Why the Future of the North American Dairy Industry Depends On Supply And Demand


With the recent announcements about both Canada and the US entering significant trade negotiations with the European Union (EU), there has been a great deal of discussion by breeders on both sides of the border about what this means to the future of the North American Dairy Industry (Read more:  A Nation Held Hostage By Dairy Cows and Dairy Groups Welcome Launch of U.S.-EU Negotiations).  One thing I learned in my microeconomics class is that in any competitive marketplace the price is determined by supply and demand.   As we enter into a more competitive global marketplace there is no question that the dairy industry will  depend on this economic model to determine its future.

The Future of Supply Management

It’s really pretty simple. In any industry you need a buyer and a seller.  If you have more buyers (demand) than you do sellers (supply) the price goes up.  If you have more sellers than you do buyers then price goes down.  Well, unless you are in Canada, where there is supply management and then that is  a completely different story.  In Canada the 12,700 dairy farms have been protected from this economic model because of the supply management system. It  blocks foreign competition from coming into Canada by placing elevated tariffs on milk and milk products thus making it impossible for imports to compete. Only about 5% of the Canadian dairy marketplace is supplied by imported products.  It has also controlled the level of production domestically (Quota) so that there is not an oversupply in the marketplace. This protects the price of milk so that dairy producers in Canada have been able to enjoy a stable milk price and consistent predictable revenue.

The challenge with this is that the world is very quickly moving to a global marketplace.  In addition, one of the global requirements is that there is “fair” and equal trade in all industries.  This means that systems like supply management are being removed in many countries and certainly are key issues in international trade negotiations.  Many Canadian producers have millions of dollars tied up in quota. Compare this to the $12 billion a year trade negotiations Canada is having with the EU and you can see why there is concern about  the future of supply management.  While I totally can see the benefits to Canadian farmers from the system, you simply cannot deny the benefits of world trade to the whole country. Hence you can see why these programs are severely at risk.

Canadian dairy farmers simply need to look south of the border to see what life without supply management is like.  Dairy operations have to operate very differently when sale price and production is not set by a managed system.  There you are forced to run your farm more like a corporate organization, with detailed analysis of profit and loss and all decisions dependent on the effect it will have on the bottom line instead of on emotion.  Yes it makes dairy farming more of a business than a way of life, but that is the future. The other is the past.

It also means that the marketplace will determine who stays in business and who goes under.  If there is an over production of milk, milk price will go down.  Those organizations that are having challenges will go under.  It’s simple business.  Run a good business you will succeed. Run a poor business and you will fail.  Notice how I said business and not farm.   Dairy farmers have to start looking at things differently.  Dairy farmers need to be business persons first and farmers second.  This could be a  change that many farmers are not able to make.

Demand the Other Side of the Equation

The  second part that I learned in my long and boring microeconomics class is that if you want to increase milk price and cannot decrease supply, then you need to increase demand.  According to estimates, the world population is set to reach 9.3 billion by 2100.  Much of this growth is set to come from countries like China, South America and Africa.  Very impressive numbers for sure, but let’s look at milk consumption in those regions.  China averages 28.7 kg/capita/year, most African countries average less than 50 kg/capita/year, and most South American countries average around 100 kg/capita/year.  That is nowhere near the 253.8 kg/capita/year that Americans consume, 206.83 kg/capita/year for Canadians and over 225 kg/capita/year for most EU countries.
Current Worldwide Total Milk Consumption per capita

Therefore, if population growth alone is not going to help significantly increase demand for dairy products, we then need to look at how milk and dairy products compete for market share.  As we highlighted in our recent article, Milk Marketing: How “Got Milk?” became “Got Lost”, the land of milk and money is gone.  As an industry we  forgot about the consumer, we  forgot about the product, and we forgot how to innovate!

demand variety

A simple trip to the local grocery store reveals that while products like organic foods, international foods and soft drinks are always innovating and battling for market share. Milk, for the most part, has not done anything.  Look at these pictures that show the amount of shelf space (key in driving sales) these other products have compared to milk.  We can no longer rest on our milk stools.  We have to compete for the marketplace with all the old beverages … and countless innovative new ones.  That may seem to be a daunting task but it can no longer be ignored!

The Bullvine Bottom Line

The world is changing, old systems and production models are being eliminated and new ones are being established daily.  Those that sit and try to battle to keep the old will be left behind.  We need to look to the future instead of fighting for the past.  Consumer demand is the most serious issue impacting  the future of the dairy industry.  We need to understand what the consumer wants instead of fighting for what we used to have. If you want to be part of the future, think about SUPPLY and DEMAND. There are good reasons why it is NOT called The Law of Supply and PROTECT!!

