Supply management explained
When Canada's dairy industry and its supply management system comes up, the discussion often turns to how the "cartel" unfairly "fixes" the price but little, if anything, is said about HOW the farm-gate price of milk is set.
Canadian dairy farmers don't actually sell milk. We sell its components (butterfat, milk protein and "other solids"). Every time milk is picked up at the farm it is sampled and evaluated on these three criteria, as well as checked for two other criteria (milk quality and the presence of antibiotics). If any traces of antibiotics are detected, the entire truckload is discarded before it enters the processing plant.
A sample of Canadian farms completes a year-long survey of every action they take on their farm to determine the cost of production of 1 litre of milk. The farms are systematically picked from across the country to represent proportionally the geographic dispersement of Canadian dairy farms, so the sample represents a variety of farms sizes proportional to those found in Canada.
Once the AVERAGE cost of production is determined, it is applied to about 85%-90% of the volume of milk shipped. The balance is paid at a relatively new class price, which follows the world price of milk.
Dairy farmers do not limit supply, as an oil cartel might do, shorting the market, so that prices are driven up. Rather, we do our best to supply the market at equilibrium. This way, the market is supplied without surplus, at natural market equilibrium, where there is no unnatural price interference.
The cost of production that is paid to the farmers at their gate is an AVERAGE. Meaning that the most efficient farmers do operate at profitable margins while less efficient dairy farms are forced to improve or, eventually, leave the industry. The affect of the portion of milk sold at world price (which is much lower than Canadian cost of production) is also encouraging producers to be more efficient. Any claim that Supply Management discourages the need for improved efficiency or competition at the farm level, which critics would lead you to believe, doesn't hold water.
Is the system perfect? No, but it beats the support systems used in other countries which are farm-output based. They encourage over-production in order to maximize government support long after market needs have been satisfied.
Thank you to our Canadian politicians, on the international, domestic and local stages for supporting our industry and the health of many rural communities.
Robbie Beck (Dairy Farmer), Clarendon, Pontiac