Obtaining an adequate net income

The last few years have not been easy in terms of farm income. On several occasions our financial stability has been shaken by various events, especially the COVID-19 crisis, the instability of the price of milk due to falling world prices, the latest trade agreements made by the Government of Canada, and an extraordinary increase in on-farm feed costs.

Incomes below cost increases create frustration and uncertainty for farmers. It’s  understandable! And even though this isn’t the first time we’ve experienced financial hardship and instability, it’s still hard to take.

What we are experiencing now is a combination of several factors, including a dramatic increase in on-farm feed costs. Since the end of 2020, only for animal feed, the increase is estimated at over 25%, or more than $4.50/hl. This is huge! Apart from these additional costs, there are fuel, fertilizer and other expenses. The price adjustment that was applied as of February 1, 2021 does not reflect the cost increases of the last few months. The indexation is based on the 2019 cost of production survey indexed to August 2020.

In addition to the effects of rising costs, there are other variables that influence income, such as world prices and the sales structure. While world prices have recovered in recent months, the sale structure has hurt our income more. In fact, the special classes, which are directly influenced by  strong demand from the secondary food processing sector, have seen their sales rise in recent months. The increase has been a meteoric 27% in the last year! While less beneficial to our income, the special classes are also part of the effects of trade agreements and commitments made to support supply management. This doesn’t mean it isn’t necessary to review the administration of these classes, and that’s why a working group on the subject has been  set up. Another well-known factor influencing our income downward is the strong demand for butterfat in general, which increases the surplus of solids non-fat (SNF) in our market.  Since the Canada-United States-Mexico Agreement (CUSMA) came into effect, the surplus issue  is compounded by the cap on exports which limits possible outlets for these SNF. Therefore, despite the February 1, 2020 and 2021 price increases, the one-year change was only $0.72/hl, or 1%.

Also, the COVID-19 crisis has had and will continue to have financial impacts on different sectors, including our industry. As for the consequences of the trade agreements, the compensation announced for the first two agreements in fall 2020 was a way to mitigate the effects, even if we would have preferred to produce the 8.4% of the Canadian market that was conceded. This good news isn’t enough, because no announcement has been made yet for CUSMA. We still expect the Government to promptly honour its commitment to provide full and fair compensation for the impacts of CUSMA including lost markets, additional costs arising from the elimination of the ingredients class and the export cap.

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What we are experiencing now is a combination of several factors, including a dramatic increase in
on-farm feed costs. Since the end of 2020, for animal feed alone, the increase is estimated at over 25%, or more than $4.50/hl. This is huge!
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Our buyers also face challenges. The negotiations and leeway they have with retailers are increasingly difficult and tight. At least the recent announcement of an eventual code of conduct is a step in the right direction to making the food supply chain more efficient by improving transparency, fairness and predictability in relations between suppliers and retailers. We should mention that consumers will benefit the most from a healthier agri-food business climate.

But one question remains: what options do we have to improve farm income? In the short term, even if grain prices are down slightly, we’re a long way from covering the cost of production. That’s why we promptly reported the difficult context to Dairy Farmers of Canada, so that requests will be prepared for the next price indexation by the Canadian Dairy Commission. We want the decision to reflect the cost of production increase for the next milk price adjustment in February 2022. Furthermore, last July, the CDC recognized the negative impacts of changes in the sales structure on our farm businesses, by adjusting the parameters for triggering the exceptional circumstances mechanism. This decision will provide a tool to correct the gaps between income and the cost of production on a permanent, rather than a temporary basis.

In the medium and long term, as producers, we must continue our efforts to improve our  production costs. As a marketing board, we will continue to work with our industry partners to develop markets that offer a better return, including fluid milk, cheese and yogurt, as well as finding all possible outlets to add value to surplus SNF on the Canadian market. To achieve this, we must always keep in mind the needs and expectations of our consumers for a sustainable and nutritious product. Our industry’s response to consumer expectations is a key element in maintaining and developing our most profitable markets.

The dairy industry contributes to the vitality and economic health of our regions. Milk producers must also benefit from this prosperity.  Rest assured that your elected officials and your organization are making every effort to achieve this goal. Our priority remains the same: to obtain the best marketing conditions for our milk, so as to ensure the durability, profitability and sustainable development of our dairy farms.

 

SignatureDanielGobeil

 

 

 

Daniel Gobeil, Chair

 

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