Industry Issues

An update on Canadian dairy trade and ingredient processing

Letter of Concern to Standing Committee on Social Policy regarding the Proposed Clean Water Act

Open letter to the dairy industry

At What Cost P5 Quota Exchange Harmonization?

Background

The Dairy Farmers of Ontario (DFO) board has explored the possibility of improving the governance of dairy marketing institutions through harmonization within the P5 Pool. The prospective benefits of improved governance in marketing are

•  More coordinated and expedited decision making

•  Lower cost of service to producers, and maybe improvements in service

DFO has recommended that in order for progress to be made within the P5, broad harmonization must occur. Among the items yet to be harmonized are quota exchange policies; interprovincial trade in quota is not currently on the table. What is proposed is a uniform P5 quota exchange policy similar to that currently in operation in Quebec .

How it Would Work
Under Quebec quota exchange rules, a cap is placed on the price of quota traded through the exchange. This cap is ratcheted downward over time toward a target quota price. Provided that the volume bid for exceeds the volume offered, producers offering quota to sell face no risk of lost sales by offering quota at the cap price level-quota buyers can enter bids at or above the price cap; bids below the price cap will not be filled. There is no "pay what you bid" provision to the exchange mechanism, and bidders that register higher bids above the cap get no more priority. There is also a provision which allows purchased quota to be "banked" or leased out for up to one year prior to use. In the typical case where bids exceed offers, the total quota offered for sale will be sold at the cap price.

The volume of quota offered is allocated as follows. The first 50% of quota offered is allocated to registered bidders evenly according to individual license holders. The second half is allocated to fill actual bids up to 10% of current quota holdings. For example, if the cap in a given month was $27,000/kg and 400 kg was offered and 800 kg was bid for, then 400 kg would be transferred from sellers to buyers at $27,000/kg. Of the 400 kg traded, 200 kg would be split evenly among license holders registering bids, and the balance would be allocated to fill individual bid volumes, up to the 10% cap on individual quota holdings.

Implications
Under the above mechanism, the quota exchange mechanism would cease to be a competitively driven auction system. Where bids chronically exceed offers, the volume exchanged would be entirely driven by the volume of offers; no meaningful interaction between supply and demand would occur. Similarly, no competitive mechanism would exist to allocate across the competitive priorities or relative profitability of quota purchasers. Put differently, anyone who wanted quota would rationally register a standing bid every month, and would be allocated whatever his or her share ended up being. For producers needing significant blocs of quota, this exchange mechanism would seem to drive them toward purchase of whole herds and/or existing dairy facilities, with capitalization effects that can be anticipated.

Questions Producers Should Ask Their DFO Representatives
Progressive Dairy Operators, through its educational activities, has advocated for a more efficient and profitable dairy industry for producers. By turning the quota exchange into an essentially dysfunctional institution, it runs counter to this objective. We encourage producers to take very seriously this prospective change, and be proactive in asking questions of their DFO representatives.

•  Is it really necessary that quota exchange policy be harmonized when quota will not be interprovincially traded anyway?

•  Has DFO staff estimated the cost of this change to Ontario producers?

•  What measures of value exist of the benefit of overall P5 harmonization?

•  What objectives have been set in place for this quota exchange policy? How will we judge whether it is a success or a failure?

•  Why do we need to adopt the Quebec exchange model? Isn't there an opportunity here to consider entirely new ideas and alternatives?

•  How will this foster the growth in the dairy industry that the DFO board says it advocates?

•  Put a number value on the savings that one quota exchange would have to make on a hl basis for it to be worthwhile

•  Will you trade off efficient development of the producer side of the dairy industry to promote "equity" in the distribution of quota?


Working Together to Supply the Canadian Market with Canadian Milk 

Andy MacGillivray, CEO and President, Gay Lea Foods 

Presented To: The Southwestern Ontario Dairy Symposium, February 22, 2007 

When Jack invited me to speak at your dairy forum, we agreed on a topic "Working together to supply the Canadian market with Canadian milk." But when you break it down and think about it, what is the real root of our problem? Is it our ability to supply? Is it our quality? Why is it then that we need to have a discussion about working together and about supplying our own market? I fear that our problem is our attitude.and our perspective!

If it was as simple as a single variable - like price - surely we would have fixed that. But I think it is much more complicated - and that is what I want to talk about today.

Some of you have heard me before with this theme - so I apologize if it's a repeat, but I'll try and update it as best I can.

How many of you remember or were wild enough to remember George Carlin and his infamous."7 dirty words that you can't say on television?"

If you never heard of it, this headline will help - Court Bans '7 Dirty Words.'

George Carlin's words were so "bad" that they were banned and certainly couldn't be used on television. But really, these words were just a commentary on the issues that America was facing at the time.

You know.we have some issues. And you know, sometimes I feel like George Carlin - sometimes we all must feel like George Carlin - it's as if we are using dirty words when we talk about what we need to do to build a dairy industry of the future. It's as if certain words have been banned from our vocabulary and our daily actions, and in our policy sessions. It's as if we can't address the real issues.

It's time to change that and so my theme today is going to focus on our attitude.our orientation. I'm going to give you the 7 dirty words that we must face and begin to embrace if we are to build a successful future.

I'm stealing from George Carlin - at least partly - to give you the seven words that we need to say in order to build our future.

Now, just like George Carlin in the 70's, I have to give you a language warning - some of these words may offend - These words are intended for a mature audience - all of these words must be faced and become part of our vocabulary if we are to build the future that we are capable of.

And, in the spirit of George Carlin, I'm going to start with a couple of his very words.because in fact they apply today.

