Has the Time Come For Supply Management?

Hundreds of Wisconsin farmers showed up at meetings this spring examining the pros and cons of Canada supply management program. ( Wyatt Bechtel )

Part 1 of 3 Part Series on Supply Management.

Though there’s reason to hope milk prices are on the upswing as summer turns to fall, more than a few dairy farmers are frustrated—even beaten down—by the constant boom, bust and volatility of global milk prices.

So much so, some are again looking to supply management as a solution.This past spring, Wisconsin Farmers Union (WFU) held more than a dozen meetings in Wisconsin, Michigan and Minnesota to look at Canada’s supply management system. Nearly 500 farmers and dairy support industry folks attended the meetings in Wisconsin, and the Michigan and Minnesota meetings were on-going as we went to press. There has also been some discussion of holding meetings in California as well.

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.

Given low milk prices and problems that came about after Grassland Dairy cut loose more than 100 dairy farms in the Midwest last year, farmers are saying we need to do something different, says Darin Von Ruden, WFU president and a farmer from Westby, Wis.  “The Wisconsin Farmers Union and the National Farmers Union have said for decades that we have to have a mechanism that produces a fair price to dairy farmers for their products,” he says.

“I don’t think that the program would be an exact replicate of the Canadian system. But we have a lot of inefficiencies in our milk collection system,” he says. “We have six dairy farms on the ridge where I live and five different trucks picking up their milk. Maybe we can find a system that is more efficient in milk procurement and return those savings to the dairy farmer.”

The Wisconsin meetings hosted by WFU featured two Canadian dairy farmers, Murray Sherk and Ralph Dietrich, who both serve on the board of Dairy Farmers of Ontario. They laid out the pros and cons of their system, saying it provides a stable, profitable milk price but acknowledge it comes with its own set of challenges.

Canada has about 11,000 dairy farmers, milks 945,000 cows and produces about 21 billion pounds of milk. It has more dairy farmers than the state of Wisconsin, which has roughly 8,500 herds milking 1,274,000 cows. Though it has fewer dairy farmers than all of Canada, Wisconsin is almost 50% more productive, producing more than 30 billion pounds of milk last year.

Canada’s supply management program grew out of the tumult of early 1960s. In Ontario, the Milk Act of 1965 created the Ontario Milk Marketing Board, which gave dairy farmers the right to set milk prices, regulate quota and negotiate with dairy processors. From there, the system grew nationally, and a national program issues quota on a percentage basis to each Province’s governing dairy board, which in turn issues quota to its producers.

“Our system is farmer managed,” says Sherk. “There is oversight by government, but as long as we provide high quality milk, government leaves us alone.”

For it to work, Sherk and Dietrich say the program needs three things:

  1. The ability to control milk prices.
  2. Production discipline.
  3. Import controls.

The upside is that 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 (COP) 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, based on farm costs and the consumer price index. In 2018, the milk price was reduced due to lower farm labor costs that came as a result of increasing farm size, mechanization and technology.

Despite the high farmgate milk price, consumer retail prices are typically on par with U.S. prices, says Sherk. This spring, Canadian retail fluid milk prices were about $3.25/gal and butter ranged from $2.40 to $3.20/lb on a U.S. equivalent basis, he says. Note, however, that over the past five years, Canadian retail fluid milk prices were typically double those of U.S. prices, according to Statistics Canada.

“The elephant in the room is the high price of quota,” says Sherk. “In Ontario, we’re at a value of $25,000 to $30,000 per cow.” If consumption increases, though, quota can be given to farmers to fill that growing need. Normally, quota grows about 1% per year along with the rate of population growth and dairy consumption.

But due to recent, explosive growth in the demand for butterfat, Canada’s quota expanded 24% over the last three years. 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 farmer-subsidized Class 7 milk protein program.

Milk quota can only be owned by farmers, and provincial boards must approve all transfer of quota. If farmers want to expand or bring in additional family members or partners into their operations, they must purchase additional quota. Quota value is based on supply and demand, and quota values have been as high as $40,000 per cow, most notably when Dutch and Swiss immigrants came to Canada in the 1990s and 2000s to escape Europe’s eroding quota program.

Because of the high cost of quota, it’s almost impossible to expand rapidly. “You can’t grow as fast as some people want, but on the other hand, we’re able to maintain a system where all growth is profitable,” says Sherk.

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.

Because domestic milk prices are so high, Canada has few dairy exports.  (Exports increased markedly this year due to its export sales of Class 7 milk proteins. Note: 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.

The bottom line to the system, says Sherk, is stability. “While farmers around the world face unexpected and wild market fluctuations, Canadian dairy farmers sell their milk at constant and stable prices. As a result, Canadian dairy farming is one of the few ag sectors in the country that is self-sufficient, providing income security for farmers requiring no government subsidies.”