Comparison of the U.S. and Canadian Dairy Industries

Transcription

1 Staff Paper #349 April 2002 Comparison of the U.S. and Canadian Dairy Industries By Kenneth W. Bailey Department of Agricultural Economics and Rural Sociology College of Agricultural Sciences The Pennsylvania State University Armsby Building University Park, PA The Pennsylvania State University is committed to the policy that all persons shall have equal access to programs, facilities, admission, and employment without regard to personal characteristics not related to ability, performance, or qualifications as determined by University policy or by state or federal authorities. The Pennsylvania State University does not discriminate against any person because of age, ancestry, color, disability or handicap, national origin, race, religious creed, sex, sexual orientation, or veteran status. Direct all inquires regarding the nondiscrimination policy to the Affirmative Action Director, The Pennsylvania State University, 201 Willard Building, University Park, PA : Tel. (814) /V, (814) /TT.

2 Comparison of the U.S. and Canadian Dairy Industries Both the U.S. and Canada have been at a trade tug of war in recent years regarding whether or not Canadian exports of nonfat dry milk, known as skim milk powder around the globe, are subsidized. The U.S. is claiming the Canadians are effectively using subsidies on their dairy exports. The U.S., however, already uses subsidies under the Dairy Export Incentive Program (DEIP) to move surplus skim milk powder into world markets. 1 In addition, surplus skim milk powder is purchased by the U.S. government from the market place under the dairy price support program. Currently the U.S. has the equivalent of a year s worth of skim milk powder sitting in warehouses, waiting to either be sold back to the commercial markets, or eventually down graded and sold as livestock feed. Both the Canadians and the U.S. are heavily involved in their dairy sectors. What is at issue, however, is whether both parties are living up to their international trade agreements. That is the current issue of intense debate between these two countries. Both Canada and the U.S. are part of the North American Free Trade Agreement, known as NAFTA, and the Uruguay Round of the World Trade Agreement, or WTO. Under the WTO, both countries agreed to limit subsidized exports of dairy products, including skim milk powder. Canadian-U.S. trade issues heated up in recent weeks after President Bush announced new tariffs on imported steel over a 3-year period. The Canadians are now concerned that their market will be flooded with cheap steel. The U.S. also imposed high duties on Canadian imports of softwood lumber, which is used in homebuilding. In response, Canada placed provisional duties on imports of U.S. tomatoes. Words like trade wars are being used in the media. Any cursory review of trade issues involves a strange and complex voyage into an unknown world of weird acronyms, mountains of proposed regulations, and computers full of data. At the 1 For background on the DEIP program, see the following URL: 1

3 heart of these disputes, however, are the economies of the respective countries, and people s jobs and lives. Since there s a lot at stake, these trade disputes are often tense and political. The purpose of this article is not to settle any trade disputes, but rather to discuss the similarities, as well as differences, between the U.S. and Canadian dairy industries. U.S. and Canadian Milk Production The first obstacle to overcome in comparing milk production and trade data between the U.S. and Canada is the issue of measurement. The Canadians use the metric system, whereas the Americans use the, well, American system. Canadians for example report milk production in million hectoliters, whereas the Americans report it in million pounds. An attempt is made in this paper to convert the science-based metric system, which has been adopted the world over, to the less commonly used American system in order to provide for a comparison (see Table 1 for Metric-U.S. conversions). Table 1. Metric-U.S. Conversions 1 hectolitre = 100 liters 1 hectolitre = gallons 1 hectolitre = pounds 1 hectolitre = cwts 1 liter = kilograms 1 liter = pounds 1 liter = gallons 1 metric ton = 1000 kilograms 1 metric ton = 2205 pounds 1 kilogram = pounds I pound = kilograms 1 gallon = pounds 1 gallon = liters 2

