TheDairySite.com - news, features, articles and disease information for the dairy industry

News

Inflation impacts Canadian dairy profitability - FCC

09 August 2022
Beef Cattle Research Council

The CDC announced a 2.5% increase in the farm gate milk price

Inflation continues to put pressure on dairy profitability, according to Farm Credit Canada's most recent dairy outlook report. Energy and feed prices seem to have peaked - but both remain near historical highs. With high inflation expected to continue, the Bank of Canada (BoC) raised its policy rate by 1%, increasing the cost of capital for farmers. After consultations with stakeholders, the Canadian Dairy Commission (CDC) announced a 2.5% increase in the farmgate milk price, effective on 1 September, to partially offset the impacts of inflation. This price adjustment will be deducted from the next price adjustment scheduled for 1 February 2023.

Production costs

Feed prices have eased from their peak. As a result, FCC lowered its forecasts for grain prices compared to earlier projections, but they remain well above their five-year average.
Although large areas in the Prairies are under moderate or severe drought, conditions have significantly improved according to the Canadian Drought Monitor. Recent Alberta crop reports show that the quality of pasture and tame hay have improved compared to last year but are still below their long-term averages. Western producers are expected to reduce feed imports, lowering production costs. In British Columbia, a wet and cold spring has meant reduced feed production. In Eastern Canada, the outlook is still positive for another good hay harvest.

Recent data show that prices for gasoline and diesel have begun to decline since peaking in June. Predicting the price of oil is a risky business, but signs are pointing to a decline in oil prices due to increased production and slower consumption growth.

Demand for dairy products

Following the February farmgate price hike, the price of butter increased the most at retail. From the June inflation data, the price of butter increased by 17.5%, compared to 7.9% for cheese, 8.0% for fresh milk and 8.7% for dairy products in general. This is not too surprising because after CUSMA, the lever the Canada Dairy Commission can use to increase the price at the farm is the support price of butter. For other dairy products, prices have been increasing more gradually as the prices for components other than butterfat depend on prices in the United States and in the rest of the world.

Inflation of world prices for skimmed milk (or nonfat dry milk) is also high and has helped balance the relative prices of milk components and supported the farmgate price. Between June of 2021 and 2022, the U.S. price for nonfat dry milk increased by 42.5%. In Canada over the same period, this caused the price of class 4(a) for non-fat solids to increase by 68%. Inflation in other milk classes has been high from a historical perspective but much lower than in class 4.

Given inflation, how well is the demand for dairy products holding up? It's difficult to make definitive statements about the strength of demand because year-over-year (YoY) comparisons are not informative due to pandemic disruptions. Moreover, the demand for dairy is getting tested by high inflation for the first time in several years, and we are uncertain how consumers will shift consumption toward new products. Nielsen data for retail sales show that dairy volumes declined 7.8% in May 2022 compared to May 2021, with a 5.4% inflation rate over that period. The consumption decline could be partially attributable to increased consumption in food services and not reflect a shift down in the demand for dairy products. Consumption data for dairy alternatives suggest that it is the case. Like dairy products, volumes of dairy alternatives declined 6.0% YoY while their price increased by 2%.

Imports of dairy products

The value of Canadian imports of dairy products has continued to grow, but this largely reflects price inflation. Compared to the first five months of last year, import volumes for milk and cream have declined, but have increased for buttermilk, whey, butter and cheese.

The Canada-US-Mexico Agreement (CUSMA) has been with us for two years. By the end of July, the import quota for butter should be nearly filled. This is not surprising given that this product has the highest fill rate given the low stocks-to-use ratio for butter. Filled rates for milk and cream will exceed 50% but should not approach 100%.

Macroeconomic conditions

Inflation hit 7.7% in June. The BoC increased the overnight interest rate (OIR) by 1% on 13 June, noting in its announcement that it expects inflation to stay high for the rest of 2022. The BoC has increased the OIR by 2.25% so far this year. BoC is expected to increase the OIR by another 0.5 to 1.0% before the end of the year.

TheCattleSite News Desk

Partners


Seasonal Picks

Managing Pig Health: A Reference for the Farm - 2nd Edition