Report proposes supply management limits Canadian dairy farmers' ability to grow

Friday, February 28, 2014

by SUSAN MANN

Canada’s supply management system is limiting its most efficient farmers’ ability to grow because they’re forced to focus on the small, slow-growing Canadian market rather export markets, says the Conference Board of Canada.

Since dairy consumption in Canada is stagnant, export markets are key to industry growth, the board says in a Feb. 27 press release. The release is the first of two on research the board did on reforming Canada’s supply management system. The next press release is scheduled to be issued Monday, while the full 110-page report with recommendations will come out Thursday, March 6.

The report is called Canada’s Reforming Dairy Supply Management: the Case for Growth. This report is one of 20 being produced by the Centre for Food in Canada, an initiative launched by the Conference Board. The centre has been engaging various stakeholders, such as officials from business, government and academia along with associations and communities in creating a Canadian food strategy.

In the supply management release, the Conference Board says Canada is largely shut out of fast growing international markets for dairy products for a couple of reasons. One is a large portion of investment in the industry is tied up in production quotas rather than productive assets. The other is Canada’s exports are limited because the World Trade Organization (WTO) considers supply management policy to be a form of a subsidy, the release says.

But “Canada’s most efficient producers are already among the world’s best and there is every reason to believe that they can compete globally,” the release says.

Richard Doyle, executive director of Dairy Farmers of Canada, says its not supply management that’s holding farmers back from exporting. “We lost a panel (decision) at the WTO that said that if you maintain a higher price domestically than the world price, then any exports at the lower price is a subsidy. We’re limited by that.”

He also notes that Canada is a northern country with higher production costs than many other countries that set the world price, such as New Zealand or Australia. Those countries have more moderate climate conditions than Canada’s and, consequently, much lower production costs.

Another factor is large exporters of dairy products, such as the United States and European Union, are “heavily subsidized,” he notes. The Europeans are spending the same amount of money, $55 billion Euros annually, that they’ve always spent in agriculture. But instead of calling the payments to farms export subsidizes, the Europeans are now referring to them as “decoupled payments,” he says.

“When a small farm in Europe gets $60,000 a year, decoupled or not, it goes into the same account,” Doyle says, noting farmers in Europe can accept lower prices from the market because they get income from their government.

“The United States is in a very similar situation. The Farm Bill, that has just been passed, is very generous to the farmers,” he says. But Canada doesn’t have these programs for dairy or other farmers under supply management.

Michael Bloom, Conference Board vice president industry and business strategy, says quota value across all supply management sectors, dairy, poultry and eggs, is about $30 billion. Of that amount, $23 billion is dairy, while the other $7 billion is for the combination of poultry and eggs.

The Conference Board focused solely on dairy supply management in its report because it wanted to do a careful analysis and “dairy is the biggest piece of the story,” Bloom notes.

Doyle disputes Bloom’s quota value numbers. He notes in this example that if someone has stocks valued at $100 a share and the market is at its peak but the stock drops to $10 a share because everyone is getting out of the market, “I’m not making $100 a share.” Someone can’t take the selling price from the small volume of quota sold annually and apply that number to the entire quota holding in Canada.

He also questions the Conference Board’s interest in the supply management system. “They’re basically promoting free trade and anything that doesn’t fit that mold they suggest should be reformed or changed.”

Doyle says he finds it “extremely difficult to have this supposedly independent body, that technically is really a lobby organization that has adopted a free trade stance,” working to change government policies but they’re not a registered lobbyist like Dairy Farmers of Canada has to be.

In addition, reports such as the Conference Board’s portray supply management as an old dinosaur that hasn’t changed over the years. “I’ve been in this business 38 years and I can tell you supply management today is not what is was 38 years ago, and it’s not likely to be the same in five years from now either,” Doyle notes.

Bloom says part of their analysis is about the market opportunity, and he was reading in a recent Bloomberg article about New Zealand’s dairy exports to China soaring 92 per cent in January. The increase in dairy income in New Zealand this season is projected to be $4.7 billion, which represents 2.6 per cent of their (New Zealand’s) Gross Domestic Product.

“We believe there’s an enormous opportunity for Canadian dairy farmers to go global,” he says.

Asked if countries already participating in export markets, such as New Zealand and Australia, have cornered them, Bloom says “they’ve done a wonderful job of getting the market. The thing is our forecast is that demand will grow so much in the next 15, 20 years for dairy in Asia, in particular, but also in Africa and elsewhere that they (New Zealand) cannot meet the growth in demand. They’re reaching their physical constraints in their economy to support more dairy production.” BF