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A row of cows are hooked up to milking machines in the Armstrong Manor Farm milking parlour on November 17, 2010.

JENNIFER ROBERTS/jennifer roberts The Globe and Mail

Buying a litre of milk sounds simple enough, but figuring out how the price is set isn't easy.



Canada's dairy industry is among the most complicated in the country, involving layers of government agencies who manage supply. While the farm price of corn, wheat and canola can be tracked regularly on commodity markets, milk is different.



The system dates back more than 40 years and evolved largely to protect dairy farmers from food conglomerates. Today the Canadian Dairy Commission and provincial marketing boards regulate the price paid to farmers and control the amount each farmer produces.

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The farm price for dairy products is determined by a range of factors, including production costs and consumers' ability to pay. Prices vary depending on the product and its composition, ie the amount of butterfat and protein it contains.



Production is controlled by a quota system. Any farmer who wants to produce milk must have a quota. They were free in the early days of supply management but not any more. The price for one quota, essentially one dai ry cow, has jumped from an average of $16,000 in the 1990s to more than $20,000 today. In some provinces a quota can cost more than $30,000. Considering that a typical dairy farmer has about 70 cows, that's roughly $2-million worth of quotas. Critics say high quota prices make it impossible for new farmers to enter the business.



Several studies have argued that the supply management system pushes up dairy prices for Canadian consumers. A recent study by the Conference Board of Canada estimated Canadians pay 60 cents more for a one litre carton of whole milk than Americans and $1.50 more for a one-pound package of butter than Australians, which has a deregulated dairy system. The OECD estimates dairy prices in Canada are more than double the world market.



Canada's system also restricts imports by imposing stiff tariffs on some dairy products. There are some notable exceptions. The Conference Board noted that Canadian food processors who make products for export are allowed to buy some dairy inputs at U.S. prices, which are generally lower than Canadian prices. For example, a Canadian company making frozen pizzas that compete with U.S. imports can buy cheese at the U.S. price, while a local pizzeria making fresh pizza for home delivery must pay the price set by the supply management system. The difference is about double, the Conference Board said in a study.



Dairy organizations argue the Canadian system is efficient and that nearly every other country, including the U.S., protects its dairy industry. They say that's because of the unique nature of these products.



Unlike other agricultural commodities, dairy products like milk, butter and cheese can't be stored for very long. As a result, the vast majority of dairy production remains within the country where it was produced and any extra is dumped on world markets at cut prices. Australia and New Zealand, which got rid of supply management, are unique because they produce more dairy products than they consume and rely on exports.



These groups also argue that by several measures, Canadian retail dairy prices are competitive. An analysis by the Dairy Farmers of Ontario shows that New Zealand has the highest retail price, at $5.69, for a four-litre size package of milk. That was followed by Ontario at $4.66, Britain at $3.57 and the U.S. at $3.38.

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"So, when you compare honestly, Canadians pay fair retail prices, Canadian dairy farmers get a fair share and the Canadian government does not subsidize milk a penny," says Bill Mitchell, a spokesman for the organization. "That's why Canada is keeping its milk marketing system - because it works."

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