1. O VERVIEW OF THE C ANADIAN D AIRY I NDUSTRY Gilles Froment, M.Sc., P.Ag. COO Canadian Dairy Commission, Ottawa February 21, 2014 1 DM272659

2. O UTLINE The Canadian marketing system and its component 3 pillars of supply management Seasonality programs Milk pools Marketing and innovation initiatives Current issues 2

3. T HE C ANADIAN M ILK M ARKETING S YSTEM AND ITS C OMPONENTS 3

4. S NAPSHOT OF THE C ANADIAN D AIRY I NDUSTRY 12,234 farms producing approximately 8 billion litres of milk (315 million kg BF) 480 processing plants Farm receipts: $5.9 billion Adds a net $10 billion to the GDP* Processed products sales: $14.7 billion Supports $15 billion of economic activity* Sustains more than 215,000 jobs* 4 * Source: EcoRessources

5. W ORLD M ILK P RODUCTION 2005-2012 ( ALL SPECIES ) 5

6. W ORLD C OW M ILK P RODUCTION (2012) Source: IDF World Dairy Situation 2013 6 6

7. C ANADA ’ S M ILK M ARKETING S YSTEM 7 Producer Marketing Board (provincial) Processor Further processor Consumer Retailer Regulated market Unregulated market

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 8

9. 9 The CMSMC directs the implementation of the National Milk Marketing Plan (NMMP) to coordinate actions of provincial marketing boards and governments Non-voting members CDC chair DPAC CAC DFC SK (3) Quebec (4) P.E.I. (3) Ontario (4) N.S. (3) N.B. (3) Newfoundland (3) Alberta (3) B.C. (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 10

11. T HE C ANADIAN D AIRY C OMMISSION Crown corporation created in 1966 Reports to Parliament through Minister of Agriculture 3 commissioners, 60 employees Generally deals with industrial milk Total budget for 2013-2014: $7.75 million Funded by government, dairy producers, commercial operations, and the marketplace 11

12. L EGISLATED M ANDATE 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. 12

13. O VERVIEW OF K EY A CTIVITIES 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 13

14. M ILK C LASSES 14 Industrial (Classes 2-4) used in the manufacture of butter, cheese, ice cream, yogurt, milk powders longer shelf life federal responsibility – interprovincial trade 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 P ILLARS OF S UPPLY M ANAGEMENT controlled prices controlled imports controlled production 15

16. P ILLAR 1: C ONTROLLED P RICES 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 usually announced in November or December by the CDC to be effective February 1. 16

17. S UPPORT PRICES 1997-2014 ($/ KG ) 17

18. P RODUCER M ILK P RICES (2012) 18

19. 19 E VOLUTION OF F ARM P RICES C ANADA AND THE US 1998 - 2013

20. P ILLAR 1: C ONTROLLED P RICES Fluid milk prices are determined by provinces according to a formula 50% indexed COP 50% CPI Valid until February 1, 2016 Applied once per year (in February) 20

21. M ILK P RICES IN LAST 12 MONTHS E NDING D ECEMBER 2013 Average in-quota revenues : $77.99/hl Average price for fluid: $94.78/hl Average price for industrial: $66.63/hl 21

22. E XAMPLE - P RICES PER C OMPONENT FOR F EBRUARY 2014 Class$/kg BF $/kg protein $/kg other solids $/hl standard @3.6 kg Fluid milk 1(a)7.1574.39 $/hl for SNF100.13 Cheddar 3(b)8.0213.980.9079.16 Butter 4(a)8.025.55 78.31 Cheese as ingredient 5(a) 4.147.840.9345.53 22

23. P ILLAR 2: C ONTROLLED I MPORTS Most dairy products are protected by Tariff Rate Quota (TRQs). Above TRQs, dairy products have a tariff of almost 300%. 23

