Export program gains ground with Ontario dairy farmers

by DON STONEMAN

Conklin and Fennell farm near Spencerville, about half an hour's drive south of Ottawa. Until about 10 years ago, Conklin was in the cream business. He sold his quota as part of a division of assets when his first marriage broke up, took a job off the farm and raised heifers to keep his hand in.

Now Conklin is married again and, even though the new couple held down two jobs, they still couldn't afford to get back into dairying. "We both worked full time and couldn't cash flow quota," says Jacqueline Fennell. The dairy quota market fluctuates, but generally remains high. For the last couple of years, the cost of quota to market the production from 20 cows has been roughly $400,000. "It was totally out of reach for us."

Conklin and Fennell have been selling milk to PurNutra Inc. since the company started producing special high fatty acid cheese last fall. "We were looking for an opportunity," Fennell says. Farmers own the company and Fennell is the secretary of the board. Their production remains modest. As winter turned to spring they were milking 25 cows, down from 29 in the fall when cheese demand peaks.

PurNutra is one of the Ontario dairy-processing companies which offers to buy milk from farmers on a third party exchange which is separate from the provincial marketing board that has handled all cow's milk produced in Ontario since 1965. A dairy producer promises to ship a certain number of litres of milk daily specifically for that export market. That milk is "first out of the tank" and is made into products that are sold outside of Canada.

The farmer must also keep up obligations to meet their quota production, the milk that is made into dairy products consumed domestically. Most of the farmers who ship milk on export contracts also produce for the domestic market. Conklin and Fennell are exceptions. There are about 30 licensed producers in Ontario who, like them, ship milk strictly for export.

Not all dairy farmers like export contracts, let alone make use of them. Still, love it or hate it, the export program is gaining ground in Ontario.

Dairy Farmers of Ontario directors are loathe to comment on the export program. In February, the United States and New Zealand formally asked the World Trade Organization (WTO) to set up a compliance panel to scrutinize how Canada handles its dairy exports. It's likely to be next January before a final decision is reached and before arbitration is completed in the event that Canada loses.

Canada has been fighting a running battle with trading partners over its export policy. A WTO trade panel found that a previous system in Canada, which involved setting a separate price for export milk, was subsidizing exports. The reason? The milk was produced and sold through the provincial marketing boards which were deemed by the WTO to be part of government. The answer? A professional management firm acts as a third party to handle contracts.

Rick Phillips, policy analyst for Dairy Farmers of Canada, is confident that Canada will win this panel decision. If Canada has to change its export marketing this time, so will the United States and New Zealand, he says.

One-third for export
Out in the countryside, exports appear to be gaining strength. The commitments vary from farm to farm. Corwic Farms, Norwich, Oxford County, is exporting between five and 10 per cent of their production from 200 cows. "It's small potatoes for our farm," says Howard Cornwell, who farms in partnership with his brothers. "It's not a big part of our livelihood," he says. "Quota is still the way to go."

A few years ago, the Ontario dairy industry switched to a daily quota system that is sometimes challenging for producers to manage. A system of credits allows a producer to fall a little behind or to go ahead of the daily shipping requirement. Cornwell sees the export market as a useful tool to "buy back flexibility" in that credit scheme. "I don't know anybody who is in it in a big way," he says.

At Brownsville, also in Oxford County, Chris Buchner and his brothers expanded their operation to about 250 cows when dairy quota prices fell to between $13,000 and $14,000 a kilo a couple of years ago. Chris says he considered exporting as a stepping stone between barn building and buying quota, but found that there was nothing to be gained. He says his operation's costs are likely higher than average with the new building.

There are rumours in the industry that farmers have sold some of their quota to ship on export contracts. Buchner wouldn't do that: There are too many uncertainties. "Selling quota to export scares me," he says. "It's like killing the goose that laid the golden egg."

On Nyoline Farm in Prince Edward County, Gerald and Marg Nyman haven't sold any quota. They just haven't bought it as fast as they have increased production. They milk 85 cows at a time in a new tie stall barn. Gerald figures that about one third of production is going to export. "We're not going to get filthy rich on it," he says. Nyman got into the dairy business a bit at a time, buying quota in 1985 and milking other farmers' culls in a rented barn while buying all the feed and driving a truck full time. After four years, he started renting land to grow feed as well.

"We've always over-shipped," he says. "We've always filled quota to get the fall incentives (the opportunity to sell even more milk when demand is highest in the pre-Christmas cheese-making season)." In April 1999, Nyman began building a new barn. "It took a while. We did it ourselves."