SHIT - Just like Carlin, it's first on our list. We are in shit - our industry is in a crisis - we must face it! Consumption and consumer demand is weakening. Per capita fluid consumption is down 14% over the past 10 years - the largest category in the grocery store. If this was the soft drink industry, they would call it a crisis. Meanwhile, competing categories like juices and water - stealing our health position - have shown significant gains.

Over the past several years, we have lost a significant percentage of the ice cream ingredient market.

The same thing is beginning to happen on pizza.

We are worried about butter coming over the border despite a prohibitive 300% duty.

We know of chocolate milk coming over the border and impacting our business. We have an increasing surplus of SMP that is sold as animal feed at prices well below world price.

Demand for butterfat is down - producers have faced three consecutive quota cuts in the past year alone.

Our industry is in crisis! We are in shit! We must face these facts! They are not dirty words that shouldn't be used. The facts show that we need to change. We must not fear or avoid that change. Recognition that we are in a crisis is the first step towards finding solutions. The Dairy Industry Working Group (DIWG) was formed in recognition that we are in a crisis - we need a united industry building a future vision.

Word #2 - still quoting directly from George Carlin - Piss - yes Piss! Derogatory as it sounds, it's often what we do on each other rather than working together to build our industry. We spend an inordinate amount of time and resources countering each other's tactics. Producers don't see processors as the key part of the supply chain that links directly to consumers. Processors don't admit that producers are an essential link in our industry and need our support to strengthen their future. We do not have a good history of working together. This has to stop! We have to stop fighting with each other - stop pissing on each other - we must find a way to work together.

The DIWG has stalled. The Minister has initiated Article 28 and regulations that support new compositional standards, but we have not dealt with the longer terms issues: growth, innovation, pricing. We cannot afford to let the Working Group stop.

Now I'm going to have to deviate slightly from George Carlin because the words he uses don't quite get at the heart of what we need to address. I will say, however, that they still seem like dirty words.

Consumer - it should be the first word in our daily vocabulary. We must become more consumer focused. Consumers must lead our thinking - lead our actions. Tropicana Orange Juice does it - look at the results! Soy beverages have done it and look at the results. More of our efforts need to be put on consumers and customers. Producers and processors must work together to make raving fans of our customers and consumers.

It is difficult to measure, but if you could index how much time we spend focusing on consumers compared to other growth-oriented consumer industries, I believe we'd be shocked! It's often last on our meeting agendas and it needs to be first. We must have a consumer focus.

There is another "C" word that needs to be part of our language - one that I've been warned shouldn't be used in discussions with producers. But I believe it's a word that is essential to our future.

Competitiveness . we need to continuously improve our competitiveness. And as the world moves to global trade, we must learn how to compete with world-class competitors. As costs are increased, we must focus on ways to improve efficiencies and competitiveness. Improved profitability will come from. This applies to processors and producers. Producers may have to look at the size and scope of their operations - processors will need to drive for efficiencies and lower costs while continuing to drive to improved value. The days of passing our inefficiencies on to our customers are gone.we have already seen the examples:

  • MPC's (modified protein concentrates
  • Butter
  • Chocolate Milk

Competitiveness is not a dirty word - we should shout it out and celebrate our step-by-step achievement. Again, as we seek to solve our immediate industry issues, we must consider our competitiveness.

An even dirtier word.

Price - it's time we admitted that price is an important factor in consumers' choice - price is an essential consideration in using the high quality dairy ingredients that we produce in Canada . We have lost a good portion of the ice cream category because we have not been price competitive. We are at risk of losing pizza customers over the high price of ingredients. Butter consumption is down.we have a surplus of skim milk powder because our price is snot competitive. It's time to recognize this is an issue that must be dealt with. Less volume at higher prices is not the formula for success. I continue to hear that we can't accept a lower blend price.now here is a word that we should consider banning! We need more volume and price is a key component in that equation.

That introduces another dirty word. Growth !

Growth is another word that needs to become part of our industry plans. Trying to establish policies that accept a shrinking marketplace is not acceptable. In everything we do, we must look for growth - and the potential in this industry is great! We all recognize the nutritional and taste values inherent in dairy products and ingredients. Our industry has tremendous potential. It's our orientation that has been wrong. Any vision that we develop for our industry must include, if not emphasize, the need for growth and I will add export as part of the group paranoia.

And the final of 7 - Supply Management - dirty words again - it's a system that has worked for 40 years. It's the system we have all built our businesses around - it is a system supported by all levels of government. But it needs updating.

Supply Management in a WTO environment needs to be adjusted. It looks as if WTO talks are back on. We should be planning for lower tariffs, high Try's, more competition.Supply management can be strengthened to allow growth, competitiveness, pricing, but not without openness. Sometimes processors whisper supply management as if it was a dirty word. It may be a system designed for producers, but it is one that has served our industry and processors well. But it needs fixing.

So, these are my 7 dirty words.shit, piss, consumer, competitiveness, growth, price and supply management.

On an optimistic side, I will say that all is not lost. We have made some progress with the DIWG. First of all, we were at the table with a common goal. We agreed on principles that needed to be followed.

Unfortunately, we couldn't come to agreement on the matter of compositional standards-so we left it to the Minister of Agriculture.

But we cannot let it stall. We must use the Working Group or some similar forum to get at the issues that need to be addressed.to use the words that we have banned for too long.to shift our attitude and our orientation to one of growth and competitiveness.

So what can you do! Use the dirty words! Demand the use of dirty words! In the organization that you belong to, demand to see a plan for growth. That very step will force us to face the demons of pricing, of fixing supply management and of working together.

I believe that if we work together.if we face the issues with honesty.if we focus on growth.we will put ourselves in a position to not only satisfy the Canadian market, but to find new avenues of growth as well.