1 overview of the canadian dairy industry gilles froment senior director, policy and corporate...
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Overview of the Canadian dairy industry
Gilles FromentSenior Director, Policy and Corporate Affairs
Canadian Dairy CommissionApril 1, 2008
DM127302
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Outline
The Canadian marketing system and its component
3 pillars of supply management Seasonality programs Milk pools Marketing and innovation initiatives Current issues
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The Canadian Milk Marketing System and its Components
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14,660 farms, 450 processing plants Milk sales: $4.8 billion Adds a net $8.3 billion to the GDP Processed products sales: over $13.0 billion Supports $26 billion of economic activity Sustains more than 142,600 jobs
Snapshot of theCanadian Dairy Industry
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Major Milk Producing Countries(cow milk, 2006)
020406080
100120140160
(Mill
ion
tonn
es)
Source: International Dairy Federation
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Canada’s Milk Marketing System
Producer
Marketing Board (provincial)
Processor
Further processor
Consumer
Retailer
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CMSMC
Canadian Milk Supply Management Committee Permanent body of signatories of the NMMP (voting
members) – One vote per province Dairy Farmers of Canada, Dairy Processors Association of
Canada and Consumers’ Association of Canada (non-voting members)
Responsible for policy determination and supervision of the NMMP provisions
Meets 5 times a year Most decisions require unanimity
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The CMSMC directs the implementation of the National Milk Marketing Plan (NMMP) to coordinate actions of provincial producer boards and governments
Non-votingmembers
CDCchair
DPAC
CAC
DFC
Sask (3)
Quebec (4)
P.E.I. (3)
Ontario (4)
N.S. (3)
N.B. (3)
Newfoundland (3)
Alberta (3)
B.C. (3)
Manitoba (3)
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NMMP
National Milk Marketing Plan Federal-provincial agreement Regulates marketing of industrial milk Balances supply and demand Sets out the establishment, distribution and
adjustment of industrial milk quota
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The Canadian Dairy Commission Crown corporation created in 1966 Reports to Parliament through Minister 3 commissioners, 63 employees Generally deals with industrial milk Total budget for 2007-2008: $7.8 million Funded by government, dairy producers
and the marketplace
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Legislated Mandate
Provide efficient producers of milk and cream with the opportunity to obtain a fair return for their labour and investment.
Provide consumers of dairy products with a continuous and adequate supply of dairy products of high quality.
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Overview of Key Activities Chair the CMSMC Calculate Estimated Requirements (demand) Recommend Market Sharing Quota Establish Support Prices Administer Revenue and Market Sharing
Agreements (pools) Administer Special Milk Class Permit Program Carry out external audits Create and administer marketing programs Remove surplus production Administer Seasonality Programs
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Milk Categories
Industrial (Classes 2-4) used in the manufacture of
butter, cheese, ice cream, yogurt, milk powders
long shelf life federal responsibility –
interprovincial movement of product
Fluid (Class 1) used in 1%, 2%, skim
milk, etc. and creams short shelf life provincial responsibility –
historically made and consumed in province of origin
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3 Pillars of Supply Management controlled prices controlled
imports controlled
production
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Pillar 1: Controlled Prices
Industrial milk prices are determined by provinces based on CDC
support prices and vary depending on the end use of the milk
Support prices are the prices at which the CDC buys and sells butter and skim milk powder under its various programs.
Support prices are announced in December by the CDC to be effective February 1.
