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Milk price hikes defeat sector growth: GMC

Efforts to grow Canada’s dairy sector are likely to be stymied as long as dairy producers can simply raise the price they get for industrial milk, according to a new report from the George Morris Centre.

The Canadian Dairy Commission on July 11 approved an unscheduled $1.45 per hectolitre increase in industrial milk prices effective Sept. 1, by boosting the support prices for butter and skim milk powder (SMP). That’s on top of any consideration it might give to another scheduled increase in December, which if approved would take effect in February 2009.

“The rationale for the price increase is probably well-founded, based on the increased costs faced by farmers for energy and feed since the last industrial milk price increase in February 2008,” according to the Guelph-based ag think tank’s report, written by senior researcher Al Mussell and research fellow Ted Bilyea.

“However, increasing industrial milk prices is in direct violation of some of the key strategic objectives articulated by dairy industry leaders.”

“At least some” provincial milk marketing boards, for example, have stated that they seek market expansion, the report said.

Also, the industry wants a “smooth transition” to new compositional standards for cheese, but processors are less likely to seek out domestic dairy products to meet those standards if prices run too high. Processors may instead import “functional ingredients” such as milk protein isolates and stop referring to their products as “cheese,” as some do now in selling “frozen desserts” instead of “ice cream.”

Furthermore, some in the industry propose that it prepare for whatever increases in market access for foreign competitors may come out of World Trade Organization talks on “sensitive” ag products such as dairy — but “increasing prices is counter to competing for domestic market share,” the report said.

“Treadmill”

The report also outlined how the milk boards’ schemes to cap the price of dairy quota have “generally ignored” the role that milk prices play in generating quota values.

With the CDC’s support price mandate in the picture, allowing increases in the support prices for butter and SMP, the report said, it follows that more milk volume will be allocated to “residual” classes and processors’ substitutions away from domestic dairy ingredients will also increase.

When that happens, the amount of available quota falls, and the price of quota rises accordingly, leading to calls for further price increases and the “treadmill” continues, the report said.

“Responding to the narrow and immediate term context of
increasing costs with a price increase removes any pretext of a long-term strategy to strengthen the Canadian dairy industry,” the report said.

If the supporters of controlled growth in Canada’s dairy sector are willing to accept short-term pain for longer-term gain, they should reject a support price increase, “particularly in an environment in which consumers are challenged by steep inflation in other consumer goods,” the report said.

“There are many ways to mitigate income shortfall of small dairy
herd operators in a price reduction strategy, which would be far more strategically beneficial than following the path of price increase and volume reductions,” the report said.

“However, these alternatives will never be given the thought deserved as long as the industry can simply raise price in the short term.”

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