Dairy Farmers Out of Touch

Worth A Look, Agriculture, Frontier Centre

Canadian prices for milk, cheese and butter are among the highest in the world, and are far higher than U.S. prices. The cost of producing milk in Canada has probably fallen over the past decade. So what do the Dairy Farmers of Canada want to do? Jack up prices for the second time this year, proving yet again that the “market” in the dairy market is a total fiction.

Last week, the Canadian Dairy Commission, the Crown corporation that regulates the national dairy market, turned down the request. The farmers had already received a 4-per-cent increase in February. If the second price had come through, industrial milk prices — milk used to make butter, skim milk powder and other dairy products — would have climbed 6 per cent in one year.

The farmers squealed when their request for the “special adjustment” was rejected. “The Canadian Dairy Commission has lost touch with producer reality,” said Jacques Laforge, a Dairy Farmers vice-president.

That’s a bold statement from an organization whose 17,000 dairy farmer members live in the sort of reality that others businesses would kill for. Decades ago, they were given production quotas, gratis. The quotas give them a guaranteed market for their product. It is a monopoly with no outside competition; Canada imports no raw milk, although you can get imported cheese. The kicker is that the farmers get a return based on a cost-of-production formula. Critics, including Ontario’s Chris Smith, whose dairy farm is not part of the quota system, says the formula encourages farmers to “exaggerate” their costs to get the highest price, regardless of what’s happening in the global dairy market.

More often than not, the Canadian Dairy Commission, created in 1966, has been happy to give the farmers what they want. In fact, the commission has allowed prices to rise in each of the past eight years. The effect is a net transfer of wealth from the consumer to the farmer.

The farmers lobbied for the second price increase because of the BSE crisis (there’s always a handy crisis). Pre-BSE, Canadian dairy cows could be exported to the United States, where they would find second careers as hamburgers. The border is now closed to live animals. The result, of course, is a glut of dairy cows north of the border. Prices have plummeted. The Dairy Farmers say a milk cow that sold for $750 before BSE hit now fetches about $100.

Hence the request for the back-to-back price increase. The Dairy Farmers say the loss of the export market has reduced gross dairy farm cash flows by 10 to 15 per cent, reducing overall farm net income by 50 to 70 per cent.

Since farm accounting is different from normal accounting, it’s hard to judge the actual degree of financial woe suffered by the farmers. Some dairy farms may be on the edge, but most appear not to be.

Wally Smith, the Dairy Farmers’ British Columbia director, says farmers are suffering. At the same time, he says he is not aware of any declaring bankruptcy because of the border blockade.

The Canadian Restaurant and Foodservices Association does not buy the farmers’ tales of disaster. It says industrial milk prices have climbed 43 per cent since 1993. Over the same period, the cost of production has fallen 3.5 per cent, it says, because of factors such as rock-bottom interest rates. The Dairy Farmers say the numbers are nonsense, citing the sharp price increases for fuel, steel and other commodities.

But it’s hard to ignore the fact that Canadian dairy prices are outrageously high by world standards. The restaurant association, citing figures from the United States Department of Agriculture and other sources, says Canadian cheddar cheese prices, at $6.08 (U.S.) per kilo in 2003, were 56 per cent higher than American prices. The average milk price paid to Canadian producers was the highest in the study, at $35.91 per 100 kilos. The European Union average was 29 per cent less. Canadian butter prices were the second highest, exceeded only by Iceland, and almost double the American price. Skim milk powder was the second highest.

The restaurant association also says the farmers’ cost-of-production formula is overstated. Using figures submitted by the Canadian government to the World Trade Organization, it says a price of $29 (Canadian) per 100 litres would cover “efficient dairy farmers’ cost of production.” The current domestic price for industrial milk is $64.77.

Something is wrong with this picture. Canadian dairy prices are among the highest in the world. The market is protected from competition. Federal and provincial governments are doling out $1.7-billion to Canada’s beef and dairy farmers to compensate them for BSE-related losses. Yet the farmers still claim they face a financial crisis. The conclusion is either that the farmers run wildly inefficient operations or are massively overstating their true costs.

The real truth is that consumers will continue to bear the brunt of the broken system. While the dairy commission denied the farmers their second price increase, the whining paid off because they will get one next year, guaranteed. Commission chairman John Core said a “significant price support adjustment” will be implemented in February.

Why not make the farmers this offer: Give the farmers their price increase, but insist on a price rollback if the United States reopens its market to live animal exports. The farmers, of course, would never take the offer. To them, the only price direction is up.