Based Cattle >$1 Million 0.01 0.04 0.030.01 Hogs>$1 Million 0.050.030.040.02 0.04 Supply-Managed Dairy 0.03 0.04 Poultry and Eggs 0.040.03 Source: Statistics Canada FFS and TDP data, unaudited Assets at market value

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

11. 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 Canadian investments in processing challenged by lack of domestic market growth, restricted export market access Increasingly, Canadian dairy processors investing capital elsewhere

12. Dairy Markets Overall, very slow growth But, exceptional growth in segments; absolute decline in others Proliferation of brands, product differentiation, more diverse dairy case Increasing pressure of imports, binding exports caps, widening trade deficit Increasing interest in linkages among production, processing, and product as elements of marketing Promising international product market outlook

13. Slow Market Growth

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

15. Deepening Dairy Trade Deficit Source: Statistics Canada

16. Strong Powder Prices Source: USDA AMS

17. Expected to Remain Strong, Mid-term Source: USDA-ERS

18. 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

19. Milk Supply Management Past Pressures Reduction/control of milk, dairy product surpluses Sustainable producer returns Improved equity among producers, pooling of markets; homogeneity Processor market power Industrial policy amenable to protection of critical industries New Pressures Protection of producer capital Growth, flexibility, linkages, export- processors, some producers Trend in differentiation, brand/SKU proliferation; heterogeneity Retail/food service market power Efficiency gains in large scale plants Industrial policy based on freer trade; ↑ imports, ↓ regulation

20. Conclusions Milk supply management is a policy artifact of fundamental economic challenges in the dairy industry Past evolution in SM has refined its policy approaches Risk today is that the nature and rate of change overwhelms ability of SM to adjust effectively, even with major realignment of existing policy parameters Suggests a more fundamental reconsideration of the contemporary objectives for dairy policy, instruments used in regulated marketing

21. Recommendations What is the robust, consensus vision of producers? Processors? Where are the market power pressures? What new types of demands from markets? What consistency with broad economic policy direction? Revisit the essence of system. What is the role of “orderly marketing” today? Needs process to identify purpose, build consensus, commitment to renewed dairy marketing system Case needs to be made Not a search for more elegant solutions to pressures on current system Design instruments to implement contemporary objectives, given external constraints

22. Recommendations Improve adjustment dynamics of system Address apparent regulatory policy/resource constraints Explore alternative mechanisms/prospects to orient system toward export market access Consider expanded use of market instruments within renewed SM system Many elements of SM have adjusted over time, others frozen in time Costs/benefits of provincial legacy plants vs. national scale market efficiencies New quid pro quo Engage provincial governments regarding their stake in milk SM Avoid path dependence in current system Pitfalls of competitive dynamic in regulatory reform Need for independent research and analysis Seek external input, analysis

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