Marked by growing imports, the major challenge of adding value to solids non-fat (SNF) (which is putting pressure on farmgate prices) and the highest interest rates in over 20 years, the dairy industry is facing a challenging economic situation. Here's a look at a lucid industry that has been challenged before.
Soaring population growth in Canada
In 2022, and after half a year of 2023 data, the facts speak for themselves: According to Statistics Canada, the nation’s population is growing by almost a million people a year, reaching the 40 million plateau last June. Unquestionably, rapid population growth is very positive for an industry focused on the domestic market. On the other hand, it is essentially fat that fuels demand.
The flip side of this coin is the need to add value to growing volumes of SNF. These are more difficult to valorize and are a major concern for the Canadian dairy industry. For many, it's the issue of the day, if not the decade. It calls for concerted action, planning and investment. This is not the industry's first challenge: The most experienced remember the two milks, then the interminable era of pressure from major trade agreements, from which we are slowly but surely getting out. Now there's the wave of SNF.
The next challenge may well be lab-grown proteins: History will tell how much of the market they will capture. Will the incursion be insignificant or massive? Between the annoying gadfly and the disruption of the animal protein market, a wide range of scenarios are imaginable.
International trade: A little more patience
The agreement with Europe will be fully implemented in 2023. The Trans-Pacific Partnership (CPTPP) will be fully implemented in 2024. We'll have to wait until 2026 for the imports agreed under CUSMA to enter our market. As the implementation of these agreements is completed, imports will stabilize. Everything points to a calm period ahead in this respect.
The cards could still be shuffled: For example, a return of former President Donald Trump to the White House cannot be ruled out. What would that mean? It's as unpredictable as the man himself. Although it will go hand in hand with a gradual reduction in compensation from the federal government, the recovery of the Canadian market's full growth potential will be welcome.
Several factors influence dairy farm profitability
As mentioned at the outset, managing the growing volumes of SNF has an undeniable effect on milk prices. Clearly, they are no stranger to the sudden drop in price last June. Through them, the industry is more exposed than ever to the reality of international markets. Historically volatile, these markets have nevertheless shown steady growth between 2018 and 2022. Since the beginning of 2023, the pendulum has swung back. As in the case of grains and meat, it's perilous to predict their evolution and much wiser to guard against the different trajectories the market may take.
Coupled with the cancellation of additional days, the summer price drop in 2023 is so far one of the year's highlights, almost supplanting the rise in interest rates in the order of concerns. To confine ourselves to these two elements, however, would be to obscure the general picture in which the price of small dairy calves, cull cattle and the two excellent grain years of 2021 and 2022 in eastern Canada are situated. The price of cull cattle is – at least partially – correlated with that of feeder calves and steers. After years of dearth, beef production has benefited from a long-awaited upturn. The excellent prices obtained for cull cattle and the impressive prices for small dairy calves provide a counterbalancing effect that is far from unattractive.
It's impossible to write about the dairy economy without mentioning the impact of interest rates. It should be remembered that the annual milk price adjustments take into account the interest paid by the farms surveyed. On the other hand, certain discrepancies with reality in the field may persist.
Firstly, price adjustments are based 50% on the cost of production, then 50% on inflation. Plus, the Canadian Dairy Commission's indexation exercise takes into account the average five-year mortgage rate of Canadian chartered banks, which has evolved very differently from short-term rates in recent years. The propensity of many farms to opt for short terms has proven to be buoyant over the past decade. Is this a guarantee for the future? The answer, and the strategies that follow, are specific to each entrepreneur and vary according to risk tolerance and financial flexibility.
Despite historically high ancillary revenues, the 2023 dairy year may not match 2022. Stagnant production and prices, as well as high interest rates, are acting as headwinds. However, the entrepreneurial spirit of farmers, coupled with the strength and adaptability of our supply management system, continue to instill in the industry a firm confidence in the future – a confidence we share in every way.