 

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Comments

  1. I think there is a second part to the whole getting rid of supply management to attempt to push free trade agreements through that not all consumers realize. The fact of the matter is Europe and the United States have large farm subsidy programs and if I’m not mistaken, dairy operations receive money from those in poorer years. So, if we took away supply management in Canada, then Canadian dairy farmers would not be receiving any form of government support while farmers in other countries would still be receiving theirs. This brings us to one of two scenarios because I assume that Canadian dairy farms wouldn’t be put into a situation as disadvantageous as this. Number 1: All dairy subsidies are cut in the EU/USA farm bills (not likely!) or Number 2: Canadian dairy farms are allowed to receive subsidization from the Canadian government (they are currently exempt from most farm support programs). Now these new trade agreements may result in some negotiated cuts in other countries subsidization programs but it’s unlikely that there would be a total cut-off of all farm subsidies across the globe, therefore situation number two is more likely. In this scenario, the government would need to pay out more money to farmers (due to adding dairy farmers to this group of farmers) and therefore would need more money. Where does government get money? Taxes! So, taxes go up. I think this is a point that many anti-supply management consumers don’t realize. Sure, you pay a lower price at the grocery store for your dairy products, but come tax time, if dairy farmers are having a bad year, the government will need money to pay out support payments to them. Now what I learned in my Ag Policy course is that subsidies are a more efficient way of transferring money from consumers to producers IF (and this is a big if) the government is totally efficient at taking the money from them and giving it to farmers (ie if government doesn’t waste any of the taxpayer’s money). I’ll let you decide whether politicians are good or bad with money but if the above argument doesn’t hold, then it’s anybody’s guess as to whether a subsidy is better than supply management (they’re likely very close in that case but it’s difficult to come up with supply and demand equations for Canada when supply is restricted).

    Anyways, sorry for the long post. I just wanted to share what I’ve learned throughout my Ag degree and M.Sc. Ag Econ courses. I’ll be the first to admit that being a Canadian dairy farmer results in a lack of familiarity as to exactly how government support works in other countries but I’m quite sure that every country has it, it’s just named something different and works a little differently. This will probably take up a lot of space in your comments section so you don’t need to post it all if you don’t want but it was just something that I’ve been thinking about and wanted to share with you.

    Thanks,

    Michael

  2. you make some very interesting points….it is happening here in Australia, where the major supermarkets only want to sell there branded products and do at a reduced price to the brand or better quality ones. Most of the milk that is producded in Victoria, the state that l live in is destin for the export market; power, buttter and cheese, this attracts on average about 8 cents a litre less than milk bought by proceccors that do the branded milk products for our grociery stores. We have 3 co-ops, 1 small reseller,[hume we supply] and the 2 multi nationals that we can supply milk to, but the latter take some getting in the door as they require large volumn of constant supply. The northern states, Qld & NSW supply those 2 companies and over the past few years have had their contracted litres and prices cut, making it alost imposibile to produce milk in those states as Victoria has a cheaper cost of production!

    There is no govt support here, in the way of topping up milk prices, you take what the proccessors offer or go else where….limited oportunities or out of bussiness.

    Its almost to the piont where Agriculture doesnt matter any more, its cheaper to import lower quality food and export mining to keep the balance of trade right.

    Here in Australia, we have a great enviroment to produce quailty foods, l dont understand why we would want to lose this.

  3. I read with interest your article. A couple of comments. You mentioned that Canada imports about 5% of its dairy products. My understanding is the US imports even less – where is the access to the US market. Europe is the same way as I understand it.

    The other comment I have is that the COP (cost of production) in countries like New Zealand and Australia is much lower than many parts of the world – this is not transferring through to cheaper prices to the consumer in those countries. Show me that model and I may buy in to the system.

  4. Milk is for baby cows, go vegan, stop raping cows, and stealing their babies. All mothers have the right to nurture and love their babies. Dairy and North America, is big business, and that’s the truth. Human beings don’t need milk from cows, they need their mother’s milk as infants, and that’s all. Calcium is found in ample plant derivative sources, if you are not aware of this, do some research. Wake up people, we have been fed untruths for $$$$$$$$ and only $$$$$$$$! Animals have the right to life, just as you and I do. Hopefully, one day, this world will change, just as it has in the past, it wasn’t so long ago that slavery and the holocaust existed.

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