Revitalizing a stagnating Canadian dairy sector will take a shift away from farm gate thinking and increased focus on processing innovation, says a new report from Dalhousie University.
“Production is not going to grow on its own. You need demand. You need stimulus. You need a sector to redefine consumer consumption. Farmers can’t do that. Processors can,” said Sylvain Charlebois, one of the authors of the report, titled Supply Management 2.0.
The report asserts that if supply management is not fundamentally changed, Canada could see half of dairy farms go out of business by 2030 as less milk is needed and farms either grow and become more competitive, or drop off the map.
Meanwhile the dairy-processing sector is adjusting to more fragmented demand, it says, and more closures and restructuring is expected.
Recent trade agreements have put Canadian dairy on precarious footing, the report authors write. The Comprehensive Economic and Trade Agreement (CETA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the United States-Mexico-Canada Agreement (USMCA) have ceded just over eight per cent of Canadian dairy market share to foreign imports.
This means Canadian dairy processors have to compete with cheaper foreign imports, said Mathieu Frigon, president and CEO of Dairy Processors Association of Canada (DPAC). This has decreased the volume of Canadian dairy sold, and changed the wholesale price structure.
Processors pay higher prices for milk in Canada than elsewhere, though prices are more stable here than in the U.S., said Frigon.
“On average they are 50 per cent higher, but it depends on a product-by-product basis,” Frigon said.
Fluid milk consumption has dropped substantially (though cheese consumption has risen somewhat), the report notes.
Frigon acknowledged that, based on GDP growth, Canadian dairy processing has underperformed compared to other food-processing industries and that this has coincided with the signing of the three trade agreements, as well as conflicts with retailers in the domestic market.
Canada doesn’t have a good environment for dairy processors, and as a result innovation and growth are lacking, Charlebois said. Innovation in processing hasn’t been encouraged enough, feeding into arguments that there isn’t enough space in the world market to export Canadian milk.
“That’s farm gate thinking,” said Charlebois. “When it comes to processing, a lot of things can happen.”
The report calls for a strategy that focuses on innovation and growth, both domestic and international. It also calls for a value chain approach to reform.
What’s needed is a restructuring of the Canadian Dairy Commission (CDC), the report says. This should include a re-evaluation of how prices are set, which could include a value chain focus.
“The industry, by applying different pricing formulas, should incentivize farmers and processors to regionalize, adopt more sustainable and humane practices, and promote new and innovative methods and companies to enter the industry,” the report says. “These practices should be embedded into the CDC’s pricing strategy.”
DPAC agrees that a value chain approach is needed, said Frigon. Policy should be evaluated for its impact on the whole dairy supply chain, not just the farm.
“A viable and sustainable supply management system requires healthy and thriving industry from the farm to the plate,” he said.
He added that while supply management has traditionally focused on the farm, DPAC has seen more sensitivity to processors’ needs from farm groups.
Frigon agreed that the loss of market share to foreign imports has weakened Canadian dairy processing. Previously, DPAC has said that the combination of the three trade deals will cost the sector $300 million annually.
In the past 18 months, the federal government has promised processors compensation for the loss, said Frigon. The compensation should take the form of incentive to innovate and invest, he said.
However, a threat the Dalhousie report doesn’t appear to account for is a fraught relationship between retailers and dairy processors.
“More and more we see an imbalance in the marketplace between suppliers and large grocery retailers,” said Frigon. “Retailers are able to impose all kinds of arbitrary fees and deductions on suppliers including dairy processors.”
In September, the Financial Post reported that Walmart Canada had infuriated suppliers by announcing a 1.25 per cent charge on the cost of goods sold to Walmart, plus another five per cent on goods sold into its e-commerce channel. The fees were to help cover a $3.5-billion infrastructure upgrade.
In the Financial Post article, Food and Consumer Products of Canada (FCPC) called the fees “diabolical” and warned that rising fees and fines were beginning to threaten the future of manufacturing in Canada.
“When we look at what happened in other countries that were faced with a similar problem, Australia, the U.K. and Ireland, they’ve implemented a grocery code of conduct to make sure the excessive market power of retailers is kept in check,” said Frigon. Canada should also have this code, he said.