Wednesday, 29 July 2015

Getting to the Short Strokes on Trade

I've written a lot on these pages about the importance of supply management to Maritime farmers.  Costs including transportation to get to the big consumer markets make farmers here uncompetitive, while the regulated marketing system called supply management has helped keep many farmers here profitable.  Over the next few days we'll learn the price Canada's dairy, egg and poultry farmers have to pay in order for Canada to join the twelve country Trans Pacific Partnership. Here's a story on the latest news on the negotiations in Hawaii, and a column I recently wrote.

Canada ramps up TPP talks with U.S. on allowing more dairy imports

Canada has begun discussions with the United States on allowing more foreign dairy products into the Canadian market – among the thorniest issues for Ottawa at the Pacific Rim trade talks, which have entered their final stretch this week in Hawaii.
Sources familiar with the Trans-Pacific Partnership talks say Canada has yet to specify exactly what volume of dairy shipments it would allow into its heavily protected market, but the talks are ongoing.
The Japanese government, one of the key players in the negotiations, was the only TPP member to publicly remark on the apparent change in Canada’s conduct at the table.
“They are putting their cards on the table,” said Akira Amari, Japan’s Minister for Economic and Fiscal Policy, according to a translation provided by the Nippon Television Network.
Trade ministers from 12 countries, including the United States, Canada, Chile and Malaysia, have gathered on the island of Maui to try to conclude an ambitious accord that would set a new standard for commercial dealings in the Asia-Pacific region and eclipse the North American Free Trade Agreement in importance.
Canadian International Trade Minister Ed Fast refused to comment on the substance of the negotiations but said he has brought several dozen negotiators to cut a deal – if one exists that satisfies Canada’s national interest.
“We’re going to have four days of tough negotiations where difficult issues have to be resolved,” Mr. Fast said in an interview. “Progress is being made, and Canada is a constructive partner at the negotiating table.”
Mr. Fast is scheduled to hold a one-on-one meeting with his U.S. counterpart, United States Trade Representative Michael Froman, on Wednesday.
Although the TPP talks take place between a dozen countries, it is the one-on-one, or bilateral, discussions between the United States and other countries that have played a key role in advancing overall negotiations.
The scope of the talks is broad. It includes expanded protection for intellectual property such as copyright and drug patents as well as rules to constrain the conduct of state-owned enterprises.
Mr. Fast said Canada wants to see constraints on government-owned companies and sovereign wealth funds so they can’t use their power to tread on private firms or pursue other ends. “We want to make sure that state-owned companies that could act in a manner that is contrary to free-market principles are subject to disciplines that ensure they don’t compete unfairly with companies that are operating within a free market.”
The Canadian government has come under repeated fire from Washington in recent weeks for neglecting to spell out how Canada would open up its sheltered dairy and poultry sectors to foreign competition. U.S. and New Zealand farmers are eager to find a way around the massive tariff walls that shield Canadian milk and chicken farmers.
Other sectors of Canada’s farm industry are growing impatient with the focus on milk and chicken producers, saying there’s far more at stake and that the cost to Canada if it is shut out of a deal would be great.
“Much of the public and political dialogue on the Trans-Pacific Partnership has been focused inward. This is a mistake,” said Brian Innes, president of the free-trade-oriented Canadian Agri-Food Trade Alliance.
“We’re ignoring how improved access to international markets will grow our economy, create jobs and support communities,” said Mr. Innes, whose coalition includes beef producers as well as wheat and barley growers.
“Over the last 10 years in Canada, agriculture and agri-food exports have grown by 77 per cent, from $31-billion to over $56-billion. … An ambitious Trans-Pacific Partnership deal could enable even more growth, along with the jobs that come with it,” Mr. Innes said.
Japan, the third-largest economy in the world, is the big prize in the TPP talks because it has signed relatively few trade agreements and the market is still relatively untapped by foreign firms.
The Obama administration is trying to wrap up a deal this week, but the timing is poor for the Conservative government in Canada, which faces an election in October and will have to weather a backlash if it grants significant access to foreign imports.
Asked whether he’s prepared to close a deal this week, Mr. Fast said: “If there’s an agreement on the table that represents a strong outcome for Canadian interests, that is very clearly in Canada’s national interests, we are prepared to complete a deal.”
John Manley, president of the Canadian Council of Chief Executives, said Ottawa’s need to defend supply-managed goods such as dairy and poultry hinders its ability to be a leader in international trade talks. He calls these sectors, where prices and production are regulated, “the last vestige of Soviet-style central planning on the planet” and says a TPP deal is crucial to help boost weak Canadian economic growth.

