A Canadian Dairy Farmer Explains Supply Management

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GUEST AUTHOR: Matt Plett | Matt Plett of Plemark Holsteins is Canadian dairy farmer operating in Manitoba

This piece originally appeared on the website of the Wisconsin Farmer’s Union. It appears here by permission of the author.


In light of the recent decision by Grassland Dairy Products to drop 75 of their producers and President Trump’s recent remarks regarding dairy trade between Canada and the United States, many interesting discussions have taken place between farmers in our two countries.

South of the border, there seems to be a lot of curiosity and fascination about the Canadian system. I’d like to clear up some confusion about what supply management is and isn’t, and how it works.

Let me start with a bit of an autobiographical sketch to help others see where I’m coming from and to also help dispel a common criticism of supply management – that its relatively high cost of entry prevents new people from entering the industry.

Though I grew up on a dairy farm, the family farm sold when I was 11 after my parents’ divorce, and we moved to Oregon. I later moved back to Manitoba (for you Americans, home is four hours north of Fargo, ND), studied Animal Science and Ag Business in University, and got a job doing dairy nutrition consulting for the major feed company in our province. I did that for eight years, always with a focus on starting our own dairy farm. I married a woman with a farming background as well, and so farming together as a family was a dream we shared in common.

Further reading: Milking Scapegoats – Wisconsin dairy farmer Chris Holman sorts out the vicious cycle Wisconsin dairy farmers find themselves in.

We kept our eyes open for dairy farms for sale, and actually kept in contact with the new owner at my old family farm, as it was ideally located in my hometown, and was also very basic – pretty much no land or expensive infrastructure, a 50-cow tie stall barn, a hay shed, and a good-sized house. As things turned out, none of his kids were interested in continuing with dairy farming, so we were able to buy the farm in 2007.

The farm was vacant when we moved in (the cows and quota were long gone) but we were able to secure financing to renovate the barn, which was in tough shape after sitting empty for a few years, and to buy 50kgs of quota. (Quota is based on daily butterfat production – 1kg of quota is the right to ship 1kg of butterfat per day). Quota was $25,000/kg at the time. It is the same price today, incidentally. We found a herd of cows, and in the fall of 2007 started milking 45 cows for 50 kgs. We started with no land and no equipment. All feed was bought in, and heifers were farmed out as we didn’t have young stock facilities.

As the cows have increased in production with time, we have bought quota each year. In 2012, an opportunity arose to buy another vacant dairy, 9 miles away from the home place. The new farm had half a section of land, an almost brand new (and slightly bigger) tie-stall barn, and ample room on the yard to build a heifer facility. We had plans to build a heifer barn on the old farm, but on 7 acres we were somewhat limited. In May of 2012, we made the move, bought 80 acres (are renting the rest for now with a plan to buy it over time) and built our heifer barn. Today we are milking 64 cows and have 92kgs of quota. We have grown to a size where we have hired help, and are making a decent, albeit modest living.

Start-up in Canada is obviously much more expensive than if we had found a vacant dairy just across the border in Minnesota or Wisconsin. However, as a first generation family farm, I think we are much better positioned in Canada than we would be in the U.S. The banking system is geared around high leverage and stable pricing in the Canadian dairy industry. I would personally rather carry a higher debt load that we are able to service than a lower debt load that we are not able to service.
To anyone making the “can’t start up in Canada” argument, I have to question how viable it is to succeed as a beginning farmer with $15 milk in the U.S. The undisciplined production means razor thin margins, and it seems the primary mindset in dealing with thin margins is to put more supply out, further reducing margins and initiating another round of expansion. It’s a curious race to the bottom that just doesn’t make any sense viewed from north of the border.

Supply Management 101
In the supply management system, farmers buy shares of market whose size is determined by the governing body, in this case a producers marketing board in response to market conditions.

If the market grows by 2%, the marketing board issues an increase of supply at 2% per share. So if a farmer owns quota shares equal to 100kg production per day, a 2% increase means than can up their production to 102kg per day.

The system is further stabilized by price setting and limits on imports. 

Price setting occurs via negotiations between between the farmers and downstream processors and ratified by the local marketing board that sets the “farm gate” price of milk. Limits on imports take the form of quotas and tariffs.

 

Now, having explained my own start in the Canadian dairy industry, I’d like to help address a few common questions or misconceptions about supply management.

Supply management doesn’t dictate farm size. There are plenty of 40 to 60 cow dairies around us. There are also at least half a dozen 700-1000 cow dairies within a 15 minute drive from our farm. It’s your call on how many cows you want to milk. Anybody can buy as much or as little quota as they want. We are viable at 90kgs, and we have good help. Land base, labor and buildings are all a good fit at this size, so until our kids want in, I don’t have plans on a major expansion. Others do, and supply management hasn’t held them back. The key to making supply management work is that the correct market cues get sent to farmers, so that the supply meets the demand in the marketplace. Beyond that, it doesn’t matter where the supply comes from — from a handful of 60-cow herds like us, or one 600-cow dairy like our neighbor. Processors put in their orders, and we respond. The problem with a non-supply-managed approach to supply and demand is that subsidies are almost universally applied to help stabilize the industry during turbulent times. The trouble with subsidies is that they usually are in response to non-viable markets. A general rule of economics is that you get less of what you tax and more of what you subsidize. American dairymen are often caught getting all the wrong cues (chase the world market, increase production, etc.) Production discipline would be a tremendous help to make markets work properly, making federal subsidies, Dairy Margin Protection Program (MPP), the Cooperatives Working Together (CWT) program, etc. unnecessary.

