Lessons for Canada from New Zealand’s dairy industry

By Sarah Reid - Published on May 27, 2016
milk bottles in a row inside a fridge
Since moving to a free-market model from subsidies and tariffs, dairy in New Zealand has become the country’s top export earner.

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Tiny New Zealand, with a population just one-eighth that of Canada, is on a quest to quench the world’s thirst for milk. Today milk is the country’s biggest export, and 95 per cent of what Kiwi farmers produce goes abroad, mostly to China.

Compare that to Canada, where dairy farmers keep fighting to protect their supply management system, which means higher milk prices for consumers and puts a strain on Canada’s trading relationships. Only five per cent of what Canada produces is exported.

While Canada is wringing its hands about what to do about the dairy sector, the question to ask is: Will ending supply management spell doom for Canadian dairy farmers?

Since moving to a free-market model from subsidies and tariffs, dairy in New Zealand has become the country’s top export earner. Overseas shipments last year, totalling NZ$11.9 billion worth of milk, accounted for about two per cent of world production, according to a report by the Dairy Companies Association of New Zealand.

The supply management system in Canada is different from New Zealand’s old system in that the Kiwi farmers’ subsidies came from government, while in Canada, consumers shoulder the higher costs.

While the New Zealand dairy industry has improved, orientation towards global markets has also meant that dairy farmers are now subject to the whims of global market prices.

In order to help farmers stabilize their earnings, the New Zealand dairy industry recently took another step in its adjustment to being part of the global market. Starting in May, the New Zealand stock exchange began trading milk price futures and options contracts.

“New Zealand, global trade, a lot of things are really changing right now and Canada is just not keeping up,” says Sylvain Charlebois, dean of the faculty of management at Dalhousie University and co-founder of the Food Institute at the University of Guelph.

Futures contracts allow farmers to sell their product at a date in the future, for a price agreed on today. Options offer farmers the option to sell, but don’t oblige them to do so.

“It’s a good risk management tool to help you manage that uncertainty,” says Andrew Hoggard, the dairy industry group chair at the Federated Farmers of New Zealand, a producers’ lobby group. Hoggard is a dairy farmer himself, with a herd of about 520 cows on a farm just north of Feilding, on the North Island.

Prior to its own deregulation, New Zealand had a system of tariffs and subsidies to encourage dairy exports, according to a 2012 University of Calgary School of Public Policy report.

But politicians and producers eventually recognized the heavy burden the system was placing on taxpayers, and the inefficiencies it was inadvertently supporting. New Zealand deregulated its dairy industry in 1984. It went through a six-year transition period, where farmers received some support, and about 1 per cent of farmers left the industry.

Between 1992 and 2009, farmers improved the productivity of their farms, with dairy cows producing an average of 25 per cent more milk. The number of cows also increased to 4.4 million from 2.7 million, says the University of Calgary report.

Global milk prices have swung wildly in the last few years. New Zealand farmers were paid the lowest price for their milk in 20 years in 2014-15, at $4.69 per kilogram of milk solids. But the year before, they received almost double that amount, $8.51 per kg, according to New Zealand’s dairy statistics report. “The last two years have been particularly tough, in terms of the milk price,” Hoggard says.

About 90 per cent of all New Zealand’s milk is sold through Fonterra, a farmer-owned co-operative. Co-operatives have been a part of the dairy business in New Zealand for almost 150 years.

Fonterra forecasts the milk price for the coming year, and farmers use this to make decisions about their business, Hoggard says. Many of their costs are upfront, and are based on the forecasts. They decide, for example, on the number of cows and how much feed to have on hand before the season starts.

But the forecasts aren’t always right, and can be expensive for farmers if they’re wrong. “If you knew right off, at the start of the season, what the price was going to be, even if it was low, you could put a plan in place and then you’re able to work to that plan,” Hoggard says.

The European Union has recently expressed interest in pursuing a similar strategy for managing fluctuations in milk prices. Dairy futures are sold in the United States through exchanges such as CME Group, but the volume traded is low compared to other agricultural products, such as corn.

Global demand for milk products is expected to grow at a rate of 3.7 per cent until 2020, the U.S. Dairy Export Council says. But Canada cannot take advantage of this rising global demand so long as supply management remains in place.

Under Canada’s system, the Canadian Dairy Commission sets prices, based primarily on the cost of production. There are high tariffs to protect Canadian farmers from outside competition, and a quota system to manage how much each farmer produces.

More than one-third of Canada’s milk is produced in Ontario, according to the Canadian Dairy Information Centre. There are 3,834 farms in Ontario, out of 11,683 Canadian farms, its statistics show.

While prices might be more stable in Canada, they’re also much higher. New Zealanders pay less than half of what Canadians pay for milk.

Canada’s refusal to dismantle this system has come at a high cost. The World Trade Organization ruled in 2002 that Canadian milk is unfairly subsidized. So Canada is limited in how much milk it can export, because of the high prices paid to farmers. Canadian farmers cannot take advantage of growth opportunities in countries such as China, where more middle-class consumers are demanding more protein in their diets.

Ottawa has begun to gingerly open the door to more competition. Under the Trans Pacific Partnership, Canada has agreed to open 3.25 per cent of its dairy market to outside competition. The former Conservative government promised farmers $4.3 billion over 15 years to compensate for the change, though it’s unclear whether the Liberal government will follow through.

The Conference Board of Canada estimates that if Canada were to begin exporting half of what New Zealand exports, Canada’s yearly production would grow to 20 billion litres of milk, from 8 billion litres today. It argues that the number of dairy farms would increase 2.1 per cent over ten years.

The Dairy Farmers of Canada declined an interview for this story. A spokesperson said in an email, “New Zealand dairy ended their quota system and ever since dairy farmers have a very hard time making ends meet. New Zealand is not an example the Canadian dairy industry wants to follow.”

Hoggard disagrees: “You’ll never find a New Zealand farmer that wants to go back to the old ways of doing it, even though we’ve had tough times.” 

Sarah Reid is a freelance journalist based in Toronto. 

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