4 The Canadian Dairy Commission reported in the early 1970s, that there were 130,000 dairy farms in Canada. That number has been reduced to 20,576 dairy farms in the 1999/2000 marketing year. The average farm in Canada in 2000 shipped 3,500 hectoliters of milk, roughly equal to 795,445 pounds, from about 56 cows. According to the American Farm Bureau, there were approximately 83,025 farms in the United States in 2000 with Grade A and B milk permits. That is down from 131,535 farms in 1992, the first year of their survey. Thus the average U.S. dairy farm in 2000 had 111 cows, almost twice the level of the Canadian farms, and shipped 2 million pounds of milk per year. The Canadian Dairy Commission reported that the average Canadian dairy farmer in 2000 produced 6,660 kilograms of milk from each cow, or about 14,653 pounds. That compares with an average 18,202 pounds per year from the average U.S. dairy cow in Total Canadian milk production in 2000 was 74.1 million hectoliters, or 16.8 billion pounds (Table 2). In the U.S., total milk production that same year was billion pounds. It would appear that the U.S. dairy industry is almost 10 times larger than the Canadian dairy industry. Table 2. Canada-U.S. Milk Production, 2000 Canada: Metric US Amount Unit Amount Unit Milk production 74.1 mil hl 16,833 mil lbs Milk per cow 6,660 kilograms 14,653 lbs Cow numbers 1, hd 1, hd Milk production/capita l/capita lbs/capita United States: Milk production mil hl 167,559 mil lbs Milk per cow 8,273 kilograms 18,202 lbs Cow numbers 9, hd 9, hd Milk production/capita 268 l/capita 609 lbs/capita Note: hl=hectoliters, l=liters, hd=head. Source: Canada: U.S.: -bb/2001/mkpr0201.pdf 3

5 However, if one accounts for differences in population (30.8 million in Canada and million in the U.S.), the industries are about equal. Production per capita in Canada in 2000 was 547 pounds compared to 609 pounds for the U.S. Consumption and Farm Prices In terms of consumption of dairy commodities, the U.S. and Canada are surprisingly similar. Data for 2000 indicates that per capita consumption for fluid milk and cream is nearly identical (see Table 3). The only significant difference is that the American s consume slightly more cheese and slightly less butter than their Canadian counterparts. Table 3. Canadian-U.S. Per Capita Consumption of Dairy Products Canada: Metric US Amount Unit Amount Unit fluid milk & cream 91.5 liters pounds Cheese 11.6 kg 25.6 pounds Butter 2.9 kg 6.4 pounds powders 2.4 kg 5.3 pounds U.S. fluid milk & cream 92.4 liters pounds Cheese 13.6 kg 29.9 pounds Butter 2.1 kg 4.6 pounds powders 3.1 kg 6.8 pounds Sources: Canadian Dairy Information Centre, and USDA s Economic Research Service. The similarities end, however, when one considers producer milk prices. The weighted average milk price in Canada for 2000/01 was Canadian dollars (C$) per hectoliter (hl) at 3.6 percent butterfat. Converting from hectoliters to pounds, that represents (C$) 24.8, or about U.S. dollars (US$). 2 The Canadian milk price in 2000 ranged from a high of C$ per hl in 2 Assumes an exchange rate of 1 Canadian dollar = U.S. dollars. 4

6 British Columbia, to C$ per hl in New Brunswick. The average farm price of milk in the U.S., called the all-milk price, was considerably lower by comparison. It averaged US$ per 100 pounds (a low price year), ranging from a high of US$ in Florida to US$ in Idaho. Dairy Policy Much of the difference between the Canadian and U.S. dairy industry is related to dairy farm policy. Both have government intervention in price determination. Both countries use a classified pricing system. And both countries export surplus dairy products. A quota system, however, is used in Canada, but not in the U.S. Since the quota is restrictive, farm milk prices in Canada are essentially managed by the government each year, and the quota takes on value. In the U.S., the marketplace has a strong influence on the level of milk prices. There are basically two markets for Canadian milk: the fluid market, which represents about 40 percent of the milk produced, and the industrial or manufacturing market, which represents the remaining 60 percent of milk production. The Canadian Provinces are responsible for managing the production and sale of fluid milk via fluid milk quotas, and in determining certain milk pricing formulas. The Canadian Federal Government, on the other hand, manages the industrial quota, sets a target milk price each year, operates a support price program for butter and skim milk powder, and determines trade policy. In the early 1970s, Canada adopted a supply management system for milk in order to provide a balance between supply and demand for milk and dairy products. The Canadian Milk Supply Management Committee oversees and adoption of a National Milk Marketing Plan, which issues Market Sharing Quotas (MSQ) to each of the Provinces. This plan represents a joint federal-provincial agreement. The Committee is chaired by the Canadian Dairy Commission, and has representatives from most of the Provinces. 5

