Canada's Alice-in-Wonderland dairy sector has been defying the laws of economic gravity for decades. But the Canadian Dairy Commission – the federal politburo of milk whose diktats ultimately determine what consumers pay for cheese, ice cream and yogurt – has outdone itself by ordering the second price increase in less than a year amid declining milk-production costs.
No sooner had the CDC released a report showing that Canadian dairy farmers' average cost of production declined by 2 per cent on an inflation-adjusted basis in 2015 than the agency last week announced that it would increase the price of industrial milk by 2.76 per cent on Sept. 1. That's on top of the 2.2-per-cent hike in February, leading to an overall compound annual price increase of 5 per cent at a time when world milk prices are plummeting.
The world is awash in excess milk. A huge glut brought about by the end of European production quotas last year and slower consumption growth in China has driven prices down by as much as 50 per cent in the past few years.
That has led to big price cuts on dairy products at U.S. and European grocery stores, with U.S. consumers likely to see further savings as Wal-Mart enters the milk business in 2017 with the construction of its own processing plant in Indiana."By operating our own plant and working directly with the dairy supply chain … we'll further reduce operating costs and pass those savings on to our customers so that they can save money," Tony Airoso, Wal-Mart U.S.'s senior vice-president of sourcing strategy, said in March.
Don't expect any similar announcements on this side of the border. In Canada's supply-managed dairy sector, efficiency and productivity play second fiddle to ensuring stable returns for farmers no matter the costs to consumers. This regressive model hurts low-income families with children the most and deprives the most efficient farmers of the opportunity to expand production and exports. It is the economic equivalent of grading on a curve.
It's also one reason Canada produces about a third of what New Zealand produces. It exports 95 per cent of its production, totalling $13.5-billion N.Z. ($12.3-billion Canadian) in 2015, compared to Canadian relatively minuscule $210-million.
Granted, the recent turmoil in the global milk market has hit New Zealand farmers (and their bankers) hard. Milk prices have fallen below production costs for many farmers and, with so much of the national economy tied to the dairy sector, the entire country is feeling the pain.
Still, no one would argue that the solution to New Zealand's current woes would be to adopt the Canadian model, no more than they would argue that Canada's oil sector should avoid the boom-and-bust cycle by embracing supply management and forgetting about the export market.
Besides, becoming a global dairy powerhouse has been profitable for New Zealand. Even at current depressed levels, its dairy exports are still five times higher than they were in 1992 and New Zealand has leveraged its expertise to become a locus for dairy innovation and biotechnology.
Even Europe has abandoned supply management in the dairy sector. Last year's abolition of production quotas has been disruptive, with milk production surging 18.5 per cent in Ireland and by smaller amounts among the most efficient producers elsewhere on the continent. That, along with a Russian embargo on European dairy products imposed in retaliation for European Union sanctions, has contributed to the major drop in market prices globally.
Just this week, the European Commission announced its second €500-million ($719-million Canadian) aid package in less than year to help dairy farmers adjust. The plan includes €150-million to entice less efficient farmers to voluntarily reduce their milk production.
"More focus must come on the supply side," EU Agriculture Commissioner Phil Hogan said just before announcing the plan. "But let me be outspoken on one thing: A reintroduction of the milk quota, [even] on temporary basis, is politically not an option and legally not possible."
Markets are messy. But the long-term impacts of ignoring price signals are far costlier than the short-term disruption caused by supply and demand imbalances. The Organization for Economic Co-operation and Development estimates that supply-management cost Canadian dairy consumers an extra $26-billion in the decade to 2011 alone, with the poor bearing the brunt and a less efficient dairy sector the result.
Think about that the next time you order a scoop of Triple Chocolate Truffle at Laura Secord or pick up a tub of Astro Original Balkan Style yogurt at the supermarket. It's to cry in your cereal.