The story old dairy farmers tell goes something like this.
Twice a day, every day, farmers milked their cows. They filled up steel milk cans and placed them at the end of the lane.
A dairy processor would drive by and pick up the cans. But sometimes the dairy needed more milk, other times it didn’t need any and the cans of milk were left to spoil in the sun.
Yet cows still needed to be milked twice a day. Farmers had to feed the cows, clean out the stalls and run the farm.
“Prior to supply management, it was really a hit-and-miss scenario,” said Brian Cameron with Dairy Farmers of Nova Scotia. “There was no link between the supply of milk and the market for milk.”
By the 1960s, dairy farmers found it increasingly difficult to make a living. Markets were volatile, dairy prices fluctuated wildly and farmers had no stability. Farmer co-operatives, formed in the 1920s to increase bargaining power, banded together to stop the boom-and-bust cycle.
In the 1970s, dairy became the first commodity in Canada to operate under a national supply management system. It has three main components: setting prices, controlling supply and limiting imports. Cameron described the dairy management system as a three-legged milking stool. “If any one of the legs is weak or breaks, buddy ends up under the cow.”
But some farmers are concerned that the proverbial milking stool is wobbly. Times have changed since supply management was brought in, and farmers are worried Canada’s tightly regulated system is under attack.
An increasing perception that milk prices are too high, coupled with renewed trade efforts by the federal government, has put pressure on the dairy industry.
Canada’s trade agreement with the European Union, for example, will allow more duty-free imported dairy products in the country, threatening to reduce market share for Canadian dairy farmers. Some farmers are worried this move signals dairy supply management could go the way of the Canadian Wheat Board, dismantled by the Conservative government in 2011.
Meanwhile, a growing chorus of supply management critics say Canadians are overpaying for dairy products. The decision by dairy officials this week to increase dairy prices by one per cent next year has renewed calls to modernize the current system.
“This is a system written on a typewriter 50 years ago,” said Garth Whyte, head of the Canadian Restaurant and Foodservices Association. “It’s a black box. People don’t know how milk prices are determined.”
The way milk prices are set is complicated.
The price farmers receive for raw milk is set by the Canadian Dairy Commission in consultation with provincial officials. When setting this “farm gate” price, dairy officials consider the cost of producing milk, consumers’ ability to pay and current economic conditions. Although dairy farmers currently receive on average up to 75 cents for a litre of milk, the price isn’t actually based on volume.
Instead, the price fluctuates based on its solid composition, the amount of butter fat, protein and lactose in the milk, as well as its intended end use. Milk for drinking fetches the highest price, for example, while milk used to make cheese, butter and other dairy products costs less. In other words, the less perishable the final product is, the less raw milk costs.
Once milk is sold to a processor, like Scotsburn Dairy, it’s turned into fluid milk, ice cream, yogurt and other milk products. The processor sells the final product to retail outlets. But there is a regulated minimum wholesale price that processors must charge retailers, called a floor price. Although this price varies, it’s about $1.37 for a litre of partly skimmed milk.
The processor charges retailers that minimum price, plus enough to cover expenses and turn a profit. The retailer, like Sobeys or Superstore, also has a minimum price it must charge for milk products as well. That floor price, in addition to retailers’ expenses and margins, is what people pay for a litre of milk, about $2.25 in Nova Scotia.
It’s this price that consumers sometimes grumble about.
“Milk prices are almost 50 per cent higher in Canada than in the U.S. and cheese is almost 25 per cent higher,” Whyte, with the restaurant association, said. “It’s enough for people to line up at the border to get their dairy products.”
A 2009 Conference Board of Canada report found that Canadian farmers receive consistently double world prices for their raw milk. This trickles down to consumers, who pay higher prices for basic dairy products, the report found.
A one-litre carton of whole milk, for example, costs, on average, 59 cents more in Canada than in the U.S., and 64 cents more than in Australia. The price differences are more glaring with a four-litre jug. Canadians pay about $6.48 for four litres of whole milk, almost twice the $3.50 Americans pay for a gallon of whole milk (about 3.8 litres), according to a University of Calgary study.
But Dairy Farmers of Canada, a national policy and lobby group, said that U.S. consumers pay the equivalent of an extra 31 cents per litre of milk in government subsidies. Although a consumer may only pay $3.50 for a gallon of milk, for example, they could end up paying over a dollar more through taxes. This is because the U.S. government sets a minimum price to cover dairy farmers’ costs. If the market price drops below that floor price, the government purchases dairy products to buoy prices and boost demand.
“The U.S. government actually subsidizes milk production,” said Cameron with Dairy Farmers of Nova Scotia. “In Canada, every penny farmers are paid for milk comes from the marketplace. That means there are no government subsidies to dairy farms.”
But Martha Hall Findlay, executive fellow at the University of Calgary’s school of public policy, said the subsidization of agriculture is waning around the world.
