The dairy industry's eight-point plan for a sustainable future

Thursday, May 1, 2014

With the ingredients market being taken over by imports and the surplus removal program becoming 'uncontrollable,' industry organizations are looking at a bold, wide-ranging plan to ensure the industry's future stability and profitability

by SUSAN MANN


Technological advances in the dairy industry have led to processors using specialized milk protein powders in products such as cheese, yogurt, protein bars, meal replacement powders and sports nutrition items. But Canadian dairy farmers are largely being shut out of supplying protein from fresh milk to make these products, because processors are using imported milk protein concentrate and milk protein isolates to replace the domestic proteins coming from fresh milk.

The growth in dairy ingredient imports is increasingly eroding Canada's domestic market and that's why dairy industry leaders have introduced a bold, wide-ranging plan to ensure the industry's future stability and profitability.

Formerly called "the ingredients strategy" but now referred to as the "new market environment for the Canadian dairy industry," the plan has eight elements, some of which exist already. These include the industry moving closer to world prices for solids-non-fat (SNF) used for further processing; the growth allowance of one per cent of total milk production annually; and the redirection of a skim milk powder program established in 2013 where farmers provide an incentive to processors so the powder doesn't end up in the surplus removal program operated by the Canadian Dairy Commission. Dairy Farmers of Ontario (DFO) outlined the plan's elements to delegates at its spring policy conference in March.

Peter Gould, Dairy Farmers' CEO and general manager, says three of the elements that haven't been implemented yet are at the core of the plan – a dairy ingredients and dairy milk components class at world prices, a new end use billing system for processors to prevent the cannibalization of existing SNF usage in cheese and yogurt, and modifications to the CDC's surplus removal program.

But ultimately the eight elements of the plan are all linked, says Richard Doyle, executive director of the Dairy Farmers of Canada. The eight elements all "need to be addressed so that we are actually looking at a new market environment and adjusting our system."

On their own, some of the elements of the plan "have been implemented but don't really work," Doyle says. For example, if the surplus removal program isn't addressed "then my redirection of skim (milk powder) program doesn't work."

The industry has made the eight-element plan a top priority this year because attempts "that we've had in the past to deal with" these matters have failed, Doyle notes. "We're getting to a point where we can't fail anymore."

The ingredients market has been taken over by imports, while the surplus removal "is becoming uncontrollable," because processors are buying more and more powder, he says. "We cannot continue to let processors buy in protein on the world market and simply sell their own protein from raw milk back to the producers through the CDC," which guarantees the processor margin, including profit on the surplus protein they buy.

Shakespeare-area farmer Ed Danen, past chair of the Perth Dairy Producer Committee, agrees. "We need to stop the imports. We're bringing in a lot of foreign product through the milk protein isolates and milk protein concentrates and then we're also ending up paying for our own SNF that we're storing."

Doyle says one way to stop this situation, which has been going on for the past six years, is to shut down the entire CDC purchasing system, "but that's dramatic because everything is inter-linked." That's not the method dairy farmer organizations are proposing and that's where the eight-element plan comes in.

Danen says of the proposal to stop imports by pricing dairy ingredients and dairy milk components at world prices that "I would think processors would rather source local quality product at the same price than foreign product."

The fresh Canadian milk protein that's displaced by imported proteins is being dried into skim milk powder and that ends up being sold as animal feed or exported through the CDC's surplus removal program "at lower returns for Canadian producers," according to a report from the DFO released at the Ontario spring policy conference.

Cost is a factor in processors' use of the imported milk protein concentrates or milk protein isolates. A kilogram of protein in the milk protein concentrate or isolate form on the world market varies from $9 to $13 per kilogram of milk protein compared to $14 per kilogram for the protein from fresh milk produced in Ontario, the report says.

That's one of the "market realities" the DFO outlined in its report on the situation. Another market reality is there is very limited production of milk protein isolates in Canada, while Canadian manufacturing of milk protein concentrates hasn't really gotten underway yet, with just 10,000 tonnes of SNF equivalent produced in 2012/13.

There are also some "production realities" that affect the situation. Canadian dairy farmers generate some solids-non-fat, one of the two broad categories of components, as part of the supply management system's primary goal to meet the domestic butterfat demand. The portion of SNF that isn't required by the domestic market is called the "structural surplus," and there's about 60,000 to 85,000 tonnes produced in Canada annually. The increasing use of imported dairy ingredients is one factor that enlarges the structural surplus.

The SNF not required by the domestic market is sold mostly as skim milk powder or animal feed. "Returns to producers for these powders can vary from $2 to $4 per kilogram of components for exports, and $1 to $3 per kilogram for animal feed," the DFO report says.

Canadian farmers have tried to limit their SNF production through policies that restrict the amount of solids that can be produced in relation to their butterfat production. During the past 10 years, that has decreased the "structural surplus by about 22,000 tonnes of SNF compared to what it otherwise would have been," according to the report. The kicker, however, is that dairy farmers' efforts to reduce their SNF production by 22,000 tonnes has been "totally offset by the reduction in SNF usage from Canadian cheese manufacturers" during the past six years.

Farmers who are benefiting from the displacement of protein in Canadian cheese production and other markets are ones from countries where the proteins are imported – the United States, New Zealand and Europe. There's currently a 10,000-tonne limit on the amount of protein isolates that can be imported from New Zealand, Europe and elsewhere but, under the North American Free Trade Agreement, there's no restriction on powdered or liquid products from the United States or Mexico. In addition, the tariff limit for the European Union will be removed once the Comprehensive Economic Trade Agreement deal is implemented.

Doyle says producer organizations in each province started talking to their processor organizations and provincial governments in early spring. In Ontario, Gould noted in April that there has been one meeting so far between the DFO and the Ontario Dairy Council, which represents the province's processors.

Christina Lewis, council president, says they're reviewing the proposal and consulting with other processors' associations across Canada. She says it's too early to say what their thoughts are on the proposal. "Our goal is to get back to them (DFO) as quickly as possible."

Adds Lewis: "The good thing is that everybody recognizes we have to make some changes to be sustainable in the future." BF