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May 17, 2018

The Allure of Supply Management

 |  By: Dairy Talk

With U.S. milk prices still lagging most dairy farms’ cost of production, Canadian milk prices and their year-in/year-out stability look like a dream world ripe with cream and honey.

 

To get a better understanding of that world, the Wisconsin Farmers Union (WFU) held nine meetings this spring to help dairy farmers and those in support industries better understand Canada’s supply management program. Nearly 500 attended these meetings, and WFU plans to hold another series of meetings in Michigan in June.

 

Upfront, and for the record, WFU is not saying implementation of such a system here is possible anytime soon. But it believes some type of supply control is necessary to break the boom and bust cycle of the U.S. dairy economy, says Kara O’Connor, WFU government relations director.

 

WFU made a video of the Dodgeville meeting available on line. Though it’s an hour and half long, it’s well worth a listen. It features two Canadian dairy farmers, Ralph Dietrich and Murray Sherk, who both serve on the board of Dairy Farmers of Ontario.

 

Here are some of the things I learned:

 

Canadian farmers currently enjoy a $27/cwt milk price. This price is adjusted annually, based on a 50/50 weighting of Canada’s consumer price index and the country’s cost of producing milk. Dairy farm COP is based on a survey of 250 dairy farms, who fully open their books to share costs. The annual milk  price can go up and it can go down. In 2018, the milk price was adjusted lower due to lower farm labor costs due to increasing farm size, mechanization and technolgy.

 

Canada’s quota has expanded 24% over the last three years, due to rising butterfat consumption. Farmers were simply allocated this quota, and did not have to pay for it. But that expansion has also led to a surplus of skim milk proteins, which in turn has led to the creation of Canada’s controversial and internally subsidized Class 7 milk protein program. Note: Canada’s explosive growth in quota over the past three years is abnormal. More typically, quota grows about 1% per year along with the rate of population growth and dairy consumption.

 

Because dairy prices are so high, Canada has few dairy exports.  (Exports increased markedly this year  due to its export sales of Class 7 milk proteins. U.S. and other competitors say these sales are illegal under World Trade Organization rules). It also allows imports of 15% of its annual milk production. Note: If the U.S. were to institute a similar supply management program, that would suggest we would have to essentially eliminate our exports and more than triple the amount of dairy products we import. In essence, U.S. dairy farmers would have to cut milk production 25%. All of sudden, that $27 milk price doesn’t mean as much to gross farm revenue.

 

Quota takes on value, ranging from $25,000 to $30,000 per cow.  Quota value is based on supply and demand, and quota values have been as high as $40,000 per cow. In order to expand, farmers must purchase additional quota. One would think high quota prices negate any expansion on a marginal basis. The only way it works is to spread this cost over the entire herd, like farmers here who spread $5,000 or $8,000 per acre land purchase costs over their entire farms.

 

Banks will lend money to farmers to buy additional quota, and they can use quota they own as capital to leverage the purchase of other assets. When farmers sell, gains in quota value are taxable, though Canada has a $1 million capital gains exemption on tangible assets, including quota.

 

My take home is that the Canadian system offers an alluring, stable milk price. But it comes with hidden costs that take off much of the luster of when you first see those seemingly high, shiny milk prices.

 

You can view the video here or see a Powerpoint of the presentation here.