He Said What?

A group of Islanders went to Ukraine about fifteen years ago to look for opportunities in the potato industry.  One came back with a story about why large collective farms had performed so poorly during the Soviet era. A farm manager was paid based on the number of times he filled up his tractor with fuel, an indication the planners must of thought, of the amount of work he was doing.  Of course this farm manager beat the system by doing almost no work, and leaving the tractor running all the time, even driving it to the nearest bar during the day and leaving it running outside.

I thought of that story when I read a comment recently by someone who should know better. John Manley, president of the Council of  Chief Executives was talking about supply management in the dairy industry and said this:  “I describe it as the last Soviet-style economic regime on the planet.”  The comment came in a series of stories in the political and business sections of the Globe and Mail and the National Post on negotiations for a big new trade deal called the Trans Pacific Partnership. The U.S., New Zealand and Australia are big dairy exporters and want Canada to give up the high duties it uses to protect the dairy industry from cheaper foreign competition.   The two papers are outdoing themselves trashing supply management, and John Manley,  a former Liberal finance and trade minister, now the spokesperson for the who’s who in Canadian business,  is a reliable source for a good quote to support this campaign.

I think John Manley’s statement is plain and simply ignorant. Drunk farm managers with no real incentive to be productive is Soviet-style agriculture.  Supply management is not.  It’s a regulated marketing system that attempts to match the supply of milk  and dairy products with demand in Canada. Quotas are used to limit production, and prices are established based on the cost of production.  Yes it does mean that efficient dairy farmers can make a middle-class living, but only if they do the work, and make good decisions managing their herd, not sit in a bar all day.

And yes  the quota to start a dairy farm is expensive, but there are substantial costs to becoming a lobster fisherman, to buy an existing medical or law practice, or a bar or taxi license.  Various industries are managed or regulated to limit new entrants, and protect the  incomes of the existing players. Canada is well-known for shielding its airlines, banks, media companies, music industry and so on from direct foreign competition,  just as other countries do.  

I often think the dairy industry has become the whipping boy for the free market crowd for a number of reasons.  One is that all of its financial information is very transparent through the Canadian Dairy Commission, and various provincial marketing boards, so critics have real numbers to work with.  Secondly few outside of agriculture appreciate that oversupply in most commodities quickly drives down the price, often below the cost of production (see potato crop harvested 2014). So yes it takes a lot of rules and regulation to tailor production to demand and really in Canada it’s only those industries (dairy, eggs, poultry)  where weather is not a big factor in production levels where this can be done successfully.  And I’m sure there’s some of that urban arrogance that was captured when CBC reporter Maggie Brown asked Galen Weston,  the executive chairman of Loblaws,  why is it that farmers feel that they are being underpaid.  Weston’s reply was that it wasn’t a question worth answering: “Because they are farmers and farmers feel that way.” 

Unfortunately it’s not just the pin-striped suit crowd and media elite that want to undermine the dairy industry. Canada’s big dairies (PEI’s ADL and Purity Dairy are exceptions) are using a trade loophole and importing increasing amounts of protein isolates and concentrates used to thicken dairy products like yogurt and ice cream.  The cheaper imports help the dairies bottom line, but cuts into the incomes of dairy farmers. Some milk in Ontario is now being used as animal feed because there’s simply no market for it.  Dairies have benefitted too from the stability and price guarantees in the dairy industry, but they’re now eroding  the system, giving critics much more ammunition to kill it off.

