The federal body in charge of Canada’s milk supply is facing pressure to raise prices for a second time this year to help dairy farmers cope with inflation.
The Canadian Dairy Commission (CDC) — a Crown corporation that controls the “farm-gate” price that farmers receive for their milk — instituted a major increase in February. But farmers say it isn’t enough to cover unprecedented spikes in the cost of livestock feed, fuel and fertilizer.
Retailers fear another farm-gate increase will set off a chain reaction through the Canadian food system. The big dairy processors — which pay the farm-gate price for milk and turn it into cheese, yogurt and cream — will want to pass the extra cost onto retailers. From there, it’s up to retailers to decide whether they will accept the processors’ price increase, and then either absorb the added cost or raise consumer prices.
Grocers and their suppliers have been fighting over who should shoulder more of the burden when it comes to inflating food costs. That tension was on full display in Loblaw Cos. Inc. grocery stores earlier this year when PepsiCo Inc. pulled its entire Frito-Lay portfolio of snacks as a protest against the grocery giant’s refusal to accept price increases.
All the squabbling hasn’t stopped grocery bills from rising. Canada consumers are facing the highest food inflation since 1981, with food prices increasing by 9.7 per cent in April compared to last year, according to the latest Statistics Canada consumer price index. Dairy prices were up eight per cent in April, while the price of pasta and meat rose 19.6 per cent and 10.1 per cent, respectively.
Michelle Wasylyshen, a Retail Council of Canada spokesperson, said the calls for another dairy price increase give a glimpse at what grocers are facing when it comes to food prices.
“This points to another example of how retailers continue to face multiple price increases and/or demands from suppliers, which is the primary reason why consumers’ grocery costs are increasing,” she said in an email.
But dairy farmers say their costs are also skyrocketing, due to a variety of geopolitical factors they can’t control.
On top of tracking inflation in consumer goods, Statistics Canada also looks at the goods farmers rely on to produce food in a quarterly report called the Farm Input Price Index. Fertilizer prices jumped 61.8 per cent in the fourth quarter of 2021 compared to the same time a year earlier, according to the latest report, while feed machinery fuel rose 17.2 per cent and 56.8 per cent, respectively.
In response, the CDC announced a historically high 8.4 per cent increase to the farm-gate price of milk. The decision caused plenty of controversy, with processors accusing the CDC of not being transparent enough about how it decides to boost prices.
After the increase was implemented in February, at least one major dairy processor decided to raise prices on retailers by up to 15 per cent.
Normally, that would have been that. The CDC hasn’t adjusted the farm-gate price more than once in a year since 2018. But the Dairy Farmers of Canada has requested another, mid-year increase due to “exceptional circumstances,” though the lobby group wouldn’t say how much it wants prices to go up.
Since the February price increase, Russia’s invasion of Ukraine has heaped more problems onto an already fragile global supply chain. Western sanctions on Russia, a major producer of soil nutrients such as potash and ammonia, have driven up the cost of fertilizer.
The war has also caused global grain price spikes due to concerns about a drop in production from one of the world’s most important grain-producing regions. At the same time, grain supplies are tight in Canada because of last summer’s extreme drought across the Prairies.
The Dairy Farmers of Canada said the cost of feed went up eight per cent between July 2021 and March 2022, while fuel was up 32 per cent and fertilizer rose 44 per cent.
“Dairy farmers are not the cause of food inflation, but have to adapt to the current reality just like everyone else,” the lobby group said in a statement. “Unlike producers of other goods and services, who can adjust their prices behind closed doors, the farm-gate price of milk is adjusted in an entirely open and transparent process through the CDC.”
The CDC controls the farm-gate price as part of the national supply management system. It was created more than half a century ago to shield Canadian dairy, poultry and egg farmers from dramatic price swings in the market. Previously, those swings would have sunk some farmers. Now, the argument goes, those farmers are able to stay afloat, and Canada gets a stable supply of food.
To make the system work, Canada sets the price and caps production to stop supply from outpacing demand. At the same time, the federal government essentially blocks foreign competitors from entering the market by slapping dairy imports with high tariffs.
Canada’s trading partners hate that, particularly the ones with large cheese or butter industries of their own. And opponents in Canada complain the system chokes competition and inflates prices.
The CDC will decide whether to approve a second farm-gate price increase later this month after a two-day consultation with lobby groups representing dairy companies, restaurants, grocery chains, farmers and consumers.
If the CDC accepts the request, it will go into effect on Sept. 1, according to a June 2 memo from CDC chair Jennifer Hayes. But she said any increase in September will end up being deducted from next year’s increase.
—With additional reporting from Reuters