4 min read
Written by Mark Xuereb
from: http://www.montrealgazette.com/business/supply+management/5815737/story.html
American dairy prices may be cheaper than in Canada, but what most consumers fail to recognize is that U.S. taxpayers are doling out billions of dollars each year to keep their farmers afloat
By MAURICE DOYON
The Gazette December 6, 2011
In Canada, only five large retailers buy 75 per cent of dairy products and three large processors buy 80 per cent of Canadian dairy farmers’ milk.
When Canadian consumers look across the border, they see milk at lower prices than at home. But what they fail to see is that their American neighbours are paying more than just retail price for their milk products.
In addition to the cash they spend up front on milk at the local store, taxpayers in the United States also contribute to numerous subsidies and programs paid out by their government to keep U.S. dairy farmers afloat. Over the years, the U.S. dairy industry has tried to solve their recurrent problem of oversupply, which results in significant government financial intervention, with sometimes counter-intuitive programs. For instance, at some point they had a program that paid farmers not to produce milk, or a program that bought dairy cows to eliminate them with the hope of reducing supply. None of these programs were really successful.
Moreover, Canadians eyeing price tags on American milk cartons do not see the significant price volatility that puts great financial pressure on family dairy farms in the U.S., favouring greater concentration in the industry.
The U.S. farm milk price has become so volatile that American dairy farmers have recently been moving from one price crisis to another, with new price highs in between, resulting in massive oversupply. This situation has been so detrimental to the dairy business environment, and the U.S. treasury, that the National Milk Producer Federation, with the help of American lawmakers, is pushing a reform that includes a form of supply management in their next Farm Bill. The hope is to tame dairy price volatility and the occurrence of dairy crises.
Under the nearly 40-year-old Canadian system, national production of milk is based on consumer demand for milk and dairy products.
The national production target is divided between each dairy farm.
Each farm has a production quota to meet. Farmers are paid according to a schedule of prices set after study of production costs of efficient farmers, as well as the state of the Canadian economy.
Supply management means dairy farmers will increase production or scale it back, depending on change in the consumer demand. The system requires farmers to exercise restraint — there is no extra money to be made by producing surplus milk. Any import also influences what can be produced, so controlling how much is imported is key.
But in exchange for keeping production in check with demand, Canadian dairy farmers know they will be able to cover their production costs and invest in their operations in a stable price environment.
Stability of individual farmers translates to stability for the entire Canadian dairy sector, averting the need for government being called upon to buy millions of dollars worth of excess milk flooding the market. The most recent dairy crisis culminated in 2009, when both the U.S. and Europe were stuck with massive overproduction, spurred by international milk prices that hit unprecedented peaks during the preceding two years.
Bailing out the farmers cost European governments an estimated 280 million euros and added roughly $350 million to the U.S. government’s tab, pushing support of the federal dairy program to roughly $1 billion.
Meanwhile, Canada’s dairy farmers, processors and consumers were unaffected by the world dairy crisis. Prices remained stable for all, and the government did not have to intervene.
Recently, the Canadian Restaurant and Food Services Association has claimed that milk prices are too high. This association should avoid oversimplification and recognize that numerous factors affect the retail price of milk, as well as price comparisons with the U.S.
First, the production prices established and paid to dairy farmers through the supply management process add up to only a portion of the final price paid by consumers. Processors and distributors play significant roles in the final prices paid for dairy products at the counter by Canadians.
The Canadian Restaurant and Food Services Association should be reminded that in Canada, only five large retailers buy 75 per cent of dairy products and three large processors buy 80 per cent of Canadian dairy farmers’ milk.
There are no guarantees that eliminating supply management would translate to lower dairy prices for consumers. It did not always happen elsewhere, but farm prices always went down. The money differential is simply captured by other actors of the value chain (processors or retailers) with little benefits for consumers.
So it’s true that Canadians may currently pay more for milk than their American neighbours at the store. But it has not always been the case, since cross-border price comparisons are sensitive to the exchange rate. And even when prices were higher in the U.S., they paid subsidies and we did not.
We don’t have to see the glass as half empty when it comes to the overall health of our dairy industry and it’s real impact on Canadian citizens.
Université Laval Professor Maurice Doyon has spent six years studying the United States dairy sector as part of his graduate work at Cornell University and also has spent a year in France, where he was able to perfect his knowledge of European dairy policies.