Mid-year farm-gate milk price increase set

Anyone expressing surprise or dismay at the recently announced plan to increase the farm-gate milk price in Canada on Sept. 1 is ignoring financial realities, says the chief economist at agricultural lender Farm Credit Canada (FCC).

“I definitely saw it coming,” J.P. Gervais told Farmtario in a recent interview, referring to a June 21 Canadian Dairy Commission (CDC) announcement it will seek approval from provincial authorities for a rare mid-year increase.

Why it matters: The announcement reignited criticisms of Canada’s supply management system.

The CDC’s mandate is to “provide efficient producers of milk and cream with the opportunity to obtain a fair return for their labour and investment.” And even though two of the six organizations the CDC typically consults before recommending a farm-gate price change – Restaurants Canada and the Retail Council of Canada – opposed a Sept. 1 increase, Gervais said accounting for all the different factors along the dairy supply chain strongly pointed in one direction.

“All the stakeholders . . . are experiencing increasing costs,” he said. “And there was little doubt in my mind that there would be a request for a mid-year increase.”

CDC typically announces revisions to the farm-gate milk price effective Feb. 1 of each year. The last time a mid-year change occurred was in 2018. At that time, the dominant factor affecting dairy farm income was the global trade challenge-fuelled cancellation of Canada’s Class 7 milk pricing strategy. Milk cheque revenues declined as a result but the effect of the increase in cost of production was relatively mild at approximately 5.1 per cent from 2017 to 2018.

But now, from the time calculations were made leading to the annual Feb. 1 increase (8.4 per cent in 2022 – already significantly higher than most years), costs have only risen more for farmers.

“Feed, energy, and fertilizer costs have been particularly impacted (by inflation), with increases of 22 per cent, 55 per cent and 45 per cent respectively since August 2021,” the CDC said in a news release.

Gervais says he always likes to point out to milk price naysayers that the CDC recommendation doesn’t ultimately amount to a fixed farm-gate price. It’s a “target price” that fluctuates depending on what happens in the marketplace regarding different classes of milk and milk components.

“That’s a widely misunderstood fact in the general population.”

Perspective is also important, he stresses. Compared to some other similarly-positioned countries, there has been an increase in Canada over the past decade in the average share of income allocated to food. From that perspective, rising Canadian food prices can be a troubling trend. “But when you start off from a situation where we were very fortunate to buy high-quality food at a reasonable price compared to much of the rest of the world, that changes the perspective,” he said.

The CDC, in its news release, explained that “in the last five years, the consumer price index for dairy increased by 7.7 per cent. This compares to 14 per cent for meat, 21 per cent for eggs, and 32 per cent for fish.”

The Commission also offered a comparison with recent farm-gate changes in the European Union and U.S., citing increases of 23 per cent and 49 per cent, respectively, over the past year for fluid milk.

Gervais also likes to make clear that the different steps along the supply chain mean the price in the grocery store isn’t necessarily going to mimic the farm-gate price. “If you think of fluid milk that consumers purchase . . . the price will likely go up by a similar amount,” Gervais notes.

But if you look at further-processed products like cheese or yogurt, which have more elements in the supply chain, the price at the store might not exactly reflect the farm-gate price.

Under the current circumstances, however, costs are going up all along that supply chain. “At the end of the day, everything costs more.”

Restaurants Canada, responding to the CDC announcement, said it “requested a dismissal of any price increase” during consultations into the decision. This was done, the organization stated, “to not only avoid a precedent (of a mid-year increase), but to reflect the reality that restaurants are at a point where they can no longer absorb or pass along any kind of additional charges.”

However, another organization consulted by the CDC, the Dairy Processors of Canada, argued in its response that “the mid-year adjustment . . . will allow for dairy prices to increase more incrementally, and may mitigate the impact on consumers.”

It should be some comfort to dairy farmers, Gervais said, that the costs of production – and, therefore, the cost to consumers – for other edible proteins have generally also gone up. But dairy needs to remain competitive with alternative proteins for consumers not to switch away. Future decisions about milk price changes should keep this in mind.

He is, however, optimistic. “If we get good crops in North America this year (and) if we get a good supply of grains and oilseeds in 2022 . . . there should be some relief for the dairy cost of production.”

Plus, in the post-Class 7 environment, the world price for milk matters more now to Canadian dairy producers than it did four to five years ago. If that price continues rising, that should help farm revenues.

With interest rates rising, even if production costs like feed and fertilizer soften, many Canadian dairy farmers face the prospect in late 2022 and 2023 of increased costs for servicing debt.

“I think we’re going to see interest expenses go up somewhat,” Gervais predicted.

But by the end of this year, “we’re likely done with rising interest rates.” Those looking at renewing loans in that period should carefully consider their strategy going forward. But he’s confident the effect won’t overly burden Canada’s dairy sector . . . or Canada’s dairy consumers.

“I’m an optimist. I think we’re going to see inflation slow.” It won’t stop or reverse, Gervais stresses, and there will still be food price increases.

“It’s going to cost us more to buy food.” But he believes the increases will be manageable – especially when taken in perspective.