Fears about skyrocketing dairy prices may be misplaced, economists say

Article content

The chief executive of the Montreal cheese-making giant Saputo Inc. on Thursday afternoon seemed to confirm what many had already feared about the price of milk.

Article content

“Whatever increase there is going to be on the raw material, we need to pass that onto the market,” Lino Saputo Jr. said toward the end of a conference call for investors.

He was referring to the Canadian Dairy Commission’s announcement late last week that called for a historic 8.4 per cent increase in the “farm-gate” price of milk, which amounts to six cents per litre. Under supply management rules, the commission can establish the price that farmers get for their raw goods, but not the price at retail.

Canadian consumers have since been wondering how much the farm-level increase will end up costing them in the grocery store when it comes into effect early next year.

Saputo’s comments validated what many were already expecting: that the farm price increases next year will keep spiralling through the supply chain and eventually hit consumers.

Article content

But some economists and scholars argue it won’t be as painful as many seem to fear. They say the relationship between farm prices and supermarket prices is messy, to say the least, and a big bump on one end doesn’t always result in an equally big bump on the other.

“These are not direct, linear relationships,” said Tyler McCann, managing director of the Canadian Agri-Food Policy Institute, an Ottawa-based think tank.

Farm prices are “a small, small piece” of the final cost of a retail product, he said, and something as simple as a supermarket sale on milk could absorb any extra costs the consumer would have felt from a farm-gate increase on raw milk, since grocers often use fluid milk as a “loss leader” to drive traffic to their stores.

Article content

Chantal Paul, director of corporate services at the Canadian Dairy Commission, acknowledged its decision would lead to increases for consumers “for sure,” but said the “magnitude of this increase is really going to depend on what’s going to happen down the supply chain.”

Historically, only a quarter of the percentage increase at the farm level “finds its way to retail,” according to Jean-Philippe Gervais, chief agricultural economist at Farm Credit Canada, who compared farm-gate milk prices to retail prices on dairy products over the past decade or so.

An 8.4 per cent increase for farmers would, historically, increase checkout prices by two per cent, he said. But there are other pressures in the supply chain currently driving up costs, too, including high transportation fuel costs and major labour shortages at processing plants.

Article content

“It all depends on the weight of milk in the overall retail product. Then you add on labour, transportation, packaging, all that stuff,” Gervais said. “I think it’s a little bit misleading to think that eight per cent at the farm level is going to trigger some significant increases in per-cent terms at the retail level.”

Gervais also said dairy prices haven’t historically risen at the same pace as overall food inflation. In the past 10 years, he said, overall food prices have risen nearly three times more than dairy product prices on a percentage basis, according to Statistics Canada data.

Food prices are on the rise this year in a number of categories, due to supply chain complications and droughts in much of western North America that pushed down crop yields.

Article content

“We expect meat prices to go up. We expect grain products, bread and pasta to go up. We expect fresh produce to go up through the winter, all for a variety of reasons, but none of those have organizations that announce those price increases,” said University of Guelph food economist Michael von Massow. “So it looks like dairy is an outlier here, but the truth is, it isn’t.”

Dairy farmers have reported that major jumps in the price of fuel, fertilizer, equipment and livestock feed have made it more expensive to raise cows and produce milk, so the price hikes were to be expected, he said.

Article content

“What we’re noticing here is, yep, it’s a really big bump in dairy prices, one that we’re not used to seeing,” von Massow said. “But if we look at some of the underlying reasons for why that might happen, even without the detailed cost of the production model, it’s not a huge surprise for me.”

But the process of calculating the cost of production hasn’t been transparent enough for Sylvain Charlebois, the Dalhousie University professor whose public criticism of the commission’s price increase sparked a national debate this week on supply management.

Charlebois, who leads Dalhousie’s Agri-Food Analytics Lab, has argued that the dairy commission doesn’t provide enough information around how it tracks changes in the cost of production, which, in turn, informs its recommendations on milk price increases.

“It’s so opaque, it’s unbelievable,” he said earlier this week. “And their decisions will impact many, many Canadians.

• Email: [email protected] | Twitter: jakeedmiston