The Canadian dairy industry has a window of opportunities to reinvent itself. Will it be missed?

This morning, David R. Henderson published a post on the Fraser Institute blog calling for the dismantlement of the dairy cartel enforced by the public policy of government-mandated supply-management. Although I can see from where his opposition to this policy comes from, I doubt ending supply-management will change the dairy industry structure in any way. The most likely path would be accelerated consolidation throughout the industry and accelerated decline if transition was to be inadequately planned for.

In the meantime, the current debate about what to do with diafiltered milk is also symptomatic of the prevailing shortsightedness hindering the discussion about how the dairy industry should be regulated. Although the present inconsistency of definition of diafiltered milk between CFIA and CBSA calls for harmonization, the direction that will be taken to resolve it may have unintended consequences that dairy farmers should consider. The truth is that this issue cannot be actually resolved without addressing the whole dairy ingredients’ strategy which in turn leads to question many, if not all aspects, of the current policy framework.

More generally, the fact is that publicly available knowledge about the actual economics of supply management is not sufficient to draw any conclusion about what would be best for the different stakeholders. Raw data exists, but the analytics is either not publicly available or simply not done. Because we are talking about a government policy affecting all consumers of dairy products, more transparency is needed.

Just an example focusing on dairy farms, my area of expertise. One of the main arguments for keeping the status quo is that supply-management shields Canadian dairy farms from the competition of US milk produced under much more favourable conditions, either natural or socio-economic. But do we actually know to what extent it is true? Do we know how much milk is produced in Canada at a cost which could be competitive with the US price after transportation, and foreign exchange is accounted for? Is it 30%, 50% or maybe 70%? The answer would change our view about the competitiveness of Canadian dairy farms, especially if we were to test the impact of policy change. For instance, I have estimated that on average the direct cost of supply management for a farmer is in the 6-to-10 dollars/hectoliter range (capital cost of quota purchase + marketing cost). The raw data of the Cost-of-Production survey of the Canadian Dairy Commission might provide some answer. I have asked to access these data through an Access-to-Information request a few months ago. I am still waiting for an answer.

Regardless of the current supply management policy, dairy production may be heading towards a major debt-fueled crisis set to occur within the next 10 to 15 years. The trigger would be an interest-rate increase coupled with a price drop because of either a demand crisis (food safety) or a supply crisis (disease, deep market imbalances). Then, a lot of dairy farms would not be able to adapt to such a new economic and financial environment, especially in Quebec.

Other questions: How competitive are Canadian dairy products on the domestic markets compared to other sources of proteins or fat, to other drinks or desserts? What are the determinants of this competitiveness? How does the policy of supply-management affect the latter? How does the policy of supply-management interfere in the allocation of capital for investment within multinational dairy processors operating in Canada? What might be the consequences for Canadian farmers and consumers?

Consequently, before making any judgement about the merits of supply-management as a policy tool to regulate the dairy industry in Canada, we should focus on establishing a comprehensive set of evidence of its benefits and its costs.

Considering the economic weight of the dairy industry, the importance of the issues at stake, the time on hands now that TPP negotiations are behind us, I think a Parliament-appointed commission should conduct i) an in-depth review of this policy, its impact in the dairy industry, in rural economies and in consumption, and ii) a foresight exercise to anticipate and imagine possible paths forward.

Over the next two years, the federal government will design its climate-change policy, which will most certainly change some aspects of the farming economy. Growing Forward 3 will also result in a new economic framework for the Canadian agriculture.

The Canadian dairy industry has a unique window of opportunities to find a form of regulation and build an economic framework that brings benefits to all stakeholders. Will that window be missed?

First, it is urgent to fill the knowledge gap to clear the horizon. Then, and once possible paths forward are identified, I am sure the leadership for change will emerge.

I have some ideas about how to address some of these issues, either in a supply-management framework or not. I also know from interesting Twitter’s conversation that farmers and other stakeholders have also very good ideas about what could be done to make a sustainable dairy industry prosper in Canada, beyond the current framework.