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.
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!
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!!