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economic insight

A glass of milk is seen in this file photo.Okea/Getty Images/iStockphoto

Here is a pop quiz. What highly prized liquid commodity has seen its global price decline by half in recent months, despite rising world demand? Hint: the price is falling because of increased supply caused by rising production by the strongest suppliers, plus technological change. The result is excruciating pressure on suppliers to reduce costs, but tremendous benefits to consumers, who now have more money in their pockets to spend on other things.

If you said oil, you were close, but no cigar. Further hint: the commodity in question is white, not black.

The answer is milk.

Canadian readers might be forgiven for not knowing, because Canada has been spared exposure to this consumer boon and burgeoning world market for dairy because our domestic market is virtually closed to such global influences.

I was a restaurateur a few years ago. In the decade I was in the business, the one indispensable commodity that not only never declined in price but, on the contrary, rose inexorably and steeply year after year, was dairy, which is subject to "supply management."

That means that dairy farmers form a legally sanctioned cartel, deciding how much will be produced and by whom. Not surprisingly, they do so in a way that keeps prices high and rising. Prisoners of this backroom-managed and state-sanctioned larceny, Canadian consumers might be forgiven for thinking that falling dairy prices are a bit like unicorns and sasquatch: oft-described but never seen.

Europe, however, has recently got rid of quotas designed to protect domestic markets and "manage" supply, and therefore of prices in favour of farmers. As a result, on April 1, the day the European Union binned milk quotas, the average winning price on the Global Dairy Auction fell 10.8 per cent.

Supermarket price wars are driving down the price to consumers, capturing the benefit for them rather than for food processors, wholesalers or retailers.

In Britain, prices have reached their lowest level in nearly a decade, with one retailer selling four pints of milk for 89 pence (or 2.25 litres for about $1.80). According to the Guardian newspaper, milk in the U.K. is now cheaper than water.

Considering that the British consume more than 5.2 billion litres of liquid milk a year, with another six billion going into dairy products such as cheese, butter and dried milk powder, themselves components of many other food products, the benefits to consumers of such price declines can hardly be overstated.

Canadians might assume that European farmers would be universally opposed to such Darwinian capitalist savagery. Not a bit of it. As one would expect, the strongest producers who have low costs of production are looking to increase their market share. The German national farmers' association DBV said, with distinctly un-Canadian enthusiasm, "The end of quotas brings more freedom for commercial decision-making about how much milk to produce, gives more responsibility for developing your own farming company, but also more fluctuations in milk prices."

The Irish Farmers Association enthused that the ending of quotas would create 9,500 extra jobs in Ireland, and upward of €1.3-billion ($1.9-billion) in annual additional export revenue.

Belgian dairy farmers, by contrast, staged mock funerals for their industry and, in a knockoff of last summer's "ice-bucket challenge" in support of ALS research, some European farmers are drenching themselves in milk in online videos to underline the pain of low prices. Happily for them, their commodity is not flammable; oil producers should not try this publicity stunt at home.

One reason for the enthusiastic embrace of competition by some European dairy producers is the progressive emergence of a worldwide market for dairy products. This is where technological change enters the picture.

There has long been a world market for some relatively long-lived dairy products such as butter and cheese. Fresh milk, however, being highly perishable, has tended to find its markets more localized. No longer.

In Uganda, where refrigeration and electricity are both in short supply, a litre of milk has an effective life of a day; a quarter of the country's dairy production is lost to spoilage. A worldwide refrigerated supply chain plus pasteurization and ever-more sophisticated packaging can make fresh milk last as long as three weeks, an object lesson in how energy intensity improves human well-being.

Of course, ultra-high temperature pasteurization (also energy-intensive) can allow room-temperature milk to last months, but it is a product not nearly as highly prized as fresh milk. Combine such technological progress with trade liberalization and consumers everywhere benefit from more diverse and cheaper dairy products.

Canadians, on the other hand, can thank their lucky stars that all their main political parties are committed to preserving supply management and thus keeping Canadian milk drinkers safe from low prices, and our most competitive dairy farmers from supplying world markets. Two cheers for democracy.

Brian Lee Crowley is the Managing Director of the Macdonald-Laurier Institute, an independent, non-partisan, public-policy think tank in Ottawa.

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