The creation of the Milk Marketing Board, now an organization called Dairy Farmers of Newfoundland and Labrador (DFNL), transformed dairy production on the island. Marketing board is a bit of a euphemism. DFNL meets four or five times a year to set the farm gate price – what farmers can expect for a liter of raw milk. It’s what economists would call price fixing, but to members of the industry it’s just good sense.
“Supply Management guarantees stable pricing, consistent production, high quality standards, and it allows farmers to negotiate as a group. Participating in supply management systems gives farmers stability and the confidence to invest in their farms,” says Harry Burden, DFNL manager.
Supply management systems are used across the country to regulate dairy and poultry farms, Newfoundland was just the last province to institute the model. While the process undeniably sets the price of raw products, it is far from capricious.
“Farm gate milk prices in Newfoundland are regulated by DFNL based on detailed cost of production data,” explained Burden in an email. “This data is collected from a representative sample of Canadian farms each year, and in Newfoundland we do a detailed cost of production study on all farms every 10 years. This formula is used nationally and was negotiated by representatives of farmers, processors, consumers groups, and governments, under the supervision of the Canadian Dairy Commission.”
Supply management is protectionist, but it also works extremely well. Newfoundland became self-sufficient in fluid milk production in 1997. By the end of the decade, dairy farms on the island were producing a surplus. The industry was strong enough that, in 2001, DFNL successfully lobbied to join the National Milk Marketing Plan (NMMP), which entitled Newfoundland farmers to an additional market share quota of 31-million liters of industrial milk annually, to be reached by 2015. Overall dairy production jumped from 34-million liters in 2001 to almost 50-million liters in 2009 – made possible by approximately $100-million in industry investment.
Low fat fudge bars in production on Scotsburn's Gram ice cream extrusion line.
Statistics Canada reports that per capita fluid milk consumption decreased across the country from 1997 to 2007, and this brings us back to the two major players on the processing side of the equation. Scotsburn and Central rose to their current position through consolidation with, and of, other companies. Newfoundland and Labrador is still a small market facing lots of challenges. Would a merger of the two organizations make sense?
Not according to Gerry Smith, senior vice president of Scotsburn. “We’re two competitive companies supplying two different brands,” he said. “I would expect that to continue.”
“No comment,” was the response from Smith’s Central Dairies counterpart, vice president Dave Collins.
It could be that a merger really wouldn’t make sense. The two companies coexist peacefully in a textbook example of duopoly, and while there might be some economy of scale gained by combining distribution systems, it is hard to believe a provincial monopoly would be allowed in such a heavily regulated industry. Conjecture aside, what has happened is exactly what 19th century economist Antoine Augustin Cournot predicted. Cornot, who first posited the duoploy model, suggested that in a game with two players, each would alter their output until they shared the market equally, and realized normal profits.
The duopoly model stands (even thought it doesn’t account for Newfoundland’s relatively small population) but it only stands as far as fluid milk is concerned. Brookfield Ice Cream Ltd. (included in the Eastern Dairyfoods merger), had been manufacturing ice cream in the province since 1926. Five years after the merger, in 1989, the facility began exporting product for export outside the province. In 2007, the company installed a new production system which allows them to manufacture premium items like ball topped cones and stick novelties. Though most of its production is for the Canadian marketplace, Scotsburn’s Newfoundland ice cream factory ships value-added items to more than 28 countries around the world.
Central Dairies, meanwhile, is focused on building a niche for itself as a manufacturer of cheese products. Its new cheese plant is producing trial batches of different types of cheeses and has already sold some product into the Canadian market. “The current product profile at the industrial plant is primarily for sales outside of Newfoundland,” says Dave Collins. “However, we do have plans to develop product profiles for sales within Newfoundland.”