On his export milk he is getting between 30 and 31 cents a litre. With higher protein and fat components, his returns are about 1.25 cents per litre above the average price. As far as he is concerned, he is further ahead selling milk for export than carrying a debt load for quota. "If you figure out all the costs, you won't average more than 25 cents over 10 years on that milk," he says. Nor does he see that there is any more labour involved with the extra cows. "I'm here anyway. We might as well milk them."

Arranging an export contract isn't that hard, he says. "You just pick up the phone and dial in."

It's way easier than the original system that the milk board had set up, Nyman says. Calls go to a call centre managed by professional services firm Deloitte and Touche. "They are quite willing to make it work properly and keep everybody happy."

He gets a separate check for his export milk from Deloitte and Touche at the end of May for milk that was shipped in April. That cheque comes about a week after his regular milk cheque from Dairy Farmers of Ontario. Nyman ships 750 litres per day on contract and notes that you have to be careful not to short yourself on your quota. "We make sure all the stalls are always full." All of the heifers are calved and go into the milking string. If there are too many fresh cows, "we sell them."

Keeps quota price down
In Essex County, Dan Diemer has been using exports to fuel his expansions. He says it's easier to buy onto a barn, buy cows and start to milk them, then go to the bank to borrow money to buy quota.

He and his wife Stacey milk 100 cows at a time and ship about 150 litres out of 2,500 produced daily to export contracts, which they renew monthly. When Diemer applies for a loan to finance a quota purchase, "you can tell the banker the milk is already flowing," he says.

Is this going to help inflate the price of quota? Diemer thinks not. "If anything the export market will keep the price of quota down" because it takes some of the edge off demand, he figures.

Diemer points out that at a 10-year payback for a quota purchase at eight per cent interest, a farmer gets only 25 cents a litre for the milk he sells into the domestic market. "I can get an export contract for 32 cents right now."

Will Diemer keep on expanding? He says he has stalls for 114 cows. "At that point we will decide if we want to build more buildings or stay where we are."

Not all farmers are keen about export. Doug Murphy of Prince Edward County worries about the potential threat to domestic markets. Export milk is considerably cheaper than milk produced for the domestic market - about 30 cents per litre as compared to about 59 cents for milk that is produced within quota. Murphy argues that processors can't help but be tempted by the cheap milk and try to ship it into markets in Ontario, displacing markets that are legitimately being served by farmers with quota that they own. "As long as they can verify it isn't staying in the domestic market," Murphy doesn't have a problem.

Not all farmers are as willing to talk about producing milk for export as Cornwell, Nyman and Diemer are. David Tyers, owner of MilkTrade, an Oakville-based brokerage firm, says that 13 farmers he deals with have no quota holdings, but he was reluctant to help arrange an interview. Most of them want to keep a low profile, he says. He says they tend to be younger farmers who can't afford to buy quota to sell into the domestic system.

Diemer, Nyman and the Cornwells know what their costs are and have strategies in place so that they benefit from shipping export milk on contracts. Export milk isn't for everybody, says Bradford-based Dave Rose, agriculture manager for the Canadian Imperial Bank of Commerce. Just because your neighbour says he's making money at it doesn't mean that you will, Rose says. "It's uncertain at best. We don't know how long it will last."

Shipping export milk will work as long as you don't add any fixed costs, such as a building, Rose says. He points out that dairy companies are making money by using up their surplus processing capacity. Farmers have to think the same way, he says.

The enterprise analysis figures that the provincial agriculture ministry has put together indicate that producing milk costs $41.40 per hectolitre without paying off any debt or paying taxes. "We aren't seeing any contracts at $41," Rose says. If you have quota and surplus cows and feed, the export market looks all right, he says. It's not going to work if you have to buy either feed or cows, or if you have to hire labour.

When you convert the $26-$31 price per hectolitre to American funds, it works out to between $6 US and $8 US a hundredweight. That's a price level that American farmers find disastrous, Rose says. "If American farmers aren't excited about these prices, I don't know why Canadian farmers are."

As for shipping milk totally without quota, Rose has a lot of questions to ask. "Would you want to do it? I don't think there is a lot of future there."

Dark cloud overhead
A number of producers that Better Farming spoke to mention the 25 cents per litre as the residual left to pay the bills after a farmer bought quota. Brian Lang, a dairy technology transfer and planning specialist with the Ontario agriculture ministry, has calculated the carrying costs of an eight per cent loan for a kilogram of quota at about 31 cents. Subtract that from 59-cent milk, then take away transportation and other marketing fees, and 25 cents is about what is left, Lang says.