CWT and MPP
Cooperatives Working Together was program created by dairy producer organizations and large dairy product companies like Land O’Lakes to reduce the milk supply in 2009 during a period of low prices. The program was the subject of a class action lawsuit alleging unfair trade practices relating to a controversial program where farmers were compensated for culling animals from their herds.

Progressive Dairyman: The original program included three components: a reduced production program to provide incentives for farmers to decrease production; the herd retirement program, and an export assistance program.

Under the herd retirement program, CWT announced invitations for dairy producers to submit bids to sell their dairy herds and cease milk production in an attempt to bring milk supply in closer balance with demand. Once bids were accepted, producers selling their dairy herds received the difference in their bid price and the actual price received for culled dairy cows on the date of sale.

Due to stressful economic conditions, there were times when tearful dairy producers begged to be accepted in the herd retirement program as a means to exit farming.


MPP or the Dairy Margin Protection Program is a USDA subsidy to dairy farmers that acts functions like an insurance program against low profit margins when US dairy markets are glutted and prices are low.

USDA: The Margin Protection Program offers dairy producers: (1) catastrophic coverage, at no cost to the producer, other than an annual $100 administrative fee; and (2) various levels of buy-up coverage. Catastrophic coverage provides payments to participating producers when the national dairy production margin is less than $4.00 per hundredweight. The national dairy production margin is the difference between the all-milk price and average feed costs.

The Plett family. Photo by author.

Supply management is not a government-run program. Sure, government trade deals impact markets, and we need to adjust accordingly, but supply management is administered by producer boards in concert with processors in terms of adjusting to the demand in the marketplace.

One mindset I just can’t fathom is the focus some dairymen have on being “big” rather than profitable. Supply management would prevent them from milking 10,000 cows, it is argued. Sure, it may slow them down, but who in their right mind would rather be unprofitable at 10,000 cows than profitable at 8,000 cows?! Instead of producing irrespective of market cues, and then hoping to find a market (more often than not dumping into the world market for next to nothing, and then needing stop-gap measures to help your industry), why not allow the market to dictate what the supply out to be? Telling people to drink more milk because you’ve produced far too much looks like putting the cart in front of the horse, from where I’m sitting.

Supply management does not mean Canadians pay more for dairy. Retail prices in Canada are very competitive with the US, especially after adjusting for the exchange rate. Supply management does mean that Canadian farmers get 100 percent of their revenue from the marketplace. Countries that favor undisciplined production have their consumers pay twice for dairy; once in the store, and once in their taxes. The $0.31/L Americans pay for subsidizing their milk through various programs is mandatory whether they decide to buy dairy products or not.

Lastly, in terms of entry, all 10 provinces in Canada have a New Entrant program. In Manitoba, as a first generation farmer, I have sat on our New Entrant committee for a number of years. We have a program where permanent, non-saleable quota is granted to new entrants with a viable business plan. We currently have 18 new entrants producing milk in Manitoba, and we are a small province with only 281 dairy farms. This program was created after I started farming, but many have benefited from it. So for those who are serious about dairying, there is more than one way to be a first generation dairy farmer in Canada. When we moved to the new farm, a new entrant bought our old farm. He has since moved to a larger farm as well, and yet another new entrant started there last month. It’s possible for those who are serious.

I would like to extend deepest sympathies to our dairy farming colleagues in Wisconsin and across the U.S. who have been affected by turbulent markets. We would love to see your industry thrive, and for you to have the rightful pride you ought to have in your livelihood. I would encourage every dairyman in the U.S., whether milking 30, 300, or 30,000 cows to look closely at implementing supply management. Why should farmers not have the same market power as other businesses do? Why not meet the market with the correct supply at a stable equilibrium price rather than depress your margins through overproduction? Why not consider why it is that other manufacturers don’t overshoot their markets with an excess of supply?

Supply management has a history of being a successful system to stabilize an industry in a way that benefits producers, processors, consumers, and taxpayers. It is the most realistic, and interestingly, non-interventionist approach to keeping our industry stable and predictable for future generations.

Further reading: Milking Scapegoats – Wisconsin dairy farmer Chris Holman sorts out the vicious cycle Wisconsin dairy farmers find themselves in.


[Please consider supporting Food and Farm Discussion Lab with an  ongoing contribution of $1, $2, $3, $5 or $10 a month on Patreon. All contributors receive a subscription to our email newsletter the FAFDL Dispatch. ]

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