7 In addition to managing the quota system, the Canadian Dairy Commission also administers pooling arrangements on behalf of the dairy industry. These pooling agreements share the proceeds of milk classes to all provinces that participate in the National Milk Marketing Plan. The milk classes in use for the 2000/2001 marketing year are provided in Table 4. Milk class prices are determined via formulas that are based on cost of production, support prices for butter and skim milk powder, all of which are guided by a target price for milk that is set by the government. Table 4. Canadian Milk Class Definitions Definitions Classes Fluid milks 1a Fluid creams 1b Milk-based beverages 1c Fluid milk for the Yukon, Nunavut and the Northwest Territories 1d Yogurt and ice cream 2 Specialty cheeses 3a Cheddar 3b Butter, powders and condensed milk for ingredient purposes 4a Condensed milk for retail 4b New products for the domestic market 4c Inventory milk and plant losses 4d Domestic marginal markets 4m Cheese for further processing 5a All other dairy products for further processing 5b Confectionery 5c Planned exports 5d There are two basic pooling arrangements. One is for Class 5 pooling by the Federal government for industrial milk. Lower-valued exports, called planned exports, are pooled under this arrangement. The other pooling arrangements are managed by the provinces, under which the other classes of milk are pooled. In addition to revenue sharing, the provinces also participate in a multiple component pricing system, and a quota exchange system. Barichello wrote that the Canadian milk pricing system is based in part on minimum floor prices for butter and skim milk powder. These prices are also used to support a structure of higher 6

8 prices for other industrial products like condensed milk, cheese, ice cream, and soft dairy products. These prices are determined by a system of end-use classified pricing. In other words, the Canadian system starts with a floor price for butter and skim milk powder. Formulas are then used to determine other class prices. The support prices are maintained because the marketing of milk is restricted with the quota system. All the sales of milk according to the alternative classes of milk are then pooled. The end result is a farm price that is amazingly close to the expected target price. According to USDA s Foreign Agricultural Service, the Canadian Dairy Commission announced last December that as of February 1, 2002 new target or support prices would be in effect for butter and skim milk powder. The support price for skim milk powder will increase from C$ 4.84 to C$ 4.99 per kilogram, (US $ 1.47/lb) and for butter, from C$ 5.73 to C$ 5.90 per kilogram (US$ 1.74/lb). Higher support prices are expected to provide dairy producers with a revenue increase of C$ 1.01 per hectoliter, equal to about 2 percent of milk sold. Thus the Canadian farm milk price is carefully managed by the government, which employs the following policy tools: 1. supply management system 2. target price (a guideline) 3. restrictive import policies (over-trq tariffs) Trade The U.S. and Canada are not only major producers of milk and dairy products, but they are major exports as well. Surprisingly, the data reveals that there is also a significant amount of dairy trade between these two countries (see Table 5). 7

9 Table 5. Canadian-U.S. Trade in Dairy Products Canada: Exports: Skim milk powder 29,354 mt Whole milk powder 1,124 mt Butter & butter oil 1,253 mt Cheese (all) 17,736 mt Total value of exports mil CA$ to the U.S mil CA$ Total value of imports mil CA$ from the U.S mil CA$ Total value of net imports mil CA$ net imports from the U.S mil CA$ United States: Exports: Skim milk powder 84,300 mt Condensed & evaporated milk 5,200 mt Dry whole milk & cream 25,400 mt Fluid milk & cream 24, liters Butter & milkfat 8,200 mt Ice cream 40,400 mt Cheese & curd 46,800 mt Total value of exports mil US$ Total value of imports 1,533.6 mil US$ Total value of net imports mil US$ Sources: Canadian: U.S.: Note: mt = metric tons. In 2000, Canada exported roughly C$ million, of which 41 percent was to the U.S. The bulk of the exports were skim and whole milk powders (22.5 percent), cheddar cheeses (21.9 percent), specialty cheeses (12.4 percent), and evaporated and condensed milk (10.6 percent). Canada also imported quite a bit of dairy products as well. Total imports were C$ mil, of which 28.3 percent came from the U.S. Canadian dairy imports consisted of specialty cheeses (35.5 percent), casein (17.0 percent), whey products (12.5 percent), and skim and whole milk powders (9.6 percent). The Canadian dairy trade data indicates that most cheese imports are from 8

