1. 1 Overview of the Canadian dairy industry Gilles Froment, M.Sc., P.Ag. Senior Director, Policy and Corporate Affairs Canadian Dairy Commission, Ottawa March 17, 2011 DM188517

2. 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. 3 The Canadian Milk Marketing System and its Components

4. 4 13,214 farms producing more than 83 billion litres of milk (8 million tonnes) 452 processing plants Farm receipts: $5.5 billion Adds a net $9.7 billion to the GDP Processed products sales: $13.6 billion Supports $30 billion of economic activity Sustains more than 160,600 jobs Snapshot of the Canadian Dairy Industry

5. 5 Milk production growth 2000-2009 (all species)

6. 6 Cow Milk Production Source: IDF * Includes buffalo milk

7. 7 Canada’s Milk Marketing System Producer Marketing Board (provincial) Processor Further processor Consumer Retailer Regulated market Unregulated market

8. 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

9. 9 The CMSMC directs the implementation of the National Milk Marketing Plan (NMMP) to coordinate actions of provincial producer boards and governments Non-voting members CDC chair DPAC CA C DFC Sask (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. 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

11. 11 The Canadian Dairy Commission Crown corporation created in 1966 Reports to Parliament through Minister 3 commissioners, 60 employees Generally deals with industrial milk Total budget for 2010-2011: $8.1 million Funded by government, dairy producers and the marketplace

12. 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.

13. 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. 14 Milk Categories Industrial (Classes 2-4)  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. 15 3 Pillars of Supply Management controlled prices controlled imports controlled production

16. 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 November by the CDC to be effective February 1.

17. 17 Support prices 1997-2011 ($/kg)

18. 18 Producer milk prices (2008)

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20. 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 August 1, 2011 Applied twice per year (February and August) August only applies if result >1%

21. 21 Milk Prices in last 12 months February 2010 – January 2011 Average in-quota revenues : $74.46/hl Average price for fluid: $89.42/hl Average price for industrial: $64.57/hl

22. 22 Example - Prices per component for Janvier 2011 Class$/kg BF $/kg protein $/kg other solids $/hl standard @3.6 kg Fluid milk 1(a)7.3766.32 $/hl for SNF92.84 Cheddar 3(b)7.6513.310.8575.51 Butter 4(a)7.655.27 74.66 Cheese as ingredient 5(a) 5.014.640.4135.37

23. 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. 24 Pillar 2: Controlled Imports 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

25. 25 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.

26. 26 Establishing MSQ The CDC calculates the Estimated Canadian Requirements or 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.

27. 27 The 7 steps in sharing quota adjustments among provinces 1Skim-off 2The 10:90 rule 3PEI’s share 4DDPIP 5Growth allowance and export stocks 6Exports 7Fluid quota

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

29. 29 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

30. 30 Evolution of milk supply and demand

31. 31 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.

32. 32 Seasonality Programs - Butter 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. 33 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.

34. 34 CDC Import / Export 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. 35 The Milk Pools

36. 36 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

37. 37 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.

38. 38 Market Shares – All Milk FluidIndustrialPool Region A (hl)1,000 2,000 Region B (hl)2,8005,200 8,000 Total (hl)3,8006,20010,000 Region A50% 20% Region B35%65%80% Pool (%) 38% 62% 100% How does pooling work? Revenue Sharing

39. 39 Average Revenue ($/hl) FluidIndustrial Region A$74.00 $66.00 Region B$79.00 $69.00 Total Revenue (average revenue x market share) FluidIndustrial Total Region A $74,000 $66,000$140,000 Region B$221,200$358,800$580,000 Total$295,200$424,800$720,000 How does pooling work? Before pooling Average Pool Price (hl) = $72.00

40. 40 Revenue needed (market share x average pool revenue) All Milk Region A2,000$72.00$144,000 Region B8,000$72.00$576,000 Resulting Cash Transfers (Equalization Pool Payments) Total $/hl Region A $4,000 $2.00 Region B ($4,000)($0.50) Total ($0.00) How does pooling work? After pooling

41. 41 What is pooled? PoolMilkRevenueMarketPromotionTransport P10Special Class xx EastAllxxxx WestAllxx

42. 42 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.

43. 43 Resulting in harmonization of…  Multiple component pricing  Producer prices  Milk classification  Quota policies  POOL = RISK MANAGEMENT TOOL

44. 44 Marketing and Innovation Initiatives of the CDC

45. 45 Some of the CDC initiatives The Dairy Marketing Program The Domestic Dairy Product Innovation Program The Special Milk Class Permit Program

46. 46 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

47. 47 Current Issues

48. 48 Current issues Finding new markets for solids non fat Evolving demand from consumers – substitution from non-dairy ingredients  Soy-based products (imitation cheeses)  Frozen desserts made with vegetable oil The market for dairy products is fairly mature Risk of tariff wall breach Pricing formula for fluid milk National pool for all milk

49. 49 Current issues World Trade Organization: an unknown but so far nothing to help supply management CETA Harmonization issues  Milk allocation in the East (P2 and Maritimes)  Transportation  Audit rules Environmental Sustainability in dairy  Cows, methane and energy efficiency (LCA)

50. 50 Fragility of tariff wall The world prices for dairy products 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 recession and to an over supply situation from high prices in 2007. At current world prices for butter (US$4580/t) and SMP (US$3070/t), the landed price + tariff exceeds the domestic support prices by $10.66/kg and $2.83/kg, respectively. A year ago, that gap was $5.55/kg and $0.96/kg, respectively.

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53. 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 Saputo, Kraft and Parmalat lost their legal challenge Saputo and Kraft appealed They recently lost their appeal

54. 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. 55 A note of interest for students…

56. 56 CDC Graduate Scholarships 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  50 M.Sc.’s and 19 Ph.D.’s Renewed for another 5 years effective August 1, 2011

57. 57 QUESTIONS www.cdc-ccl.gc.ca www.dairyinfo.gc.ca www.milkingredients.ca