Restructuring Canada's dairy supply management policy could result in lower prices of dairy products in grocery stores while expanding global marketing opportunities for Canadian dairy producers, according to findings from The Conference Board of Canada's analysis of supply management.
The report, "Reforming Dairy Supply Management: The Case for Growth," released March 6, suggests that Canada's current policy limits the growth of its dairy industry, especially in international markets.
"A win-win reform package needs to be accompanied by a new vision for industry growth," said Dr. Michael Bloom, vice president, industry and business strategy, for the conference board. "Dairy producers and rural communities have a lot to gain from reform under a growth scenario. More efficient producers are more likely to see an upside, but we have to change the way we do business."
The current policy determines a target price for milk based on the cost of production and proceeds to restrict the supply to generate that price, which is ultimately paid by food processors and consumers.
In fact, the Organization for Economic Cooperation & Development estimated that for the decade ended 2011, the current system cost Canadian dairy consumers an average of $2.6 billion per year, or approximately $276 per family.
Because of current policy, Canada has not experienced growth in milk volumes despite an increase in its population since the policy was established more than 40 years ago.
The dairy industry in Canada has shrunk from more than 174,000 farms in 1967 to 12,500 farms currently (Figure), with the herd size averaging 77 head; meanwhile, the domestic dairy market has gone stagnant.
Furthermore, Canada was a net importer of dairy products in 2012, although it had $27 million in milk powder exports. Globally, its share of the world market is marginal — at 0.02% for milk powder, 0.29% for cheese and 0.01% for butter.
The demand for dairy products worldwide, especially with China facing a whole milk powder shortage, is robust and has grown 7% per year for the last three years.
"Dairy supply management is an old solution to an old problem," Bloom said. "When the current system came into effect, international trade in dairy products was very limited. Today, countries such as China are growing markets thirsting for quality dairy products. We're not in a position to take full advantage because our system is now outdated."
Therefore, it will be necessary for Canada to change its current supply management policy in order to capitalize on demand growth, especially since a World Trade Organization panel ruled that the price gap between Canadian and world prices is a subsidy and, hence, limits the country's exports to the WTO subsidy threshold.
According to the report, a new system must comprehensively incorporate "FEED": funding efficiency, equity and duration.
"Supply management reform must coordinate the three major aspects of supply management: price setting, quota and trade barriers. Cutting out any single part of the reform makes the entire system unstable," Bloom said.
A change in policy must include reforming a production quota that historically has been the foundation of Canada's dairy industry. The conference board recommended a book value buyout, which is estimated to cost $3.6-4.7 billion.
Still, trade policy negotiators need to gain access to international markets for Canadian dairy products at the same time price and quota reforms are occurring in order for the industry to profit.