Subsidies and the environment are two other issues that don’t get much attention. Yes U.S. dairy farmers are paid less which is the underpinning for cheaper dairy products, but they’re also subsidized through government cheques in the mail. In Canada farmers are just paid once. Is there an appetite to add income support to put farmers here on the same footing if supply management disappears?  I doubt it. And the size of farms needed to compete in ruthlessly competitive export markets has become an environmental problem in New Zealand, Australia and the United States.  More than 50% of U.S. milk is produced on 3% of the farms, all with more than a thousand cows, and opposition is growing in states like Wisconsin  after manure spills.  Dairy Industry Posing Pollution Threat To New Zealand's Rivers, Says Expert” is a recent headline in the International Business Times.  Bigger not always better.

It may be that other countries like Japan will want to protect it’s rice farmers, and the U.S. its sugarcane growers, and so on that countries will be allowed some exceptions to strict free trade. That’s how Canada has maintained supply management in other trade negotiations.  For now expect the relentless attacks to continue. And watch out for the Soviet central planners at the dairy farm down the road. 

Wednesday, 8 July 2015

More Bigger Not Better

The on-going campaign on the business and political pages of our major newspapers to snuff out supply management continues.  President Obama now has congressional approval to negotiate the final terms of what's called the Trans-Pacific Partnership, setting the stage for final bargaining over the next couple of monthes on an 11 country trade deal that includes important emerging economies in Asia and South America.  The U.S., New Zealand, and Australia in particular want Canada to give up the high tariffs  used to shield the regulated dairy, poultry and egg industries from cheap imports.  I've written extensively about this over the last six years, and the search function at the bottom of the page will show you where those are if you wish.  

While cheaper milk and cheese is held up as justification for getting rid of supply management, there are other factors that don't get as much attention, like subsidies and the environment.  Yes U.S. dairy farmers are paid less than Canadian which is the underpinning for cheaper dairy products, but they’re also subsidized through government cheques in the mail. In Canada farmers are just paid once. Is there an appetite to add income support to put farmers here on the same footing if supply management disappears?  I doubt it. And the size of farms needed to compete in ruthlessly competitive export markets has become an environmental problem in New Zealand, Australia and the United States.  More than 50% of U.S. milk is produced on 3% of the farms, all with more than a thousand cows, and opposition is growing in states like Wisconsin  after manure spills.  “Dairy Industry Posing Pollution Threat To New Zealand's Rivers, Says Expert” is a recent headline in the International Business Times.  Bigger not always better. 

And this week more indication that the free market doesn't always bring the best results. And don't forget this is the export market the media elite think is just full of opportunity for Canadian dairy farmers.

Milk Spilled Into Manure Pits as Supplies Overwhelm U.S. Dairies

Domestic output is set to be the highest ever for a fifth straight year. Farmers are still making money as prices tumble because of cheaper and more abundant feed for their herds. Supplies of raw milk are topping capacity at processing plants in parts of the U.S. and compounding a global surplus even with demand improving.
Agri-Mark, a 1,200-dairy cooperative in New England that had $1.1 billion of sales last year, started pouring skim milk last month into holes used for livestock manure. It was the first time in five decades, and farmers so far have unloaded 12 truckloads, or 600,000 pounds (272 metric tons). While having small amounts of milk spoil or go unsold isn’t unusual, Northeast dairies dumped 31 percent more this year through May than the same period of 2014, government data show.
“Usually we’d find someone to buy it at a reduced price, or ship it to the Midwest,” said Bob Wellington, a senior vice president at Andover, Massachusetts-based Agri-Mark, which was founded in 1913. “But those plants are full. There’s no way to process it in the time needed for a perishable product.”

