Empowering Farmers

The Canadian Supply Management Experience

Bruce Saunders1st Vice-President, Dairy Farmers of Canada

Chapeco, Brazil, January, 2005

Outline of the presentation

• Who we are?• History of supply management in

Canada• Determining production quota• Benefits of supply management• Expectations from the Doha Round of

negotiations• Conclusion

• 16,000 dairy producers • Milk sales: $4.2B • Adds a net $8.3 billion to the GDP• Processed products sales: over $10B• Supports $26 B of economic activity• Sustains more than 142,600 jobs:

– On-farm: 50,800– Farm suppliers: 25,200– Processing sector: 66,600

Economic Snapshot of the Canadian Dairy Industry

When Canada was a major exporter, producers received

low returns.

So…Canada turned its attention to the

domestic market.

Brief History

Objectives of the Canadian Dairy System

1) Ensure orderly marketing of milk by balancing supply with demand

2) Balance the negotiating power between stakeholders to obtain fair prices for the producer

3) Ensure that consumers have access to adequate supplies of high quality products

Pillars of Supply Management

Depends on three pillars:

1. Import controls

2. Producer pricing

3. Production discipline

All equally important

Producers Need Market Power

• Legislation is necessary

• Canada uses legislation for management of supply

Fundamentals of the Canadian System Balancing Supply With Demand

Balancing Supply with DemandCanadian Milk Supply Management Committee

ProvProv

ProvProv

ProvProv

ProvProv

ProvProv

ProvProv

ProvProv

ProvProv

ProvProv

Non-votingMembers

CDCChair

BoardBoard

BoardBoard

BoardBoard

BoardBoard

BoardBoard

BoardBoard

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BoardBoardBoardBoard

Balancing Supply with Demand

Prevents Market Price Volatility

Evolution of Farm Prices in Canada and the U.S. 1990 to 2004

60.00

80.00

100.00

120.00

140.00

160.00

180.00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Ind

ex 1

990=

100

Canada Target Price Highest of Class III and IV Prices in the U.S.

Balancing Supply with Demand

Market Stability

Canadian Milk Production 1960, 1976, 2003

0.00

1.00

2.003.00

4.00

5.00

6.00

7.008.00

9.00

10.00

J F M A M J J A S O N D

milli

on h

l

1960 1976 2003

CMSMC estimates demand based on: milk consumption evaluation of stocks expected imports traditional exports possible change in

markets

Balancing Supply with Demand Step 1: Estimating Demand Requirements

CMSMC sets quota to meet demand

Balancing Supply with Demand Step 2: Setting Supply Target Requirements

Balancing Supply with Demand Step 3: Allocate MSQ - Historical Basis

Province % % 1982 2004

Newfoundland 0 0.14

PEI 1.9 1.74 Nouvelle-Écosse 1,3 1,16 Nouveau-Brunswick 1,3 1,35 Québec 48 45.48 Ontario 31,2 31,68 Manitoba 3,9 3,53 Saskatchewan 2,6 2,52 Alberta 6,7 6,55 C.-B. 3.1 5.86

Step 4- Allocation of Quota to Individual Producers

Producers

ProducersProducers

Producers

Producers

• Daily quota system: no year end

• Daily quota established on a kg of

butterfat per day

• Adjusted regularly to reflect market

demand fluctuation: upward or

downward

• Transferable

Production Quota

Balancing the Negotiating Power Marketing Agreements (MA)

• Terms negotiated between:

Provincial boards and Processors

Co-operative Private

enterprises

• A single sales agent (provincial board) negotiates: plant supply, milk quality, classes and prices, and payment terms

Balancing the Negotiating Power Domestic Price NegotiationsDomestic Price Negotiations

• The price of industrial milk sold in regular classes is set by the CDC following a consultation process and reflects a cost of production formula including return on investment and equity

• The price of fluid milk is set by the provinces• One price adjustment per year (February)• All processors pay the same price for a given

class

Balancing the Negotiating Power Distribution of Producer ReturnsDistribution of Producer Returns

Balancing the Negotiating Power

Increased Market Concentration

Farm level • 17,000 dairy farms

Processing level• 3 largest dairy processors have 70% of

sales of approximately $11 billionRetail level

• Largest retail chain has 35% of sales • Top 10 have 90% of sales

Producer Returns (Deductions)

Deductions per hL of monthly shipment:Transportation $2.32•Administration $0.45•Promotion $1.22•Research and DHI: $0.12

Total $4.11The operating costs of the system are therefore bourn by the producers.

Price of Milk

Milk Prices Paid to Producers:

2001-02 2002-03 2003-04 2004-05

Can $ per hl

58.52 61.07 61.19 63.65

US $/cwt 16.43 17.99 20.16 22.41

Ensuring Consumer Benefits

• A Canadian Paradox: Canada’s method of implementing supply management in the dairy industry results in benefits accruing to all stakeholders – not just to producers

Ensuring Consumer Benefits Comparison of Canada-U.S. Retail Prices

Cost of Dairy ProductsAAFC Nutritional Food Basket

6.48

%

0.66

%

0.09

%

18.7

6%

21.3

1%

27.2

1%

35.5

5%

44.7

6%

38.6

7%

37.9

5%

10.6

2%

22.3

6%

17.4

3%

-11.

45%

5.28

%

11.2

7%

32.3

7%

23.9

0%0

10

20

30

40

50

60

03/9

107

/96

01/9

706

/97

01/9

806

/98

11/9

806

/99

11/9

905

/00

11/0

005

/01

11/0

105

/02

12/0

205

/03

11/0

305

/04

$ C

anad

ian

Canada United States

Ensuring Consumer Benefits

No Cost to Government

Milk US Canada

Producer Prices $15/cwt $22.4/cwt

Government Payments1

Federal programmes

$6.75/cwt __

Government Payments1

State programmes

$1.45/cwt __

Total $23.20/cwt $22.4/cwt

1- US Agricultural Support, Grey, Clark & Shih, January 2005

All price in $US per cwt

A System Under Threat

Three Pillars:

• Import controls

• Price setting

• Production planning

A System Under Threat WTO – Impending Threat

Market ImportAccess Controls

Domestic ProducerSupport Pricing

Export Production

Competition Discipline

1-

2-

3-

Each Pillar Can Be Affected:

• Producers’ ability to get revenues from the market

• No cost to government

• Stable and reasonable prices for consumers

• Stable and steady supply for processors

• High quality products

Conclusion:Supply Management Benefits at Stake

Conclusion (continued):Supply Management Benefits at Stake

• Maintenance of family farms

• Benefits rural development and environmental sustainability

• Production discipline which prevents surplus production that distort both international and domestic markets