Conference Board report points to export food bonanza for Canada

Friday, June 6, 2014

World population and income growth is driving demand for dietary protein, says the Conference Board of Canada. But Canada's present supply management system is preventing Canadian farmers from taking advantage of the export potential

by JIM ALGIE

The Conference Board of Canada's controversial report, Reforming Dairy Supply Management: The Case for Growth, predicts benefits in three areas of the Canadian economy from expanded milk production. The report concludes mainly that:

• Domestic consumers will benefit from price reductions;
• The Canadian economy will benefit from new processing jobs;
• Dairy farmers will benefit from higher volume sales.

Published in March on the non-profit organization's website, the Conference Board argument has raised widespread doubt among dairy farmers and some economists about the practical reality of its proposals. The report emerged as part of a three-year, $3 million-plus project funded mainly by food processors to develop a comprehensive national food strategy.

Among other things, the general document talks about the need for improved hygiene standards and nutrition in the food supply and policies for feeding low-income Canadians. Among farm policy issues, however, scrapping 50 years of supply management in milk, eggs and poultry is by far the most controversial part of the Conference Board strategy. It is also key to what the Ottawa-based economic think-tank describes as a potential food export bonanza for Canada.

Under federal regulations dating from 1966, the Canadian Dairy Commission sets national production limits and co-ordinates the activities of provincial agencies based on domestic demand trends and average farm production costs. The rules control milk production by quota, restrict imports and mainly leave others outside Canada to the business of international trade.

Conference Board conclusions depend heavily on the widespread notion that economic growth in Asia and the Far East will drive demand and prices for the foreseeable future. World dairy markets have grown by seven per cent per annum over the past three years, the Conference Board report maintains. It predicts that mid-century population growth of two billion people and income growth will boost demand for dietary protein.

The report's authors have good things to say about Canadian dairy farmers, the best of whom "managerially and technically are among the most sophisticated in the world." The expertise of  Canada's most efficient farmers, the country's well-established domestic processing industry, abundant land and water resources and relatively low eastward freight costs make a potent combination for expanded trade, the report argues.

"At equal scale, Canadian dairy farms are relatively efficient compared with their U.S. peers," the Conference Board has found. "Supply management has restricted trade development, not farmer technical and managerial know-how."

The report analyzes farm accounting data from 2011 and finds that top-performing dairy farms in Ontario return 12.3 per cent per annum on real assets, more than three times the lowest-performing farms which still yielded a four per cent return.

New Zealand now exports 97 per cent of its total milk production and supplies about 30 per cent of all dairy products traded globally. However, future pasture-based dairying in New Zealand's temperate climate is close to its carrying capacity, the report argues.

Conference Board researchers analyzed the existing Canadian system for transfers among farmers of milk supply quota. They found limits on the impact of Canada's most efficient farmers by restricting their access to quota and by artificially sheltering less efficient producers.

The report estimates the average net worth of dairy farms at more than $2 million, significantly above that of the average Canadian household. The current value of milk supply quota nationally, it says, is about $23 billion. That money, Conference Board researchers say, would be better used for production.

To end supply management, Conference Board authors recommend a gradual buyout of quota using a depreciated book value at an estimated cost of between $3.6 billion and $4.7 billion, together with negotiated openings to world trade. They recommend funding book value at about one third of market value for quota, arguing that "farmers should not realize a capital gain on quota assets funded by taxpayers and consumers."

The buyout could be funded through existing pricing mechanisms and geared to movement toward world prices, much as Australia did during recently completed deregulation of its dairy sector, the report says.

"Supply management is, in effect, a social contract between supply management commodity producers and society," the report says. "Society, through government policy, laws and regulation, underwrites the business risk of supply management commodity producers." BF

SIDEBAR: Canada's dairy industry is both efficient and innovative, says DFO rebuttal
Canada's dairy system provides consumers with a reliable, high-quality milk supply at a retail price that compares favourably with other nations, according to a Dairy Farmers of Ontario rebuttal written in direct response to a controversial Conference Board of Canada report.

The Conference Board's three-year Food Strategy research project, published in March, includes a recommendation that Canada scrap current controls, expand production and pursue exports. A five-page rebuttal document provided to Better Farming by Dairy Farmers of Ontario general counsel Graham Lloyd criticizes the Conference Board analysis for using misleading information about both the level of current milk prices in Canada and the potential impact of an end to supply management.

The rebuttal also emphasizes the role of government subsidies elsewhere and highlights innovative efficiencies made possible by stable farm pricing under the current system.

"Canada's dairy industry is among the most innovative in the world," the rebuttal paper says, citing data on reinvestment by Canadian dairy farmers in innovation. "The Conference Board is wrong when it suggests increased exports lower domestic prices," it says.

Recent data shows rising retail milk prices in the United States, New Zealand and France because of export demand. Nielsen surveys show weighted average retail price for fluid milk in Canada at $1.48 per litre. That compares with $1.45 in Australia and $1.50 in New Zealand.

The U.S. price of $1.04 per litre does not include an estimated 31 cents per litre in subsidies, the rebuttal says. U.S. subsidies don't prevent losses, it argues, referring to 2012 data showing that the average U.S. dairy farmer lost $9.25 per hectolitre.

A Conference Board recommendation to boost Canadian milk production is "not viable in the Canadian economy," the rebuttal says. It would require expansion of the dairy land base into areas now used for other crops, forcing higher land prices.

Under current policy, Canadian dairy farmers have increased operational efficiency per cow at a faster rate than in the United States and New Zealand, the rebuttal says. It relies on UN Food and Agriculture Organization (FAO) data showing output per cow in Canada at about 8,700 kilograms, an increase of 187 per cent since 1970.

During the same period, output per cow in the U.S. rose 118 per cent, in Australia 97 per cent, in New Zealand 44 per cent, the FAO data shows. A summary of Food and Agriculture Organization data on milk output per cow for 2011 appears on the DeLaval-operated website, milkproduction.com. It shows U.S. output first in the world at 9,678 kilograms, with Canada, second, at 8,699 kilograms. Australian cows placed 22nd in world ranking at 5,728 kilograms, and New Zealand, 37th at 3,716 kilograms. BF