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January 31, 2018

One Canadian Producer's Perspective On Dairy Issues

 |  By: Mike Opperman

Around the world, most of the important aspects of managing a large dairy are the same. Cows need to be fed, bred and milked, and the people who do those jobs have to be managed. Stan Van Keulen owns Donia Farms, a dairy located near Vancouver, British Columbia. The farm’s name comes from a district near where Van Keulen’s parents came from in Friesland. He and his three sons milk 1,200 cows on two dairies in a style that’s not too different from anything one would see on a modern U.S. dairy. On the 900-cow dairy, cows are milked three times a day in a double-16 parabone parlor. In the 300-cow dairy, cows are milked in a 40-stall rotary. About 26 employees help run the dairy and farm the 1,200 acres of corn and grass that gets harvested for silage. Like many U.S. producers, Van Keulen has taken active leadership roles in the dairy industry. He was president of Mainland Dairymen’s Association for about 20 years and still serves on director boards and as a senior advisor for other organizations. As a business owner, Van Keulen looks for opportunities to diversify income.

About three years ago Van Keulen’s sons decided to start marketing a small portion of their milk to consumers. They started with Kefir and have expanded to butter and milk, all labeled as grass fed. While only about 5% of the farm’s milk goes to a co-packer to be packaged for retail sales, the business continues to grow, and it gives Van Keulen perspective on consumer trends. Van Keulen is also in the process of passing the dairy on to the next generation. While his son David manages the retail effort, his son Jon manages the cows while son Nico manages the crops, all cross-share duties when necessary. So far the transition has gone smoothly, even within the quota system. Van Keulen says quota can be transferred to family members through a tax-free provision available to intergenerational family farms in Canada.

There are labor issues in Canada, too. “We are lucky, we have a Latino base, but we also have non-Latinos working for us as well,” Van Keulen says. “Foreign workers are always in demand, and we can bring them in basically with the same policies as the U.S.” Van Keulen does say that, unlike the U.S., there isn’t a big problem with undocumented workers in Canada. But managing labor is still an issue.

Just like his U.S. counterparts, Van Keulen has to manage taxes as well. But he admits producers in Canada don’t have some of the flexibilities of U.S. producers. Because of Canadian tax laws, producers are not able to defer revenue to a subsequent tax year. “In the bonus years when U.S. producers got $20-plus per cwt, they had the ability to move income around,” Van Keulen says. “We don’t have those provisions. We can’t move it forward or backward. We can buy new equipment to offset income, but we can only write off a percentage of that. The tax man always comes for his share in those profitable years.” While there are significant and important similarities between dairy producers like Van Keulen and his U.S. counterparts, there is much that is different with respect to producers participating in their milk markets.

Supply Management

One of the greatest differences between the U.S. and Canadian dairy industries is supply management. For decades U.S. producers have called for a system that would control production to bring it more in line with domestic and global demand, thereby decreasing price volatility. Van Keulen, as a Canadian producer, appreciates the consistency offered by supply management. In fact, he says he has great respect for U.S. dairymen who operate dairies without the stability the supply management program provides. The lowest milk prices he has seen is 69¢ per liter, the highest 74¢ per liter, on a 3.6% fat, 3.2% protein basis. Converting that to U.S. prices, his price has ranged between about $24 and $26 per cwt. Most U.S. producers would salivate over a $2 price fluctuation over a career. The minor fluctuation in milk price has been the result of world markets, Van Keulen says. About 20% of the Canadian milk price is based on the world market, with the other based on domestic economics. Those ratios change as export market prices and currencies change. U.S. producers understand the importance of export markets, especially in a non-supply management system. A look at the table shows that as exports go, so do U.S. milk prices.

“We were beginning to see evidence of price volatility before trade became such an integral part of our dairy sales, but I don’t think there is any denying that much of the price volatility that we see today is a result of fluctuations in exports,” says Mark Stephenson, director of dairy policy analysis at the University of Wisconsin. “Every major downturn in price that we have experienced in the last decade and more corresponds to being off trend in exports—either exports plateaued or declined. When that happened, the product stayed on our shores and backed up into increasing stocks and ultimately, the price had to drop.” Stephenson cautions not to paint the export markets in a negative light. After all, while exports could be blamed for low prices, they could also be lauded for high prices as well.

“No dairy farmer that I know likes the downturn in prices, but I can’t think of a single one that would want to miss 2014 either,” Stephenson says. While supply management does offer Canadian producers stability, the market north of the border does experience highs and lows. As the graph shows, however, those peaks and valleys don’t match the volatility experienced in other world markets.

“We never used to have that (price volatility), but as the fractionation of milk takes place, sometimes tariff lines don’t keep up with the fractionation,” he says. “Products seem to flow more easily across borders and that’s why we see the small fluctuations.”

The lack of variation is beneficial to all parts of the dairy industry, Van Keulen says, from producer to processor to consumer. Processors always know how much milk is in the system and can plan accordingly, and producers always have a consistent price. Consumers benefit, too, with stable prices on store shelves. “We tend to have about a 0.5% or 1% oversupply in the system just to make sure there is enough supply to fulfill and lead the market,” Van Keulen says. Consistent pricing at the producer level makes life easier in a number of ways. For one, the banker likes it. Van Keulen says that because the industry is in expansion mode, it’s not daunting to ask the banker for a loan to grow a dairy or invest in new technology. “It’s not that prices are that much better, it’s because we have that predictability and new demands taking place in the marketplace.”

In the end, Van Keulen says U.S. and Canadian producers aren’t all that different. “We’re no different than the American dairy farmer. We milk our cows the same way. We have our small operations, we have our large operations maybe not to the scale as dairies down there,” Van Keulen says. “Put two dairy farmers in a room and talk dairy and not politics, they know the language. Nothing’s different. It’s that other stuff that gets in the way.”