Pricing Mechanisms in Supply Management Systems

Table of Contents

• Introduction
• Cost-of-Production
• Chicken Pricing
• Dairy Pricing
• Egg Pricing
• Turkey Pricing

Introduction

In Canada, the broiler hatching egg, chicken, dairy, egg, and turkey industries operate under national supply management systems. By matching the supply of the product available in Canada with market demand, supply management systems aim to provide efficient producers with fair returns and to provide Canadian consumers with an adequate supply at reasonable prices.

Pricing of the raw commodities is an important element in achieving the goals of supply management. In general, the minimum prices that producers receive and primary processors pay are regulated. These prices are established at the provincial level by the provincial board. The various mechanisms are outlined in this factsheet.

The prices charged by primary processors to further processors, the foodservice industry and other buyers are not regulated. These prices are negotiated between the parties involved.

Cost-Of-Production (COP)

Cost-of-production (COP) is a factor that can be used in establishing the regulated prices. It is one measure of the producer expenses involved in producing a commodity at a specific point in time. In general, COP formulas include variable input costs (feed, labour, etc.), fixed input costs (depreciation, plant and administration, overhead, etc.), levies paid by producers to operate national agencies and provincial boards, and a return on labour and investment.

COPs are measured through producer surveys and/or the model farm approach, a computer model designed to represent an efficient, full-time operation.

For the nationally supply-managed commodities, COP studies are conducted by an independent third party and, except for broiler hatching eggs, are overseen by the national agencies (eggs and poultry) or Canadian Dairy Commission (dairy). Ontario Broiler Hatching Egg and Chick Commission conducts its own COP studies. The studies are usually conducted every three to five years, with individual components of the formula updated between studies using published data.

Most commodities remove a portion of the highest cost producers from the formula in order to reflect an efficient segment of the industry. For example, the turkey industry removes 10% of the highest cost producers while the dairy industry removes the highest 30%.

Chicken Pricing

Chicken Farmers of Ontario (CFO) has price-negotiating authority. It negotiates the base price paid by primary processors for live chicken with primary processors every sixteen weeks. The live chicken price is determined by a formula established by the Agriculture, Food, and Rural Affairs Appeals Tribunal that includes the price of chicks, feed and producer margin. The producer margin is negotiated annually whereas the feed and chick prices are updated for each pricing period. If the two sides cannot reach an agreement, the dispute goes to final offer arbitration.

Dairy Pricing

The Dairy Farmers of Ontario (DFO) has price-setting authority, and sets the prices processors pay for fluid and industrial milk destined solely for domestic markets. DFO may have informal or formal discussions with processors concerning any adjustments. These prices are limited under the Agreement on All Milk Pooling among the eastern provinces. DFO's pricing decisions within the limits of the Agreement can be appealed to the Agriculture, Food and Rural Affairs Appeals Tribunal (Tribunal) for a binding decision.

The regulated prices for raw milk vary with the end use of the milk. There are five categories of milk. Four of these are targeted for use in only the domestic market:

Class 1 - fluid milk and cream;
Class 2 - industrial milk for ice cream, yogurt and sour cream;
Class 3 - industrial milk for cheese;
Class 4 - industrial milk for butter, condensed and evaporated milk, milk powders and other products.

CDC reviews industrial milk prices once per year, for implementation on February 1st. In making its pricing decisions, CDC reviews the advice of industry stakeholders, COP calculations, market conditions, the changing dairy environment, and the general economy.

More specifically, CDC establishes support prices for butter and skim milk powder. Support prices are set at levels designed to provide manufacturers of dairy products with an assumed margin to cover costs and a return on their investment, and to provide producers with a fair return. These support prices are the basis for the prices set by the provincial marketing boards for industrial milk. Fluid milk prices used to be based on CDC prices but recently have been negotiated between producers and processors. A pricing formula will be implemented in 2007.

Class 5 is known as 'special classes'. Class 5 milk
includes milk for: i) cheese and non-cheese products that are used for further processing for domestic and export markets; ii) for confectionery products; and iii) for exports within Canada's World Trade Organization (WTO) limits on subsidized exports.

Class 5 prices are not set by DFO. The prices for milk ultimately used in further processing track U.S. prices. The price for milk that is used in the confectionery industry is negotiated between Canadian Milk Supply Management Committee and confectionery manufacturers.

Producers sell all of their milk to DFO, and in turn, DFO sells the milk to processors and pays producers. For all milk produced within their individual marketing quotas, producers each receive a blended price that reflects the volume of milk that has been sold in each class. Revenues are pooled with revenues from other provinces before being paid to producers. Producers receive a significantly reduced or zero price for milk produced in excess of their individual marketing quotas.

Egg Pricing

The Ontario Egg Producers (OEP) has price-setting authority. It sets the prices paid to producers for the various grades and sizes of table eggs, and adjusts them up to 13 times a year. OEP's pricing decisions can be appealed to the Tribunal for a binding decision.

Normally, the prices for various egg grades are calculated using a formula based on the price for Grade A large eggs but adjustments are made to reflect market conditions. When setting prices, OEP considers a number of factors, including a COP calculated by the Canadian Egg Marketing Agency (CEMA).

Producers are paid the table egg price for all eggs but levies are subtracted to blend the revenues for table eggs with the revenues from eggs that are ultimately sold in the lower priced industrial market.

In Ontario, eggs not required for the table market are re-purchased by either OEP or CEMA, with the price established through a formula based on COP. These eggs are re-sold to breakers (processors) with the price established through a formula negotiated between CEMA and the breakers.

Turkey Pricing

The Ontario Turkey Producers' Marketing Board (OTPMB) has price-setting authority. It sets prices for broilers, hens and toms (the three size categories of turkey). In practice, input comes from processors, especially Ontario Poultry Processors' Association's Turkey Committee (OPPA). Pricing decisions can be appealed to the Tribunal for a binding decision.

The basis for the pricing decisions is the weekly feed and poult costs determined by the CTMA. Other factors such as market conditions (stocks, wholesale prices, consumption data, etc.) and the price of competitive products are also considered.