A fair payment policy focused on the market

The reduction in volume and associated increase in the market value of SNF have been priority issues for the Canadian dairy industry for the past 20 years. To understand the context behind the new payment policy, we need to review the various measures that have been integrated into the Milk Payment Regulation to gradually achieve the goal of decreasing SNF quantities. Before 1992, payment was based on the volume of milk delivered and on butterfat (BF). It was at that time that the first application of multiple component pricing gave more value to protein, with 80% of the price of SNF being applied to protein and 20% to lactose and other solids. In 2004, a maximum SNF-BF ratio was implemented and any SNF above that level received no payment. Incentive measures were put in place with the transfer of $3 per kg from protein to butterfat to add value to milk with high fat content and, two years later, a premium was introduced for the lowest SNF-BF ratios. In 2012, we harmonized our policies at the P5 level to obtain collective gains. The maximum ratio and the premium were also reviewed.

While these measures and policies were instrumental in reducing SNF production over the years, trends and consumer choices favouring fat-rich dairy products like butter and cream, together with the decline in consumption of drinking milk, continue to contribute to significantly increase SNF surpluses across the country.

The new payment policy responds to resolutions carried at our annual general meetings between 2016 and 2018, which called for adjustments to be made to better reflect market realities. We brought these requests to the attention of our P5 colleagues and following a stringent, democratic multi-phase process, including comprehensive work and analysis by the P5 Quota Committee and consultations with various decision-making bodies, the policy was adopted in 2020. The new payment method was implemented in Ontario, New Brunswick and Prince Edward Island on February 1. It is scheduled to begin on August 1, 2021 in Quebec and Nova Scotia. The harmonization of payment policies between the provinces will ensure income equity among P5 producers, while being more attuned to market needs. A key factor behind the development of the new policy was a desire for greater producer income equity, based on their respective contribution to SNF surplus. While the implementation of the SNF-BF ratio has helped to reduce SNF production, a revenue discrepancy for the various target ratios remains.

 

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The new payment policy responds to resolutions carried at our annual general meetings between 2016 and 2018, which called for adjustments to be made to better reflect market realities.
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This new payment policy helps to enhance the income of producers who contribute nothing or very little to SNF surpluses and must not create a major change in food habits. It is also designed to ensure continued production of high-quality components.

The main change is the introduction of an additional ratio level under 2.0 kg of SNF per kg of BF, called the market ratio. This will provide for adding value to all SNF required by the Canadian market, whether for dairy products or further processing. Producers who have an SNF-BF ratio between 2.0 and 2.30 will be paid according to the Ingredients class price and not paid when the ratio exceeds 2.30. If the ratio is less than 2.0, lactose and other solids will be paid at a set rate of $0.90 per kilogram and 75% of the total revenue will be attributed to butterfat and 25% to protein. Thus, we are sending a clear message to the market while being sufficiently flexible to evolve with market demand and respond to new information related to milk components.

The challenge of marketing surplus SNF has become more difficult under the CanadaUnited States-Mexico agreement (CUSMA), which ties our hands by imposing charges on exports above a certain level, thus restricting our skim milk powder and protein concentrate exports. CUSMA limits these exports to 35,000 tonnes in addition to capping exports of infant formula. This represents a serious challenge when we consider that Canada exported 82,000 tonnes in 2017-2018 and 60,000 tonnes in 2018-2019! The entire industry must address this problem. At the farm level, we will continue to reduce quantities produced in all provinces. The industry also needs to ensure that all markets that can add value to non-fat solids are satisfied. Lastly, processors must increase their processing capacity and develop new outlets. This will require significant investments for which we will need government support. The involvement of government is essential in this context of export restrictions and uncertainty generated by the recent trade agreements.

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Daniel Gobeil, Chairman

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