Is the controversial cap to blame for a shortage of quota offered for sale?

Monday, November 1, 2010

Yes, say some dairy farmers, who feel it is limiting their ability to expand. Not so, say others, who feel that there are different reasons for the lack of quota coming on the market

by DON STONEMAN

Simcoe County farmer Robert Wright started planning a new dairy in 2008 and began milking in the new barn on March 30. His business plan called for the purchase of 10 kilograms of quota at a time to bring his herd up to the new barn's 140-cow capacity.   

But eight months later, a frustrated Robert Wright is still milking only 60 cows. The reason? He can't buy the quota to fill up his barn and he blames the milk marketing board's cap on quota prices, introduced Feb. 24 of this year. He says it discourages farmers from selling.

Started in August, 2009, the price of quota was capped at $25,500 per kilogram and reduced monthly to $25,000 per kilogram by Jan. 1. The new policy required that all quota offered for sale go on the exchange, except for same site transfers, where new farmers take over ongoing operations, and sales to immediate family members.

The new policy says that if demand exceeds supply at the cap price, the first half of available quota is allocated to successful bidders in one tenth of a kilogram increments and the remaining quota is pro-rated as a percentage of the remaining demand.

"I think they're totally wrong in what they are doing, for obvious reasons," Wright says.

His operation is fully automated with a robotic milker, robotic stable cleaner and automatic calf feeding. He figures he can milk 140 cows and raise their offspring with "a man and a half" worth of labour.

"If (the board's) vision is that the industry should be made of operations milking 60 cows in tie stall facilities, I think that is wrong. The whole world is going in the opposite direction."

Not everyone agrees with Wright's views on the controversial policy on quota sales.

"I don't think, right now, it really matters what the price (of quota) is," says St. Marys dairy producer Erika Kiestra. She says quota is not changing hands in British Columbia, where the price for quota hovers at $31,000 a kilogram. And there's little quota being offered for sale in Manitoba either. (See Figure 1). Kiestra says that, most recently, a substantial amount of quota came on the market and was purchased by a handful of producers.

Former Dairy Farmers of Ontario (DFO) board member Craig Connell says he would be "extremely disappointed" if the cap was done away with. He allows that life is difficult for people who built a barn that is half full of cows. But he thinks there are several reasons for quota not coming onto the market.

One is that quota is in the hands of fewer and fewer producers. "The people who are buying today are not going to be selling it" any time soon, he says. In British Columbia and Nova Scotia, where there are relatively few producers compared to Ontario, "there are months there when there's no quota for sale because nobody is selling it."

Secondly, the current milk price is netting slightly more than 70 cents a litre. "There won't be many people who aren't making money" milking cows, says Connell, and there are few agricultural alternatives. Rising grain prices this fall will give farmers a choice, he notes.

Connell thinks more quota will become available soon, but "I don't think we will ever come back to the position where, we can just buy 25 kilograms this month." Future purchases of that size are more likely to be made over a year or 18 months.

"I keep hearing stories about farmers whose barns aren't full. I think that's where the board made a mistake," says Tavistock dairyman John Van Dyk, a past candidate for a position on the DFO board. Van Dyk would allow producers to buy ongoing operations in order to get enough quota to fill their new barns, or families to merge operations so as to become more efficient.

Another controversial solution proposed for the lack of quota is growing the market. Wright wants the marketing board to cut the price of milk to compete with imported product and let efficient producers fill their barns with cows.

Kiestra agrees the board should concentrate on selling more milk, but she warns that "it's a slippery slope." In the European Union, the price of milk was allowed to fall and now producers are selling at barely their cost or less. "Ontario (producers) can't make a pricing decision by themselves," she points out.

Certain areas of the country would rather produce less milk than fill markets at a lower price, agrees Connell. Quota policies and prices are shared amongst the provinces in Eastern Canada and converting the other partners "is tough sledding," he says. But it might be worth the effort of trying to capture markets sensitive to lower priced milk.

Farmers get a blend price for their milk and it varies depending upon the amount that is sold into categories to make various dairy products. Connell says dropping the blend price a couple of cents wouldn't hurt.  "Anyone who was doing a reasonably good job of producing milk" would remain in good financial shape.

Dairy Farmers of Canada (DFC) spent a lot of money on promotion and recaptured some of the ice cream market where butterfat was being replaced with vegetable oil, says its president, Jacques Laforge. "It was expensive," he admits.

Growing the market isn't going to solve the problems of producers who want to grow by 25 per cent or double their herds, he says. However, market growth will reduce the competition from producers who want to buy a small amount of quota because they have become more efficient.

Wright says a price concession, not promotion, resulted in a recent one per cent increase in quota that took effect Aug. 1. Van Dyk agrees that promotion is expensive. He ships milk with 140 kilograms of quota and pays $20,000 a year in checkoff fees for dairy promotion. In October, Van Dyk invited farmers to take part in an online survey on how their promotion dollars are spent.

"If our markets grew by 10 per cent over 2-3 years, that would solve a huge number of our issues," Van Dyk admits, thinking back to the question of an overly tight supply of quota, which is where this discussion started. BF