He agrees with Rose that the choice of buying quota or selling milk to an export contract depends on a farmer's personal economic situation. There's also the question of what trade issues might do to quota prices. Another round of WTO talks is just around the corner. "If you assume that (supply management) will go on as it is, you may be more interested in buying quota," he said.

The American and New Zealand challenge to Canada's export system hangs over it like a dark cloud. Rose thinks that "chances are good" that Canada will come through this WTO GATT challenge with its export system intact "and believes that other countries will model their systems after ours." But Lang refuses to speculate. There is no point, he says.

Meanwhile, Spencerville's Fennell is optimistic about the future for dairying and not just for exports. She's quit her job at a local bank to have more time on the farm. She and Conklin have rebuilt a 15-year-old barn and added a new milk house. A new feed house will likely be the next step.

PurNutra, the company they ship to (and own shares in), recently received permission from Dairy Farmers of Ontario to begin producing dairy products for sale inside Canada. That production would come from within quota milk.

Are they interested in taking part in the domestic market? "We would love to buy quota at some point," Fennell says. But first, they want to build that feed house. BF

No quota breaks for chicken growers

by DON STONEMAN

Posthuma points out that, unlike in dairy, only quota holders can raise chicken for export. Second, farmers raise chicken for export "on margins," he says, and the margins are thin. The effort is worthwhile only if the grower has surplus space that would sit empty otherwise. "The fixed costs remain the same, only the variable costs change," Posthuma says.

Fixed costs include building a barn. Variable costs include chicks, medication and feed. "It makes sense to do a little bit of export for some people," says Posthuma, but under this export program he never expects to see anyone build a chicken barn strictly to meet export markets. As with export milk, chicken grown for overseas markets is the first out of the barn. Domestic requirements must be met afterwards.

Exports are useful to the industry because they help the Canadian industry produce for its domestic market, Posthuma says. "Consumers want white meat and the wings." It's tough to find a home in Canada for dark meat from the back and legs. However, export markets want the back and the legs. Therefore, exports allow growers to produce more of the highly saleable white meat for sale in Canada, while shipping the dark meat out of the country.

Even if a certain number of a grower's birds are destined for export, the white meat will likely stay in Canada. "Part of his production is domestic. You can't separate the two," Posthuma says.

The difficulty in separating domestic production from export production begs the question: Does this program comply with World Trade Organization rules?

"That's a very good question," Posthuma says. "At the end of the day, the only way you really know is if it is challenged." He notes that when the chicken export program was launched in March 1997, the federal department of trade said it was fine at the time.

But the federal government said the same thing about Canada's dairy export policy. Since then, dairy's export program has been challenged, found to be in violation, revised twice and now faces a second challenge before a WTO panel.

Posthuma doesn't think the provincial marketing board can be mistaken for government. He sees the provincial board's role as "a facilitator, rather than a regulator." Chicken Farmers of Canada is a step further away from producers, but still not a branch of government, and audits the system, making sure that chicken produced cheaply for export doesn't stay in the Canadian market.

If the United States decides they don't like our chicken exporting policy, it's because it's a dog in a manger. The United States refuses to trade with Canada's major chicken buyer, Cuba. In recent years, Cuba has purchased slightly less than half of Canada's annual planned chicken exports. In order of volume of sales, other customers are South Africa, China, the United States, Russia and Poland.

In 1999, the last year with complete records, Canadian chicken processors committed to sell 33.4 million kg of chicken overseas, with six million kg coming from Ontario. Exports were a small part of the total production of 838.5 million kg.

In 2000, farmers raised 874.3 million kg, a 4.3 per cent increase over 1999. Export commitments were 34.6 million kg, with Ontario contributing 5.1 million kg. At press time, Agriculture Canada still hadn't released totals on export figures. The "committed" production is only part of total chicken exports. Canada exported a total of 62.5 million kg in 1999. (No figures are available for 2000).

Export tonnage includes products such as skins, chicken fat and other products for which processors find markets from their regular production, says Chicken Farmers of Canada.

When processors commit to export a certain amount of the chicken, it must leave the country. Egg exports are no advantage either, from the producer point of view. Nor are egg exports threatened by a WTO ruling, says Laurent Souligny, chairman of the Canadian Egg Marketing Agency. When the dairy industry lost its first challenge, the egg industry moved to make certain that it was WTO compatible, he says.

Eggs are produced in Canada under two prices -- one for table eggs, the other for processed eggs. Laurent says growers get the same price for processed eggs regardless of whether they are consumed in Canada or exported. Not much leaves the country, and the little that does mostly ends up in Asia.

"The important thing is that we have only one price for processors," Souligny says. He expects that will protect Canada's egg industry if trading partners are ever disturbed about sales into their markets from Canada. BF

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