Canadian Pizza Magazine

Sleight of hand

By Cam Wood   

Features Business and Operations Finance

Increase hidden by BSE swap

The Canadian Dairy Commission has delivered a 2.6 per cent increase on support prices – or so it seems.

Increase hidden by BSE swap

The Canadian Dairy Commission has delivered a 2.6 per cent increase on support prices – or so it seems.

What we do know now, in this well-crafted governmental sleight of hand game that federally appointed agencies tend to play, is that last year’s bovine spongiform encephalopathy compensation increase is now absorbed into what the CDC considers their fulfillment of a 2002 production cost agreement with the dairy farmers.


Today, while the pizza industry is asking whether the price of cheese will go up or not, the cold hard facts are – they already did … we just paid a year in advance.

According to the CDC announcement, effective February 1, 2006, the support price for skim milk powder will increase from $5.7282 to $5.8337 per kilogram. The support price for butter will remain unchanged at $6.8695 per kg. Support prices are the prices at which the CDC buys and sells butter and skim milk powder to balance seasonal supply and demand changes on the domestic market.

“It is a rather deceptive announcement,” said Jill Holroyd, director of research and communications for the Canadian Restaurant and Foodservices Association.

Holroyd said while the CDC is stating the 2.6 per cent BSE component applied in 2005 is no longer included in the support prices, the dollar value of that “temporary measure” remains.

Chantal Paul, communications chief with the CDC, said the commission does not see there being an increase in cheese costs, as the butterfat component has not been affected. Paul said some prices might be affected through adjustments made by the provincial marketing boards, but not as a result of the CDC position.

“Milk is paid to farmers according to what is in it – fat, protein and other solids – and the value of these components depends on the use of the milk (higher for table milk, lower for butter and skim milk powder, with cheese somewhere in the middle). The new support prices should, in theory, have no impact on the price of the butterfat component of the milk sold to make cheese since the support price for butter has not changed. We can expect a price increase for the two other components (protein and other solids). But these decisions are really made at the provincial level. How this will impact cheese buyers therefore remains to be seen,” Paul told Canadian Pizza.

For dairy producers, the higher support price should translate into an increase of 1.79 cents per litre for milk used to make products such as yogurt, cheese, butter and skim milk powder. The actual increase to producers may vary slightly depending on the pricing decisions made by provincial authorities using support prices as a reference.

Provincial milk marketing boards and agencies use support prices as a reference to determine the price paid by processors for the portion of the milk that is used in the production of butter, skim milk powder, cheese, yogurt, ice cream and other processed foods. Processors, taking into account all the factors that affect their own production costs, then set the prices of dairy products.

Finally, distributors and retailers decide how they will pass on any increases in the price of dairy products to consumers
Last year’s support prices contained an add-on to compensate for the financial impacts of BSE. The butter and skim milk powder support prices effective February 2006 will no longer provide such compensation.

“Let me first remind you that the price increase last year had two components: one to fulfill part of the CDC’s commitment concerning producer revenue and the other to compensate for losses associated with BSE. The total of the two was a 7.8 per cent increase,” Paul said.

And this is where the smoke appears. That BSE compensation from 2005 has been turned into the revenue the CDC is using to meet their commitment to the dairy industry for 2006, effectively resulting in a 2.6 per cent increase that was supposed to be temporary.

“For (December 15’s) announcement, the commissioners reviewed the relevance of the BSE add-on as promised and came to the conclusion that the new support prices should not contain such an adjustment. In addition, they fulfilled their commitment to adjust the support prices to allow 50 per cent of dairy producers to cover their cost of production by February 2006 (a commitment made in 2002). To do this, they added 1.79 cents per litre to the price that the producers get for their milk.”
The CRFA is still miffed at the operating process of the CDC, citing the stipulation in the CDC Act that the commission is obligated to have a consultative committee for issues such as pricing. In June 2005, the Auditor General of Canada made reference to the lack of this in her report on the CDC, and yet it continued again this year.

“(The BSE component) was supposed to be reassessed and reviewed. It wasn’t and now it has just been built in to the price,” Holroyd said.

“This really points to the need for more accountability and transparency (at the CDC).”

On the other side, the Dairy Farmers of Canada is claiming the CDC has missed the opportunity to meet its commitment to farmers.

“In 2002, the CDC recognized that dairy farmers were efficient and said it would ensure that the support price allow 50 per cent of farmers to cover their cost of production. We are disappointed that this announcement falls short of that commitment,” said Jacques Laforge, president of the DFC.

“The CDC is not maintaining the amount it dedicated to dealing with the fallout of BSE, even though prices for valuable dairy heifers and cull cows are still depressed.”

The CRFA is angry that the CDC continues to ignore several key findings by the Auditor General, and continues to set prices without the consultation committee established in the CDC Act.

“The latest CDC decision plus the permanent BSE compensation – which will cost the industry more than $118 million in 2006 alone – will only accelerate the trend of declining dairy consumption,” the CRFA said in their reaction to the CDC pricing.

One fact that remains, despite pricing and production issues, is that Canada’s dairy industry is still mired in troubled times. The national per capita consumption of milk products has declined by 10 per cent in the past 15 years, and shows little sign of strengthening.

In recent years, the U.S. has battled aggressively against what it called “illegal subsidies” to the Canadian dairy industry. In a series of challenges at the World Trade Organization, the U.S. claimed export prices on Canadian cheese and other dairy products provided export subsidies to its dairy processors and farmers above the level that Canada committed to in the WTO. In 2003, Canada was forced to eliminate the commercial export milk program as a result.

And some confusion remains on the true impact of mad cow disease in Canada. Recently, an American pizza magazine circulated in Canada under a thinly-veiled Canadian masthead suggested the border was open to the dairy industry, and prices for cheese should come down to pizzeria operators. In truth, cattle trade with the United States remains heavily restricted. The only Canadian cattle allowed into their market at present are animals younger than 30 months destined for slaughter. The animals must not move between feedlots, and must be slaughtered before they reach the age of 30 months according to the very rigid trade conditions imposed by the U.S.

Tom Walsh, a lawyer with the U.S. Department of Agriculture, told the Canadian media when the ban was initially lifted on Canadian cattle and beef products, live cattle must be sent to the U.S. in sealed containers and no breeding cattle will be allowed across the border.

This essentially means no trade or sale for dairy farmers of the live animals.

According to one Ontario dairy farmer, this continues to create hardship for Canadian milk producers. The value of their live
animals on the trade and slaughter market – both once sizable sources of additional income – has been significantly reduced.•�

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