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Support prices 1997-2008 ($/kg)
3
3,5
4
4,5
5
5,5
6
6,5
7
7,5
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
ButterSMP
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World Prices for Cow Milk (2006, US$/100 kg)
India, 21
Mexico, 27
Poland, 28
USA, 28
Metro China, 29
NZ, 33
EU 15, 34
Norway, 56
Switzerland, 57
Canada, 58
Japan, 68
Source: International Dairy Federation
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Evolution of Farm Prices in Canada and the US1998 to 2008
$20,00
$30,00
$40,00
$50,00
$60,00
$70,00
$80,00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
CA
$ pe
r H
L
Canada Target Price Highest of Class III and Class IV Prices in the US (converted to CA$ per HL)
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Pillar 1: Controlled Prices
Fluid milk prices are determined by provinces according to
a formula In BC, Alberta and Saskatchewan: one
formula (AUC) In Manitoba: another In the Eastern Provinces: (40% indexed
COP + 30%CPI + 30%PDI/capita) until Jan 31, 2010
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Milk Prices in last 12 monthsMarch 2007 – February 2008
Average in-quota revenues : $71.11
Average price for fluid: $81.28
Average price for industrial: $64.32
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Example - Prices per component
Class $/kg
BF
$/kg protein
$/kg other solids
$/hl standard
@3.6 kg
Fluid milk 1(a) 6.76 6.67 6.67 83.91
Cheddar 3(b) 7.41 12.72 0.83 72.60
Butter 4(a) 7.40 5.10 5.10 72.20
Cheese as ingredient 5(a)
3.17 9.83 0.60 46.69
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Pillar 2: Controlled Imports
Most dairy products are protected by Tariff Rate Quota (TRQs).
Above TRQs, dairy products have a tariff of almost 300%.
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Pillar 2: Controlled Imports
Examples of TRQ and over-quota tariffs
Product TRQ (t) Tariff (%)
Skim milk powder 0 201.5
Dry whey 3.2 208.0
Butter 3.3 298.5
Cheese 21.4 245.5
Ice cream 0.484 277.0
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Landed Price vs Domestic Price (Exports from Oceania)1998 - 2008 (January)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Landed price (high) Landed price (Low) Domestic Price
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Pillar 3: Controlled Production Provincial milk marketing boards allocate
production quota to their respective dairy farmers. This quota combines both fluid milk quota and
industrial milk quota. Fluid milk quota is established by provincial
marketing boards and equals demand. Industrial milk quota is established nationally by the
CMSMC and is called Market Sharing Quota (MSQ).
Quota is calculated and expressed in kg of BF.
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Establishing MSQ
The CDC calculates the Estimated Canadian Requirements (demand) on a monthly basis.
ECR= Production + Opening Stocks + Imports – Closing stocks – exports – DDPIP – Class 4(m)
MSQ is adjusted every two months when ECR increase or decrease.
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100
120
140
160
180
200
220
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Feb-08
mill
ion
kg
BF
Evolution of MSQ
Quota cut of 1976
1% and 2% milk more popular; lower butter consumption
Low butter stocks
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The 7 steps in sharing quota adjustments among provinces
1 Skim-off
2 The 10:90 rule
3 PEI’s share
4 DDPIP
5 Growth allowance
6 Exports
7 Fluid quota
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Respecting production targets Provincial production targets:
August-January – Minimum 97% Dairy year – between 99.5-100%
Provinces are free to adjust their farm quota or not, however, provinces will be penalized if they over or under produce their share of quota.
Over production: no payment for the milk Under production: quota pre-filled for the next
year
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CDC Seasonality Programs While milk production is quite stable year
round, people consume more dairy products in the fall/winter and less in the spring.
To offset this, the CDC buys and stores butter and skim milk powder in the spring and puts those products back in the market in the fall/winter.
These transactions are done at support prices.
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Seasonality Programs - Butter Plan A
Becomes the property of the CDC
25 kg blocks
Plan B Must buy back within
one year of production of the product
One-pound prints ready for retail sales.
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Managing Surpluses Production is managed on butterfat basis. Surpluses of milk solids non fat (SNF) arise
because consumers want the fat portion of the milk more than the SNF portion.
The CDC buys the surplus SNF and disposes of it by exporting it or selling it for animal feed.
Both these markets yield a lower return to producers than regular sales.
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CDC Import / Export
IMPORTS According to WTO
(3,274 mt) Butter : sold to further
processors Cheese: private sector
imports (20,400 mt)
EXPORTS Subsidized exports
according to WTO limits (none to USA)
SMP (CDC exports to Cuba and Mexico)
Permits for private exporters including non-contingent classes
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The Milk Pools
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Pools were established in themid-1990’s in response to… Increased concentration at the retail and
processing levels New trade rules (FTA, NAFTA, WTO) Differing provincial policies (for ex. Milk
allocation to plants) Fluid milk moving between provinces Inequities in producer returns
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The CDC administers 3 milk pools The P10 (all 10 provinces) The P5 (in the East) The WMP (in the West) These pools allow dairy farmers to share
and balance revenues, markets and in some cases, transportation costs.
