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The P5, a pool including the dairy boards of Nova Scotia, Prince Edward Island, New Brunswick, Quebec and Ontario, has announced two production quotas hikes this fall. The first is a 2% increase that became effective in on October 1. The second is another 2% increase that will become effective on January 1. In addition, the P5 issued several incentive days for fall 2022 and for fall 2023.¹ The stated objective is to better match production and consumption given a projected decline in butter stocks in late 2022 and 2023. I am not aware of any production hike for the Western Milk Pool (WMP), a pool that includes the dairy boards of Manitoba, Saskatchewan, Alberta and British Columbia.

The P5 announcements got me looking into milk production data. I thought I would share a few graphs and observations with you. This post provides an overview of some data and is meant for those who know little about Canada’s dairy sector or those who’d like a refresher on recent trends. You’ll learn about production across provinces, milk composition, stocks and farm gate prices.

More milk going into processing

Let’s start by looking into production data in Figure 1. Be careful when looking at that figure because the scale on the vertical axis differs by province; otherwise it would not be possible to clearly see the data for the smaller provinces. In Figure 1, and other figures, I do not show data for Newfoundland and Labrador because it is small and not part of the P5 or the WMP.

Milk production has steadily increased in the P5 provinces but has flattened or declined in the WMP provinces. Quebec is the largest producing province, followed by Ontario. Quebec and Prince Edward Island produce relatively more milk for industrial purposes, i.e., milk that is processed into dairy products. Milk volumes for industrial purposes have increased while volumes for fluid purposes, i.e., for retail sale as liquid milk, have flattened or declined. This reflects the trend of lower fluid milk consumption but increased consumption of dairy products such as cheese. As a greater share of milk is for industrial purposes in the P5, member provinces have been less impacted by the drop in fluid milk consumption than those member of the WMP.

Trends in production respond to the trends in consumption. Thus, to illustrate the trend of lower fluid milk consumption, I took the data in Figure 1, aggregated them at a quarterly frequency and then divided them by quarterly population estimates. The result are the per capita volumes of milk for fluid purposes shown in Figure 2. Indeed, per capita volumes for fluid purposes have declined in all provinces, but less so in Quebec. Looking at the figures for New Brunswick, Nova Scotia and Manitoba, we see sudden jumps up and down volumes. My guess is that those can be explained by the opening of the closing of plants.

Quebec appears in a good position relative to other provinces given the slower decline of volumes for fluid purposes and its important dairy processing sector. However, one downside is that the price of milk for fluid purposes is higher than the price of milk for industrial purposes. For that reason, as we will see later, the milk farm gate price has been higher in the WMP than in the P5.

Milk at the farm contains more fat

Milk is priced to farms according to its butterfat, protein and other solids content. In the last few years, marketing boards have been pricing milk components to give incentives to farmers to produce more butterfat as it is the relatively scarce component on the Canadian market.

There are different ways farmers can increase milk butterfat content, including genetics and feeds. Figure 3 shows that farmers have been responding to those incentives. Butterfat share of total solids has increased the most in British Columbia and growth has been the most modest in Quebec. Butterfat content is seasonal and thus are farm-gate prices.

Low butter stocks

We are getting to the reason for the recent quota hikes. Stocks are used to smooth out seasonal variations in butterfat supply while demand for butterfat is a lot smoother. The Canadian Dairy Commission (CDC) also uses butter stocks to support farm gate prices. The CDC sets a minimum price for butter at which it will buy and sell butter, effectively putting a floor price on butter.

I calculated the butter stock-to-use ratio in Canada between 2010 and 2022. The stock-to-use ratio is a useful way of summarizing the strength of the supply and the demand. It represents the number of months that stocks could satisfy consumption without new production coming in.

I collected data for stocks and utilization from Statistics Canada table 32-10-0109. My understanding is that those data only consider the inventory held by dairy processing companies and therefore will tend to underestimate total butter stocks. Nonetheless, they show reliably well trends in butter stocks in Canada. Figure 4 shows the data. I added a horizontal dashed line for a stock-to-use ratio of 2 to facilitate comparison between years. There is no particular meaning to that value.

Figure 4 shows that the stock-to-use ratio was high in 2018 but has declined since. It’s been hovering around 2 since late 2020. The CDC observed that butter stocks were 26,158 tonnes in August and are expected to decline to 16,000 tonnes by the end of the year, a value not seen in 6 years. Those recent low levels and expected low levels have motivated quotas hikes in the P5.

How much are farmers getting paid?

Figure 5 shows farm gate milk prices in Canada from Statistics Canada table 32-10-0077. These are average prices. Farms do not all receive the same price as their revenue per hectolitre depends on the concentration of the three components. I added a dashed line at $80/hl to make the comparison between provinces easier. There is no particular meaning to the value of $80/hl.

A few observations from Figure 5:

• Prices go up and down because of seasonal variations in component concentrations and variations in component prices.

• Prices grew slowly until February 2022 when the CDC increased the farm gate milk price by $6.31/hl.

• Revenues are shared within milk pools and for that reason members within a pool tend to be paid similar prices. The P5 and the WMP have started a three-year process to share their revenue. The transition to full revenue pooling will be completed in July 2023.

• Average prices in the WMP tend to be higher than in the P5. This reflects the larger share of milk sold for fluid purposes in the WMP.

I’ve been dubious for some time of the accuracy of the farm gate prices published by Statistics Canada. I finally took the time to collect data from the Producteurs de Lait du Québec (PLQ) and compare their prices to those published by Statistics Canada. The gross prices published by the PLQ is significantly higher than the prices published by Statistics Canada. However, once I removed administrative fees and transport costs, prices from the two data sources are very similar as Figure 6 shows. That’s reassuring. Prices have diverged more over the last year but I expect that as Statistics Canada revises its data that they will become more comparable to those of the PLQ.

What else?

Of course, there is a lot more to write about the Canadian dairy sector. I’ll come back eventually to show more data and possibly analyse current issues. Let me conclude by noting that the farm gate milk price is set to increase by 2.2% on February 1, 2023. This follows a 2.5% increase implemented on September 1, 2022.