Farm Credit Canada (FCC) has published an update to its 2022 Outlook for Canada’s dairy industry published in January:

Much has happened in the three months since we published our dairy outlook in early February. The war in Ukraine, which has cost so many lives, rattled grains and oilseeds, fertilizer and energy markets.

According to an announcement by the Canadian Dairy Commission (CDC), the higher support avocado prices took effect on February 1, increasing farm sales by 7-8% between January and February, depending on the area. Farm prices skyrocketed to retail prices of dairy products. However, consumption is still strong even as P5 (Eastern provinces excluding Newfoundland and Labrador) announced preferential dates for May (1), June (1), August (1) , September (2), October (2) and November (1) and a 2% quota increase effective April 1. However, the story is different for Western manufacturers. Western Milk Pool (WMP) is facing a milk glut and for that reason has announced a zero credit restriction policy effective on 1st March.

Our forecast does not consider CETA and CPTPP compensations from the federal government. The federal government will announce CUSMA’s compensations in its fall 2022 economic and fiscal update.

2022 trends to watch

1. Production cost

In our January outlook, we asked, “Have feed costs peaked?” We now know that the answer is no. As the outlook for grains, oilseeds and pulses updated, the war in Ukraine has wreaked havoc on crop markets. For farms that rely on ready-to-eat feed, war directly affects their production costs. This is especially true for farms in the Prairies, which rely on imported feed for feed following the 2021 drought. In fact, Western Canada is expected to import 4.5 million tons of U.S. corn for 2021-22, compared with less than a million tonnes in a typical year.

The Canadian Drought Monitor shows large areas of the Prairies are still in a dry state. Quality pasture and hay will be key to keeping production costs low for Western producers. In eastern Canada, no area is currently dry, and the outlook is good for another good hay harvest.

Energy prices also increased. Gasoline prices have increased by about 34% and diesel prices by a spectacular 66%. Energy costs account for about 4% of dairy farms’ direct cash costs. It also affects the costs of other inputs indirectly – their impact on profitability should not be underestimated.

2. Demand for dairy products

Retail prices of dairy products increased after the February 1 livestock price hike. Most of the hikes occurred in February and March. The biggest increase was in butter, which recorded a 12% increase between January and March 2022. The competitive position of dairy products declined in the first quarter of 2022, with prices for other proteins slight increase or decrease.

Milk consumption remains strong despite higher prices. Nielsen data on retail sales showed a 5.4% decrease in milk consumption volume in March 2022 compared to March 2021, with an inflation rate of 6.2%. However, this ignores the impact of shifting consumption to food service with the removal of hygiene measures. For that reason, comparison with other products speaks volumes about the strength of demand for dairy products. During the same period, retail food sales fell 3.1% with an inflation rate of 5.4%, while meat consumption fell by 8.9% with an inflation rate of 9.7%. Overall, this suggests that dairy products held similar importance in customers’ shopping carts last year, even as prices skyrocketed.

3. Import of dairy products

The Government of Canada has revised the allocation of import permits for dairy products as a result of the CUSMA dispute settlement panel. However, the US government was not satisfied with the amendments. The Government of Canada recently closed consultations on how to implement the panel’s recommendation and the dispute remains unresolved.

Canada’s imports of dairy products continue to increase. Figure 1 shows the monthly import value of Canadian dairy products. Since the beginning of 2022, the main source of growth has been avocado imports due to low inventories and higher support prices.

4. Macroeconomic conditions

Inflation continues to be the leading macroeconomic theme. The inflation rate in March was 6.7%, the highest since 1991. The Bank of Canada has raised its policy rate by 0.75% this year, among other significant increases. is a high possibility. For more information on the macroeconomic environment, see our Economic and Financial Markets Update on June 2.

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