milk supply management: al mussell a bird’s eye view
TRANSCRIPT
Milk Supply Management:
Al Mussell
A Bird’s Eye View
2
Economic Research in the Canadian Agri-Food Sector
Bird’s Eye View
An independent view
Abstracts from detail of the system
Objects, structures, some outcomes, given context
View of the essentials of the situation
Perspective from which to observe system in its entirety
Initial ObservationsEvolution in milk supply management continues, at an accelerated pace, with greater urgency and contemplation of change
Still largely a technical discussion
Challenged by complexity; change in any one parameter requires diverse realignments in others
Obscures other, more fundamental changes to the context for milk supply management
Observations- Bird’s Eye View
Producers have
changed
Processors have
changed
Markets have
changed
Economic policy
direction has changed
Dairy Farms in Canada
Source: Statistics Canada
201412,219
Dairy Farms by Milking Facility/Type, 2012
BC AB SK MB ON QC NB NS PE NL
4.3% 10.3% 13.7%
40.7%
70.0%
91.2%
40.0% 42.6%
62.9%
20.0%
89.6%84.5% 81.4%
47.2%
26.7%
6.6%
57.1% 55.7%
37.1%
80.0%
6.0% 5.2%4.9%
12.1% 3.3% 2.1% 2.9% 1.7% 0.0%0.0%
Province
Proportion of Dairy Barns by Type
Robotic System
Free Stall
Tie Stall
Source: Herds on milk recording, Canwest DHI, Valacta. 8977 herds
Dairy Farm Asset Values
Source: Statistics Canada Cansim
Farm Operating Income/Assets
2005 2006 2007 2008 20092010Land-Based
Field Crops 0.02 0.02 0.03 0.04 0.04 0.03Cattle <$1
Million 0.02 0.02 0.02 0.02 0.02 0.02Horticultural 0.04 0.04 0.04 0.04 0.04 0.05
Margin-BasedCattle >$1
Million 0.01 0.01 0.04 0.04 0.03 0.01Hogs>$1 Million 0.05 0.03 0.04 0.02 0.02 0.04
Supply-ManagedDairy 0.03 0.03 0.03 0.03 0.03 0.04
Poultry and Eggs 0.04 0.03 0.03 0.03 0.03 0.03
Source: Statistics Canada FFS and TDP data, unauditedAssets at market value
Apparent Producer Interests in Dairy Policy
Retain revenue/ operating earnings
basis
Preserve capital
asset values
Market growth
(subset of producers)
Improved flexibility,
opportunity to expand operations (subset of producers)
ProcessorsConsolidated, highly competitive processors, operating at national or regional in scale (some multinational)
Confronted by highly concentrated retail/food service environment; increasingly assertive in dealing with suppliers
Rapidly shifting dairy manufacturing technology
Canadian investments in processing challenged by lack of domestic market growth, restricted export market access
Increasingly, Canadian dairy processors investing capital elsewhere
Dairy Markets
Overall, very slow growth
But, exceptional growth in segments; absolute decline in others
Proliferation of brands, product differentiation, more diverse dairy case
Increasing pressure of imports, binding exports caps, widening trade deficit
Increasing interest in linkages among production, processing, and product as elements of marketing
Promising international product market outlook
Slow Market Growth27
.93
28.0
4
27.9
5
27.8
8
28.1
7
28.2
6
28.2
2
27.8
3
29.1
0
29.4
5
29.4
9
29.3
3
29.3
6
29.1
3
28.6
6
161.
014
161.
014
165.
712
166.
23
164.
22
177.
036
177.
234
178.
945
173.
3
181.
58
181.
52
179.
04
183.
28
189.
7
187.
63
-
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13
Fluid Milk, Million Hectolitres MSQ, million kg
Growth in Product Categories Differs Sharply
3.26
8.29
11.44
5.61
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Litr
es p
er C
apita
Yogurt Ice Cream
Source: Statistics CanadaCalculations done by AAFC-AID, Dairy Section
Deepening Dairy Trade Deficit
Source: Statistics Canada
Strong Powder Prices
Source: USDA AMS
Expected to Remain Strong, Mid-term
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
17.50
18.00
18.50
19.00
19.50
20.00
20.50
21.00
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
$US/
Lb
$US/
cwt
All milk Nonfat dry milk
Source: USDA-ERS
Economic Policy Direction
Economic growth/industrial policy based on freer trade
Commitment, government track record on major FTA’s• CETA (complete)• TPP (in process)• Canada-South Korea (complete)• Canada-Japan (in process)• Canada-India (in process)
Reduced willingness to impose new regulation (mostly)
Reduced resources for regulatory implementation
Milk Supply ManagementPast Pressures
Reduction/control of milk, dairy product surpluses
Sustainable producer returns
Improved equity among producers, pooling of markets; homogeneity
Processor market power
Industrial policy amenable to protection of critical industries
New Pressures
Protection of producer capital
Growth, flexibility, linkages, export- processors, some producers
Trend in differentiation, brand/SKU proliferation; heterogeneity
Retail/food service market powerEfficiency gains in large scale plants
Industrial policy based on freer trade; ↑ imports , ↓ regulation
ConclusionsMilk supply management is a policy artifact of fundamental economic challenges in the dairy industry
Past evolution in SM has refined its policy approaches
Risk today is that the nature and rate of change overwhelms ability of SM to adjust effectively, even with major realignment of existing policy parameters
Suggests a more fundamental reconsideration of the contemporary objectives for dairy policy, instruments used in regulated marketing
Recommendations
• What is the robust, consensus vision of producers? Processors?
• Where are the market power pressures?• What new types of demands from markets?• What consistency with broad economic policy
direction?
Revisit the essence of system. What is the role of “orderly marketing” today?
• Needs process to identify purpose, build consensus, commitment to renewed dairy marketing system
• Case needs to be made• Not a search for more elegant solutions to
pressures on current system
Design instruments to implement contemporary
objectives, given external
constraints
Recommendations• Improve adjustment dynamics of system• Address apparent regulatory policy/resource
constraints• Explore alternative mechanisms/prospects to
orient system toward export market access
Consider expanded use of market
instruments within renewed SM system
• Many elements of SM have adjusted over time, others frozen in time
• Costs/benefits of provincial legacy plants vs. national scale market efficiencies
• New quid pro quo
Engage provincial governments
regarding their stake in milk SM
• Avoid path dependence in current system• Pitfalls of competitive dynamic in regulatory
reform• Need for independent research and analysis
Seek external input, analysis
www.georgemorris.org
Thank you