Dairy: Wanted: a more flexible pricing system for industrial milk

Tuesday, April 1, 2008

Dairy officials are looking for ways to reconcile support prices with anticipated world trade proposals, while still taking account of the production costs of the most efficient operators

by SUSAN MANN

Dairy Farmers of Ontario (DFO) agrees with its federal counterpart and the Canadian Dairy Commission (CDC) that the way industrial milk is priced must change.

Each December, the CDC announces the new butter and skim milk powder support prices, which are then implemented on Feb. 1. To set prices, the CDC consults with farmers, processors, retailers, restaurateurs and the Consumers' Association of Canada. Industrial milk returns for farmers are based on those support prices and are set by provincial milk boards.

Commission chief executive officer John Core told the DFO annual meeting in January that support prices shouldn't be driving industrial milk prices. Those comments werereiterated by Jacques Laforge, president of Dairy Farmers of Canada.

Processors agree. "The industry needs to find a better way of pricing to be market driven," says Don Jarvis, president of the Dairy Processors' Association of Canada, which represents all the major dairy processors across the country.

The feeling is that the current pricing system may lack flexibility because price increases are made fairly automatically, says Chantal Paul, the CDC's communications chief. "Maybe it's time to look at another way of doing it that gives you flexibility to increase, for example, the price in one class more than the price in another class."

The formula being used by the CDC isn't totally being followed, because farmers and the CDC wanted to ensure that the most efficient 50 per cent of producers recovered their costs of production. That goal has now been reached, says DFO chair Bruce Saunders.

"The formula we had been using since the mid-1990s had to be somewhat tweaked in order to arrive at that goal," he explains. "That formula is no longer functional."

In addition, with a potential new World Trade Organization deal, the industry may not be able to have a support price for both butterfat and skim milk powder in the future.
In the current talks, there's a proposal to halve the aggregate measure of support, which is the difference between the domestic price and the world price, Saunders says.

The industry isn't happy with this proposal, but it believes measurers can be put in place to deal with it. One of the ways to overcome it is to "make skim milk powder competitively priced with world product," Saunders explains. "But if you have skim milk powder, which is currently supported by the support price, at world price, then it's no longer a support price."

The question then becomes how the CDC can set the price in future and still fulfill its mandate of recognizing the production costs of the most efficient dairy farmers?
No meetings have been held yet to discuss proposals, he notes. But the CDC would like a new pricing system in place by late fall of this year.

Planning and discussions have to happen now. But, before any pricing changes are implemented, federal regulations may need to be changed. Saunders says that changes will likely have to be made to the CDC Act, but he didn't think any changes were required to provincial regulations. BF