“Times have changed so dramatically,” said Finlay, a lawyer and former MP. “The subsidization of agriculture has diminished around the world.”
Findlay pointed to Australia as an example of a country that transitioned from supply management to an open market. One of the first countries to introduce supply management, Australia dismantled the system by offering dairy farmers transition payments, financed by a temporary retail levy on milk, which still ended up being cheaper for consumers.
“Consumers now enjoy lower prices and Australia has one of the most dynamic and efficient dairy industries in the world,” Findlay said. A litre of milk Down Under costs roughly $1.55, for example, compared to about $2.25 in this province.
However, Elizabeth Crouse of Nova Scotia’s Natural Products Marketing Council said supply management ensures dairy production remains in the province. She said it has helped maintain family farms, support rural communities and give farmers a reasonable return on their investment.
“To me it’s a golden system,” Crouse said. “We do all this without having to use subsidies.”
In 2011, there were 12,746 dairy farms in Canada, a 91 per cent drop from the 145,000 dairy farms when supply management started. There are 235 farms in Nova Scotia today. In comparison, the U.S. had an 88 per cent drop in dairy farms over the same period to 67,000 in 2008.
“Supply management has nothing to do with protecting the family farm,” Findlay said. “The rate of consolidation in supply managed farms has been almost higher than other agriculture sectors in Canada.”
However, supply management has helped dairy farmers make a decent living. The average net operating income of dairy farmers was $75,699 in 2011, far above the average of $31,306 for all animal production.
Still, becoming a dairy farmer is no walk in the park.
Gerrit Damsteegt grew up on a dairy farm in the Netherlands. After his brother took over the family farm, skyrocketing prices for land and quota in his home country prompted him to emigrate 25 years ago. He moved to Canada because of supply management.
“I purchased a very small farm and slowly built it up,” said Damsteegt, owner of Boundary Lane Farms Ltd. in Shubenacadie. “For the first 14 years, I had another full-time job on top of being a dairy farmer.”
Damsteegt said the mountain of debt and gruelling work were worth it, given Canada’s stable, regulated market that ensures a fair return for his labour and expenses. He now has more than 250 Holsteins — from the smallest calf to the oldest cow — about 130 of which are milking at any given time.
“I have four kids but they are still young so it’s too early to say if they’ll want to take over,” he said. “They certainly do realize it’s quite a commitment. It’s not a 40-hour work week.”
Damsteegt’s day starts before dawn and doesn’t end until he’s finished his last round in the barn close to midnight. But if a cow is in labour, he’s on call all night. “We try to have about 15 cows calving every month,” he said. “I can plan ahead like that because of supply management. I know how much I need to produce because of my quota.”
Farmers must have a quota to produce and sell milk in Canada. In simple terms, one quota is roughly equivalent to one cow. A quota allows a farmer to produce one kilogram of butter fat a day, about 25 litres of milk, which is more or less what one cow can produce. Quotas are one of the key pillars of supply management, as it controls the production of milk.
But a quota, purchased on a provincial exchange, is expensive. In Nova Scotia, one quota costs $25,000. Damsteegt, for instance, has amassed 153 quotas over the decades, which in today’s dollars would cost $3.8 million. This explains why many farmers are heavily indebted — or can’t break into the dairy industry at all.
Dalhousie University agriculture professor Alan Fredeen said the cost is too high for young people looking to start a farm.
“I teach a number of people interested in farming but it’s just not something they can afford to do,” Fredeen said. “I believe supply management is a good system overall. But the quotas are just too expensive for new farmers.”
Dairy Farmers of Nova Scotia has tried to address this issue with a new entrants program. The provincial dairy group will loan one new farmer up to 12 quotas on a matching basis per year. For example, if a young farmer buys 10 quotas, he or she can also be eligible for a loan of up to 10 quotas.
While Fredeen appreciates efforts to attract new farmers, he said the cost is still prohibitive for most. For example, 10 quotas would cost $250,000. A new farmer would face other costs like buying cows, production equipment and land.
Michael Grant with the Conference Board’s Centre for Food in Canada said quotas hinder efficient farmers from producing more milk for an export market.
“We’ve kind of boxed ourselves into this paradigm and we’re missing these fantastic opportunities to meet the growing demand for dairy products around the world,” he said.
He said processed dairy products like skim milk powder, baby formula and cheese could become a booming export commodity for Canadian processors. Instead, Grant said Canada’s dairy industry will shrink as a result of the recent trade deal with the European Union.
“The industry is going to be smaller because our exports will not grow in relationship to the amount we give up in terms of imports,” he said. “We could actually have a growing dairy industry but you can’t do it under the current structure.”
Grant called the current approach to reforming the dairy supply management system through trade deals is like “death by a thousand cuts.”
“We could have a larger dairy sector but it’s got to be through root-and-branch reform. We can’t do it through this incremental trade agreement approach.”
Source: Herald Business