Monday, April 14, 2014

Sticky Production - Agriculture's Version of Sticky Wages?

"Last time we were asked to feed the world, everyone planted more until 1985, when they continued to plant more, even though the market told them not too. We don't do a very good job responding to when the market tells us not to plant." Cal Whewell, 
FC Stone Risk Management Consultant

Since hearing this comment at the Grain Farmers of Ontario March Classic, I have been unable to shake it from my consciousness. It speaks so much to the traditional character of farmers, hanging onto the hope of a price rally and committed to production growth even when the invisible hand of the market wants anything but. In some ways, it is like the economist's sticky wage theory. When economies slow down, and unemployment is high, employers are unable to reduce employee wages despite excess available labour, whereas during boom times, competition for labour often drives prices up. In agriculture, we are easily coerced into producing more, yet scaling back is much more difficult. 

In the '80's, the U.S. government ended up introducing the Conservation Reserve Program, essentially paying producers to take acres out of production and stop the plunge. The signals Whewell spoke of today were not only falling new crop corn prices, but also the ongoing strength of wheat and soybean contracts. I believe he could have just as easily been talking about dairy producers. 

With the future of our Canadian supply management system at risk, I am intrigued by the latest market explosion playing out south of the border. The fundamentals of record high prices, record exports and low feed prices are returning profits to a sector which was devastated only a few years ago when prices collapsed in 2009. 
Source: IFCN Milk Price Indicator
The run up in prices has little to do with American dairy consumption, and is more so due to strong global demand, particularly from China, which is driving the world milk price to new heights. U.S. dairies are responding by expanding their herds and ramping up production, partially through imported Canadian heifers, as anyone who has been to a sale barn lately will testify. 

For me, this raises some questions. First and most importantly, with this strong demand and world prices nearing $60/100 kg, how much market are Canadian farmers missing? Also, how reliable is the long-term forecast for this market and will this above-average pricing hold? It didn't in the corn markets, despite the "feed the 9 billion" security blanket. The past two months, the price has already softened (Global Dairy Trade). Developing nation demand for dairy products is growing a rate double that of the OECD nations (OECD FAO Ag Outlook Highlights, 2013), but we are talking about nations where food still costs more than 1/3 of an individuals' income and the number malnourished is alarmingly high. 
Source: Washington State Magazine 
Supply and demand theory would dictate prices will fall as production is increased. I believe this will be the case, because as Whewell states, farmers have proven illogical in responding to market signals when its time to reduce production. Only time will tell if American farmers learned from the last crash and will slow production soon enough to avoid a similar fate. The removal of dairy price supports from the farm bill leaves producers with a margin insurance program, instead of the highly contested and overturned market stabilization program which would curb production during trough periods (supply management). 

Though not hoped for, it is likely the Margin Protection Program will prove its effectiveness soon enough, and we will have to ask ourselves if not supply management, are these the types of programs we can expect? Without external interruption, will Canadian producers withhold production in low times any more than our American counterparts? The next generation of producers is armed with degrees, and marketing know-how, but somehow I doubt the voice of austerity will prevail anymore north of the border. Dairy farmers will produce more milk, because that is what farmers want to do.

Thursday, April 3, 2014

The Cost of Dirt Cheap Dairy

Discounted chocolate milk

There are many voices in the debate over whether supply management is good for Canadians. Reality is these predictions are just that; they are expected outcomes crafted using best and worst case scenarios depending on who is crafting the position. In Owen Robert's recent post on, he shares some of the dairy industry's common arguments. Without trying to create fear, I am taking this further as I think there are more questions consumers should consider in light of supply management's future and whether "dirt, cheap dairy", or any "cheap food policy" for that matter, is good for Canadians. 

1) What does a cheap food society look like? 

Contrary to popular belief, sustainable food systems need not always cost more but they do require farmers earn a comfortable living, which means netting a profit without working 20 hours a day. Most would consider this fair. While dairy farmers earn a good living compared to the average citizen, they are also running a business and often those returns must be reinvested in land, equipment or cattle. So, like any small business owner, they are often taking home more equity than cash.  

Furthermore, that return also allows them to use less intensive agriculture practices, resulting in less impact on the environment and cows (compare this to the large, super-dairies south of the border). Dairy farmers are very proud of their farms, putting great energy and time into their maintenance. One individual commented on Owen's blog pointed to the dismal New York rural landscape as an indicator of what 'cheap food' does to a rural society. I have heard this same comment from co-workers visiting Ontario; our well-kept fence rows mostly lack the rusty relics and vacant, blown over buildings commonly seen of rural American farmsteads. 

2) What is the cost of cheap food?

When margin is removed from the value chain, pretty quickly the entire value chain starts to feel the squeeze. As actions are taken to cut costs, the most critical element of the system is put at risk, food safety.

Frequent recalls in processed meats and produce could be partially attributed to the cheap food mentality. There should never be an excuse for actions which compromise human health and put lives at risk, yet we know large companies are under constant pressure to cut costs and increase production just to keep the lights on (and keep Canadians employed). It's not unreasonable to think in an environment where the bottom line is strained, less care may be taken or decisions which might otherwise seem inconsequential increase the risk of compromised safety. 

3) What does cheaper food solve?

As Owen already pointed out, it exists in Canada. Blessed to have never personally known the challenges facing low-income households, I do wonder if it's less a function of food prices and more about availability and proper education about healthy food preparation. 

The food desert is a well-documented issue in the U.S., and in Canada, we know there are also many regions, both within urban and rural areas where Canadians do not have access to fresh fruit and vegetables and healthy foods within walking distance. Compounding this, our schools no longer teach healthy cooking so while the edge of the supermarket is the cheapest route to the cash register, many resort to filling their cart with products from the centre aisles. Less nutrient dense and loaded with excess calories, fat, and sugar, these products may be more convenient, but are contributing to Canada’s tripling obesity rate. They are also more expensive.

You only need to watch one of the many food documentary trailers on YouTube to raise an eyebrow at the lengths the system has gone too to produce "cheap food". I believe the race to the bottom mentality with which our society has become obsessed is putting food production in a corner. Proper distribution of value, from farmer through the retailer and consumer ensures Canadians receive safe, healthy and sustainably produced food. Though great opportunity exists for reform in Canada’s dairy industry, sweeping changes intended to wipe out supply management may only hurt Canada in the long run.