24. P ILLAR 2: C ONTROLLED I MPORTS Examples of TRQ and over-quota tariffs ProductTRQ (’000 t)Tariff (%) Skim Milk Powder0201.5 Whey Powder3.2208.0 Butter3.3298.5 Cheese20.4245.5 Ice cream0.484277.0 24

25. P ILLAR 3: C ONTROLLED P RODUCTION 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. 25

26. E STABLISHING MSQ The CDC calculates the Estimated Canadian Requirements or ECR (demand) on a monthly basis. ECR = Production + Opening stocks + Imports - Closing stocks - Exports - DIP- Class 4(m) MSQ is adjusted every two months when ECR increase or decrease. 26

27. T HE 7 STEPS IN SHARING QUOTA ADJUSTMENTS AMONG PROVINCES 1Skim-off 2The 10:90 rule 3PEI’s share 4DDPIP + DIP 5Growth allowance 6Exports 7Fluid quota 27

28. E VOLUTION OF MSQ 28 Quota cut of 1976 1% and 2% milk more popular; lower butter consumption Low butter stocks

29. R ESPECTING P RODUCTION T ARGETS 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 + penalty Under production: lost opportunity to produce 29

30. E VOLUTION OF M ILK S UPPLY AND D EMAND 30 Forecast includes a 1% growth allowance

31. CDC S EASONALITY P ROGRAMS 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. 31

32. S EASONALITY P ROGRAMS - B UTTER 32 Plan A Becomes the property of the CDC 25 kg blocks Plan B Processors must buy back within one year of production of the product One-pound prints ready for retail sales.

33. M ANAGING S URPLUSES Production is managed on a 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. 33

34. CDC I MPORT / E XPORT 34 IMPORTS According to WTO (3,274 t) Butter: sold to further processors Cheese: private sector imports (20,412 t) 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

35. T HE M ILK P OOLS 35

36. P OOLS 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 36

37. T HE 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. 37

38. W HAT IS P OOLED ? PoolMilkRevenueMarketPromotionTransport P10Special Class xx EastAllxxxx WestAllxxx 38

39. H OW P OOLS ARE A DMINISTERED 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 allocation when demand changes. The CDC keeps a bank account for pool operations. 39

40. R ESULTING IN HARMONIZATION OF … Multiple component pricing Producer prices Milk classification Quota policies POOL = RISK MANAGEMENT TOOL 40

41. C URRENT I SSUES 41

42. C URRENT I SSUES Increased imports and cross-border shopping Harmonization issues within regional pools Quota management Audit rules National all milk pool Milk allocation to plants Marketing/Innovation Special Classes, Dairy Marketing Program and CDC Dairy Innovation Program Trade negotiations Focus market growth 42

43. Several countries still have high budget expenditure for the milk sector EU - €3,5 billion on average 2008-2011 US – approx. $4 billion per year ($40 billion in the last decade) – New Farm Bill? These subsidies contribute to depressed Pw Trade agreements WTO CETA (additional cheese imports) TPP ? Producing milk in Northern hemisphere is more costly than in the Southern hemisphere S OME OBSERVATIONS ON T RADE 43

44. 1% permanent growth allowance for added flexibility in supply Dairy Innovation Program Skim Milk Redirection Program Mozzarella market and fresh pizza - Class 3(d) More flexible allocation policies (yogurt and fine cheeses) On-going development of market of SNF Reduce structural surplus Opportunity to add value and increase returns to producers without increasing price to consumers I NCREASED FOCUS ON ADDITIONAL FLEXIBILITY TO GROW THE MARKET 44

45. A NOTE OF INTEREST FOR STUDENTS … 45

46. CDC G RADUATE S CHOLARSHIPS To ensure that Canada has enough specialists in the areas of Food and dairy sciences Economics and policy (supply mgt.) Animal science CDC commitment: $3 million over 5 years 70 M.Sc.’s and 25 Ph.D.’s Renewed for the last time 2011-2016 46

47. QUESTIONS www.cdc-ccl.gc.ca www.dairyinfo.gc.ca www.milkingredients.ca 47