Dairy quota: a useful management tool
There’s an old saying that you can’t go home again. Matt Plett proved it wrong in 2007 by buying back the family dairy farm near Landmark, Man., that his father had sold 15 years earlier.
Plett and his wife Tanya used their savings to buy the farm. After renovating the vacant tie-stall barn, they bought cows and quota to satisfy their life-long dream of becoming dairy producers.
Obtaining quota was the key. To purchase 50 kilograms worth – the minimum considered necessary to be commercially viable – the Pletts needed roughly $1.25 million. Thanks to a sound business plan and a willing financial institution, they got it.
It was a lot of money for a young farm couple to borrow. But today, after adding another 17 kilograms at an even higher price, Plett, 32, says the cost of quota isn’t necessarily prohibitive to entering the dairy business.
“If someone really has their mind set on it, I do believe it’s still possible,” he says.
Along with import controls and regulated prices, quota forms the foundation of Canada’s supply-managed dairy and poultry industries. Allocated nationally (except for fluid milk) and distributed provincially, quota controls the amount of milk, eggs, chicken and turkey a farm may produce.
To either obtain or sell quota, producers go through quota exchanges administered by provincial marketing boards, using a bid-and-ask procedure to establish a clearing price for a successful transaction. Ever since exchanges originated in the 1990s, quota values have increased dramatically. Manitoba is no exception.
In February 1995, Manitoba’s clearing price for one kilogram of butterfat (the standard unit for dairy quota) was $8,800. By 2009, the average price had nearly tripled to $25,774.94 a kilogram. In November 2011, it topped $31,000 a kilogram. (A kilogram of butterfat is roughly equivalent to one dairy cow.)
Spiraling prices occasionally lead to suggestions that farmers may be speculating in quota as well as using it. But David Wiens, Chair of the Dairy Farmers of Manitoba, says there’s no indication that producers use quota as anything other than a farm management tool.
“From our perspective, we don’t see any evidence of producers buying or selling quota based on speculation,” says Wiens, who milks cows near Grunthal, Man. “What we see is that producers are either buying for expansion or reducing their herd size.”
It’s true that quota exchanges will see major transactions involving producers wanting to expand significantly and others trying to sell out completely. But Wiens says successful exchanges don’t always involve big numbers. Sometimes they can be quite small.
Wiens says dairy farmers often buy or sell small amounts of quota to fine-tune their milk production. If cows temporarily underperform for some reason, producers may sell one or two kilograms. If production suddenly exceeds their quota base, they can buy small amounts of quota to bring things back into balance. Such back-and-forth transactions may occur several times over the course of a year.
The cost of quota doesn’t always go up either, Wiens adds. Two years ago, dairy quota values in Manitoba dipped for several months because poor feed quality resulting from wet weather caused milk production to fall. Instead of buying quota, producers struggled to fill their existing allocations. Later, when production improved, quota trading picked up again. So did the clearing price.
It’s an example of the market working as it should, Wiens says.
“If you only want to expand by three or four kilos, it’s probably not an issue,” he says. “If you’re increasing your herd size by 20 per cent, it becomes much more of an issue.”
Not all provinces approach quota values the same way. While the P4 western milk pool (Manitoba, Saskatchewan, Alberta and B.C.) allows the price of quota to float, the P5 eastern pool (Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island) controls it.
Starting August 1, 2009, the P5 began a phase-in program to cap the price of quota at $25,000 a kilogram.
The reason for the move was to shield milk producers from running up too much debt, says Phil Cairns, senior policy advisor for Dairy Farmers of Ontario. Quota purchases were being financed over ever longer payback periods, a key factor in the rise of quota values over the previous 10 years.
The result has been mixed. Quota prices have indeed stabilized. But the cap has resulted in upward pressure on the price of land, cows and facilities, says Cairns.
There’s no denying that quota is expensive. Farm management specialists say quota makes up two-thirds of the cost of investing in a dairy farm.
But for farmers like Matt Plett, quota is just the cost of doing business.
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