Sylvain Charlebois is professor at the Food Institute, University of Guelph
Canada can compete in dairy globally, but it certainly will not be easy. In light of the giant Trans-Pacific Partnership trade deal, many wonder whether the Canadian industry can actually pull this off in the long term.
More market access for foreign-based milk products means Canadian consumers will increasingly have choices. Crucially, dairies will need to acquire an acute knack for recognizing opportunities abroad and capitalizing on them, something they have never had to do.
Milk is a tricky commodity. The average cow produces up to 30 litres a day, and so dairy logistics, branding and distribution efforts need to be seamlessly synchronized.
A few Canadian industries over the years have clearly embraced the global marketing challenge. One is the wine industry – despite our domestic differences and strict regulatory framework, wine has done quite well with trade in recent decades.
Global competition in the industry is unmerciful. Despite the fact that U.S. wines have not been subject to import tariffs for several years as a result of the Canada-U.S. free-trade agreement, our wine industry is still thriving. Despite competing against major global players such as the United States, France, Italy, Chile and Australia, Canada's wine industry is internationally recognized, fostering excellence while garnering an impressive list of major awards on all continents.
Amid rising systemic threats, the wine industry sought out better technologies while maintaining good practices and focusing on quality. The industry committed to doing what it does best – low-to-medium-priced table wine, mid-to-premium-priced branded wine and, of course, ice wine. Vertical and horizontal integration plus higher production capacity play a significant role in the industry's persistence, and it has done it almost without any subsidies.
Even though it is always risky to make commodity-based comparisons, some valuable lessons can be conceptually juxtaposed onto what our dairy sector is about to face over the next few decades.
It is easy to find not-so-great case studies for making the paradigmatic shift from supply-focused to outward-looking management. Parts of Europe, such as France and Britain, are reeling from the reality of ending their dairy quota systems after a 13-year transition. Opportunities to reconfigure were clearly missed.
When it comes to competitiveness, difficult decisions are warranted. Some farmers simply cannot and will not compete. With the diverse nature of Canada's domestic market, hobby farms with fewer cows will always have a place, but a broader, more aggressive model cannot afford to support many of them financially. Provisions should be made to encourage some to exit.
In processing, farmer-owned co-operative Agropur and dairy giant Saputo, two companies that appeared to have hedged against future supply management by investing internationally, are poised to support farmers better in an open market. More innovation – like we have seen with the Dairy Farmers of America, which has just released a milk-based energy drink with no caffeine – is likely to be leveraged by lower input costs. And dairy processing will likely gain from more market access, which will eventually help Canadian farmers. Since consumers are increasingly concerned about where their food comes from, and Canadian milk has currency in our country, processors will think twice before switching suppliers.
But to compete, dairies will need to think globally as well. New Zealand has an interesting model with its private marketing board, a dairy co-operative called Fonterra. Such an approach has made New Zealand the largest dairy-trading country, and has become the envy of many. With abrupt milk price fluctuations, Fonterra has had its highs and lows, of course – but mostly highs.
But New Zealand is not Canada. Our climate and geographical disposition against the United States puts our dairy sector in a much weaker position. Additionally, unlike New Zealand, Canada is not close to emerging markets such as China, Indonesia and Malaysia.
The fact that New Zealand has its first trade deal with Canada under TPP is certainly not a problem for Canadian dairies. Many possibilities are logistically within grasp for butter fat, milk powder and specialized products. Partnerships are desirable for the future, including international alliances. World-class processors in dairy and other sectors would be attracted to Canada for its ability to make unique, world-class milk. But a solid campaign abroad will be needed.
Since its inception more than 40 years ago, supply management has offered an interesting legacy. On one hand, we have a crop of professional and resourceful producers who run efficient operations throughout the country. However, Canadian dairy farms are not as productive as their counterparts abroad – far from it. According to a recent German-based study, Canada's average cost for milk production is the second-highest in the industrialized world, after Switzerland. The Canadian cost to make 100 kilograms of milk is $72 (U.S.) versus $35 in the United States. This is likely Canadian dairy's biggest challenge. The gap needs to be narrowed and the only way to do so is economy of scale. Building competitiveness will be key to moving forward.
Like wine producers in years past, dairy farmers can compete – they just need to embrace the opportunity.