Global Glut

Domestic output in May reached 18.4 billion pounds, the most in any month, and is on pace to reach a record 208.7 billion pounds this year, the U.S. Department of Agriculture said June 18. Globally, production will rise 2.1 percent to a record 582.52 million tons as top exporter New Zealand sells the most ever and the European Union ends limits on dairies that had been in place since 1984, the USDA said.
U.S. farmers expanded after futures on the Chicago Mercantile Exchange surged to a record in September, fueled partly by rising cheese demand and a jump in purchases by China. Since then, warmer weather has brought a seasonal increase in supply, demand slowed from importers, and a stronger dollar eroded exports.
“The world needs less milk,” said Eric Meyer, president of HighGround Dairy, a Chicago-based broker.

Price Slump

Global dairy prices have dropped 39 percent from an all-time high in February 2014 and are the lowest in five years, United Nations data show. In Chicago, benchmark Class III milk futures, used in cheese making, are down 36 percent to $16.11 per 100 pounds from a record $25.30 in September. Prices may fall to $14.41 by the end of the year before recovering in 2016, said Tom Bailey, a New York-based analyst at Rabobank International.
New Zealand’s dollar has tumbled to a five-year low as falling milk prices amplified speculation the nation’s central bank will cut interest rates this month. The kiwi slid against almost all of its 16 major peers this year.
The milk slump has been a boon to buyers including processor Dean Foods Co. and retailer Supervalu Inc., contributing to a slowdown in the pace of food inflation.
At the same time, the dollar’s rally against most of the world’s currencies helped to spur a 10 percent drop in U.S. milk exports in the first four months of 2015, while imports rose 12 percent, compounding the domestic surplus, government data show.
The bear market has been no barrier to more supply. At Mitch Breunig’s farm in Sauk City, Wisconsin, he’s still profitable even as the value of his milk fell 26 percent. Costs have dropped for things like fuel, and wet spring weather left an abundant alfalfa harvest, providing higher-quality hay for his 420 cows to eat. The animals are producing 3 percent more milk than last year.

Feed Profitability

“I just have way more feed than a year ago,” Breunig said, adding that his eight grain silos are full. “In terms of profitability, boy, that has a huge effect.”
Demand remains strong, with Americans eating more dairy products than ever, especially cheese and butter, said Bill Brooks, a Dearborn, Missouri-based dairy economist at INTL FCStone. Futures may reach $17.57 in the fourth quarter, he said June 18. The USDA estimates global milk demand will rise for a sixth straight year to a record 582.7 million tons.
There’s also concern output is dropping in California, the largest U.S. producer. A four-year drought may be eroding feed quality and cutting into profit, said Bill Schiek, an economist at the Dairy Institute of California in Sacramento.

Shrinking Profit

Dairy profits may not last much longer. Income over feed costs will fall 38 percent to average $8.90 per 100 pounds of milk in 2015, from a record last year, FCStone’s Brooks said. Profit margins below $7.50 usually signal output will drop, according to Matt Gould at the Dairy & Food Market Analyst newsletter.
For now, there’s more than enough incentive to produce more milk. Breunig, the Wisconsin farmer, estimates his alfalfa costs will drop 26 percent to $70 a ton this year, while corn will be down 10 percent. He’s also getting top dollar from the slaughterhouse for calves and old cows at the end of their productive life, because wholesale-beef prices are near the highest ever.
Dairies in the Northeast dumped 31 million pounds of milk in the first five months of 2015, including 7.9 million in May, which was 67 percent more than the same month last year, USDA data show. Farmers are saying it is the most ever, according to the dairy newsletter’s Gould.
The 1,950 cows at Majestic Crossing Dairy in Sheboygan Falls, Wisconsin, are still making money for co-owner Dean Strauss even after revenue sank 40 percent from last year.
“There’s ebbs and flows,” Strauss said. “We have to be prepared and put money away when the times are good, for when poor markets come.”