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Market Shares – All Milk
Fluid Industrial Pool
Region A (hl) 1,000 1,000 2,000
Region B (hl) 2,800 5,200 8,000
Total (hl) 3,800 6,200 10,000
Region A 50% 50% 20%
Region B 35% 65% 80%
Pool (%) 38% 62% 100%
How does pooling work?Revenue Sharing
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Average Revenue ($/hl)
Fluid Industrial
Region A $74.00 $66.00
Region B $79.00 $69.00
Total Revenue (average revenue x market share)
Fluid Industrial Total
Region A $74,000 $66,000 $140,000
Region B $221,200 $358,800 $580,000
Total $295,200 $424,800 $720,000
How does pooling work? Before pooling
Average Pool Price (hl) = $72.00
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Revenue needed (market share x average pool revenue)
All Milk
Region A 2,000 $72.00 $144,000
Region B 8,000 $72.00 $576,000
Resulting Cash Transfers (Equalization Pool Payments)
Total $/hl
Region A $4,000 $2.00
Region B ($4,000) ($0.50)
Total ($0.00)
How does pooling work? After pooling
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What is pooled?
Pool Milk Revenue Market Promotion Transport
P10 Special Class
x x
East All x x x x
West All x x
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How pools are administered
Provinces report production and sales data (by milk class) monthly to the CDC.
The CDC calculates money transfers between members to equalize returns.
The CDC calculates quota allocations when demand changes.
The CDC keeps a bank account for pool operations.
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Resulting in harmonization of…
Multiple component pricing Producer prices Milk classification Quota policies
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Marketing and Innovation Initiatives of the CDC
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Some of the CDC initiatives The Dairy Marketing Program The Domestic Dairy Product Innovation Program The Special Milk Class Permit Program
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Strong market growth sectors
The finished products: - Sports recovery drinks/powders- Meal replacement products (bars, beverages)- Meal / dietary supplements- Organic products- Pet food
The dairy components:- Organic milk protein concentrates and isolates, casein,
caseinates, peptides The challenges:
- Ingredients that are still relatively new or not available from our industry (MPC,MPI)- World market priced/ highly competitive market- Manufacturers/users looking for level playing field conditions
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Current Issues
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Current challenges
Finding new markets for solids non fat Evolving demand from consumers –
substitution from non-dairy ingredients World Trade Organization: an unknown but so
far nothing to help supply management Harmonization issues (Example: price of fluid
milk in the West, milk allocation in the East) Pricing methodology for industrial milk
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Article 28 Growing concern over imports of MPC 85 not
protected by the Chapter 4 TRQ Federal Minister decided to invoke Article 28
(Feb 2007) A WTO rule that allows the introduction of new TRQ’s
in exchange for compensation to exporting countries A pre-established compensation that reflects the
highest historical imports + 10% On-going negotiations between Canada and 3
countries (Switzerland, New Zealand, EU) - Australia and US rejected)
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Cheese Compositional Standards
CFIA is responsible Will come into force in December 2008 The use of milk protein concentrate and
milk protein isolates is limited Processors warn of an increase in
production costs which will translate in an increase in retail price
Who will enforce these standards and how?
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Future Pricing Issues Impact of current tariff protection Impact of future trade agreements Price sensitivity of particular classes Differential impact of fluid vs industrial pricing Expansion of Special Milk Class Permit
Program Should support prices continue to drive
industrial milk pricing? Methodology for future price changes
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A note of interest for students…
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CDC Graduate Scholarships
To ensure that Canada has enough specialists in the areas of Food and dairy science Economics and policy (Supply mgt) Animal science
Agreements signed with 6 Canadian universities and research organizations.
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QUESTIONS
www.cdc-ccl.gc.ca
www.dairyinfo.gc.ca
www.milkingredients.ca