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In the first issue of PMQ Canada, we discussed the price of industrial milk (used to make cheese) and how it affects Canadian pizza operators. We reported that the Canadian Dairy Commission (CDC) decided to hike prices 11.7 percent this year despite complaints by stakeholders in the industry. This increase equates to $254 million in subsidies for dairy farmers passed on to restaurateurs and consumers.
As you all may very well know, this pricing affects pizza operators more than other restaurant owners because frozen pizza manufacturers are given a 30 percent discount in the price of cheese to help them compete in the NAFTA market. During the time this ruling was made, frozen pizza and ready-to-eat pizzas were not in fierce competition like they are now.
With better technology and improved recipes, frozen pizza is quickly gaining a share of the market at the expense of ready-to-eat pizza operators. According to the Canadian Restaurant and Foodservice Association’s (CRFA) report “The Impact of Two-Priced Cheese on Canada’s Pizza Market,” the sale of Canadian frozen pizza and fresh pizza at Canada’s grocery stores grew more than 410 percent between 1997 and 2001, from $45 million to $230 million. The frozen pizza category accounts for 17 percent of total frozen prepared food sales in Canada—double the market share it had in 1997—making it the leading frozen food in terms of growth.*
With the increase in consumers getting more and more meals away from home, the competition increases not only among convenience restaurants and pizzerias but also with the frozen market. The fair thing to do would be to level the playing field by overturning the discount. With that said, some new developments have arisen on the dairy price market.
How Prices Are Decided
First, let me remind you how cheese prices are set in Canada. The CDC was mandated in 2002 to support the cost of production for half the nation’s farmers by 2006. The mandate is based on cost of production from efficient farmers. The CDC conducts an annual study on farms that produce industrial milk. The findings of this survey are what decide whether prices go up or down. The CDC has not defined what determines an efficient farmer.
The CRFA says that the price of milk has only gone up since the termination of a CDC oversight committee (made up of consumer and industry stakeholders) in 1994. There is no reason for the ending of the oversight committee, and the CRFA has repeatedly called for its reinstatement. The dairy farmers in Canada make an average profit margin of 23.4 percent, compared to 14.9 percent for other farms and just 4.6 percent for foodservice operators, the CRFA reports
The CRFA also reported that the cost of production for farmers has fallen 5.1 percent since 1999. The CDC said last year, in a report from the CRFA, that a significant increase in dairy prices was necessary to offset BSE-related (mad cow disease) losses by dairy producers. These losses came from the United States closing the border to imports on Canadian beef since two cases of mad cow disease were reported.
New Developments
The Ninth Circuit Court of Appeals in California recently lifted this ban. The Circuit Court cited there was no scientific justification for U.S. District Court Judge Richard Cebull in Billings, Montana, to mandate a continued ban on cattle imports after the U.S. Department of Agriculture asked for the ban to be lifted, according to the U.S. National Restaurant Association.
Another significant piece of news is that the price of cheese in the United States had fallen to $1.37 per pound at press time. This is the lowest price since October 2004, according to The Cheese Reporter.
Official Reactions
After discovering this news, I contacted Ron Reaman, vice president of food supply for the CFRA, to get his take on whether the reinstitution of cattle trade between the U.S. and Canada would lower dairy prices. His reaction was that this should in essence lower prices, but he doubted it would do any good. “A component of that percent was compensation for the border closing,” Ron says. “Dairy control has consistently gone up, and it’s no benefit to us in the restaurant industry. We would certainly implore a roll-back on the prices with the open borders.”
I also contacted Chantal Paul, chief of communications for the Canadian Dairy Commission, asking the question, “Some new developments have come up in the dairy market with the price of milk falling in the United States and the border being reopened for cattle trade from Canada to the United States. Do you see this causing a drop in industrial milk pricing over the next few months or next year?” Her response was as follows:
“Prices for industrial milk in Canada (milk for processing into cheese, butter, yogurt, etc) are determined once a year,” Chantal says. “New prices are announced mid-December and take effect the next February 1st. So in the short term, general industrial prices will not react to the partial border opening. This change in the trade situation could have an impact at the next pricing review, next December.
“As far as special class prices, which are available for frozen pizza makers, among others, they generally follow U.S. prices. So if the price of cheese falls in the States, the special class price for cheese in Canada will follow. These prices are reviewed once a month.”
This statement brings good news for the frozen pizza manufacturers. It looks as though they will enjoy an even lower price on cheese since they are given the discount on industrial milk. The pizzeria owners will not enjoy any benefits between now and the end of the year. We will be watching closely to see if the opening of the border will lower the price of industrial milk in December.
What Can Be Done
The CRFA will continue to work on behalf of the restaurant industry on this issue, Ron says. He also said the World Trade Organization is examining the agricultural tariff system in many countries including Canada this year. He says this may affect how pricing plays out in the future. We’ll keep you updated as we get reports from them on the summits affecting the agriculture industry.
So, what can you do as an operator? As we mentioned in the first article on this issue, it’s important for you to contact your Member of Parliament representative. Your role as a pizzeria owner is to make the government aware of how the cheese pricing policies are hurting your business. You can find your M.P. by following this link http://www.parl.gc.ca/common/ index.asp?Language=E. We also want to hear your thoughts. Please email your comments to canadiancheese@pmq.com.
– PMQ –
*Canada Market Development Reports: An Overview of Selected Segments of The Canadian Frozen Food Industry – “2002”, USDA GAIN Report. Data from A.C. Nielsen Market Track Report.
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