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The Canadian economy would gain $1.2-billion a year and as many as 8,000 new dairy jobs if the industry was freed to pursue rapidly expanding dairy markets in Asia and Africa, the report says.Serhiy Zavalnyuk/Getty Images/iStockphoto

Canada's dairy industry faces a grim future of stagnant sales, dwindling farms and lost opportunity if the country remains a bystander to a global boom in milk products trade, the Conference Board of Canada argues in a new study.

But it doesn't have to play out this way, the think tank concludes. Trade can both save the family farm and lift the overall economy, according to a chapter released Monday from a major new examination of the 1970s-era supply management regime.

The Canadian economy would gain $1.2-billion a year and as many as 8,000 new dairy jobs if the industry was freed to pursue rapidly expanding dairy markets in Asia and Africa, the report says.

The hitch, of course, is that those markets are largely out of bounds because of the way the country runs its domestic dairy industry. The highly regulated prices paid to Canadian farmers for their milk under the supply management system are deemed subsidies under World Trade Organization rules. "Until the industry is positioned to capture this growth, it will continue to tie itself to a profit creation and distribution system that results in stagnating dairy product sales, low employment, fewer dairy farms, higher debt and fewer cows," according to the study.

More worryingly, Canada is losing ground by doing nothing, the study points out. Canadian dairy farmers are sacrificing $1-billion a year in lost revenue, displaced by cheaper imported dairy ingredients and substitution from oil-based products in everything from ice cream to yogurt, the study says. Every year, the industry loses 9 per cent of its farms.

Dairy imports alone now account for 15 per cent of the Canadian milk market – lost share worth $440-million under "an extremely conservative estimate." The surplus milk that Canada currently produces is essentially wasted, put into cheap animal feed instead of "feeding Chinese babies," the report points out.

Dairy Farmers of Canada, the main lobbying organization for the country's 12,500 dairy farms, refuted the study's basic conclusion – that Canada can compete in global markets. The cost of getting rid of supply management "will always surpass by several folds the assumed benefits of allowing a few to compete in the most price-volatile market of all agricultural products," executive-director Richard Doyle said.

But the Conference Board says the world is changing fast, making the export case undeniably compelling. By 2022, global demand for butter, cheese and milk powder is expected to grow by 22 per cent, 11 per cent and 13 per cent, respectively, according to the Organization for Economic Co-operation and Development and the United Nations Food and Agriculture Organization.

At least two of the world's major dairy exporting countries – New Zealand and Australia – are facing capacity constraints because of factors such as high feed costs and drought.

Relatively low shipping rates from Canadian ports on the west and east coasts make exports to Asia viable, the report found.

The Canadian industry has a lot of room to grow. In 1980, Canada produced 14 per cent more milk per capita than the U.S. In 2011, Canada produced 21 per cent less.

But the industry would have to change, the Conference Board acknowledges. Farms would have to grow larger, from an average of 76 cows now to near 200 cows, in order to become more efficient. The report pointed out that a farm of that larger size would still generate revenue on par with a Tim Hortons franchise – still relatively small. The average U.S. farm has 187 cows. Existing larger Canadian dairy farms, the study says, are "relatively efficient" compared to their U.S. peers.

The report was written by Conference Board research director Michael Grant, director of policy research Vijay Gill, University of British Columbia economist Richard Barichello and researcher Mark Liew.