10 European countries, although the U.S. is also a significant trading partner. For example, 87.7 percent of all whey product imports into Canada are from the U.S. The Canadian trade data indicates that in 2000, Canada was a net importer of dairy products, valued at C$ million. In addition, Canada imported more dairy products from the U.S. than was exported to the U.S, resulting in a trade imbalance in 2000 of C$ 12.4 million. However, the exact dollar amount of this imbalance can be debated. For example, Canada imported C$ million in casein from the U.S., a product that is not actually produced in the U.S. In 2000, the U.S. exported US$ million in dairy products, of which US$ was whey, US$ was cheese and curd, and US$ was skim milk powder. Of the 84.3 million metric tons of skim milk powder exported from the U.S. in 2000, about 72.4 percent of that was from the Dairy Export Incentive Program. On the other hand, the U.S. imported US$ 1,533.6 million in dairy products. The bulk of these imports were for cheese (US$ million), casein (US$ million), and milk protein concentrates (US$ million). Conclusions The Canadian and U.S. governments are likely to continue to struggle with dairy trade issues under the Uruguay Round trade commitments (referred to as the WTO). Surprisingly, the North American Free Trade Agreement (NAFTA), which committed both sides to reduce all tariffs to zero over a 10-year period, does not even apply when considering dairy trade between these two countries. Early in the debate between the U.S. and Canada over dairy trade issues, it was decided that the WTO agreement, which had greater import protection, would apply. In 1995 Canada created a new export class of milk that allowed Canadian dairy processors to pay less for milk used for export purposes. In 1998 the U.S. and New Zealand governments 9

11 approached the WTO and challenged that the discounts applied by Canada to dairy exports were a subsidy which violated the WTO trading rules. In 1999, a WTO dispute settlement panel found that Canada's special milk class system and import restrictions on dairy products violated WTO obligations. Therefore in August 2000, Canada's federal government eliminated the Optional Export Program and the special surplus removal milk class, 5(e). Canada replaced this system with a new dairy export program in each province. The U.S. is arguing this system still represents a form of export subsidies, and that Canada is exceeding their WTO commitments. Both the Canadian and U.S. governments are heavily involved in the pricing of milk. The U.S. Senate and House, for example, is currently negotiating a Farm Bill proposal to provide U.S. dairy farmers with a counter cyclical payment whenever market prices fall below a specified level. Both governments have restrictions on dairy imports. And both have some involvement in the exports of dairy products. In the short run, the USDA will likely reduce the support price for skim milk powder from current levels, resulting in less government purchases of surplus product. The likely impact of this is a lower cost to the U.S. government for managing the dairy price support program, along with lower milk prices for U.S. dairy farmers. Subsidized U.S. exports of skim milk powder (the DEIP program) will continue to be reduced under the WTO. In addition, Canada will have to abide by a WTO agreement on subsidized exports of skim milk powder. The real challenge involves the next round of the WTO, which was kicked off in Doha, Qatar last November. The U.S. and Canada are not going to fundamentally change their support programs for dairy. For example, Canada is probably not going to walk way from a supply management program that allows dairy farmers to exchange quota. However, a new WTO commitment will likely result in even lower levels of subsidized dairy exports. In the end, both countries will have to 10

12 reduce subsidies that affect global markets. This could have political fallout in both countries if it also involves less support to their dairy farmers. References Barichello, Richard R. Canadian Dairy Industry and Policy: Implications for Future Trade. Paper prepared for the Kansas City Symposium on Dairy Trade and Policy. October 8-9, 1999, Kansas City, Missouri. October