A Complex Issue – A Free Market Solution

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    We have read the response to the Canadian Grocer article titled “Udderly ridiculous: Fluid milk prices fluctuate across Canada” from Ms. Johnson of the Dairy Farmers of Canada (which was later credited to DFC President Wally Smith), and would like to clarify a few points about our study which showed that Canadians are paying highly variable prices on 2% milk when measured in each of the twenty markets we surveyed.

    We agree with the DFC that the price of milk at Costco compared to a convenience store in the same market would have a logical difference based on the quantity purchased and the convenience factor of buying close to your home at 2 AM. This is something that most consumers expect as we almost always pay a premium when shopping at a convenience store.

    However, when we compare the prices of milk at one retail chain, such as at all the Walmart stores we surveyed across the country, the data shows huge differences in prices from one region to the next. A 4L package of 2% milk at Walmart in Charlottetown, PE retails for $7.27 and the same 4L package sells for just $3.97 in Walmart stores in Ontario, including the store Sudbury.

    In an open and free market we would expect to see very little variation in the price of milk at Walmart stores from one city to the next – not an 83% premium for buying milk in PEI vs. Ontario!

    Why does this difference exist? It is a complex issue, but some of the ingredients include: 1) Supply Management, which sets the farm gate price of milk based on average production costs, removing the incentive for producers to become more efficient; 2) Minimum Wholesale Prices (in some markets), which provide a guaranteed profit margin for inefficient processing plants and distribution systems and 3) Minimum Retail Prices, designed to protect retail margins. Not all of these factors come into play in all provinces, as the regulations are driven by provincial governments.

    Removing these artificial subsidy programs, financed by shoppers at the checkout, would require farmers, processors and retailers to become more efficient in getting milk from the cow to your glass, mainly through bigger farms, more efficient processing plants and more competition between retailers. The whole value chain has a role to play.

    In fact, milk is the exception to the pricing rule at Walmart, where for the most part we see very consistent prices on common grocery items right across the country. A great example to compare is Coca-Cola 2L, which has a very narrow price range across the country at Walmart, definitely well below the 83% gap on 4L jugs of 2% milk.

    The price of Coca-Cola is much more consistent across Canada because Coca-Cola does not have to source its ingredients from suppliers who set prices under Supply Management and they can build large production facilities wherever they choose in Canada and drive economies of scale through mass production. It can also distribute its products from coast-to-coast via a very efficient supply chain. Additionally, retailers such as Walmart are also able to negotiate with Coca-Cola on a national level, and sell Coca-Cola at the price that they feel provides a competitive price to the consumer and delivers adequate profitability. The end result is even more affordable products on the shelf for consumers to purchase.

    The fact that 4L of 2% milk is $3.97 in Walmart stores in both Scarborough, ON and Sudbury, ON shows the benefits of open markets. People in Sudbury should likely be paying more due to transportation and other costs, but the efficient system of dairy farmers, processors and retailers in Ontario delivers affordable prices to consumers even in more remote locations.

    Yes, an open market where supply and demand set the price of milk and product is allowed to move freely across domestic borders might mean that some less efficient farmers and regional processing facilities would get squeezed out of the market. They simply would not be as efficient as larger farmers and processors in delivering inexpensive milk to Canadians.

    Overall, as farmers and processors become more efficient and competition increases, prices for consumers should fall while the more efficient industry is still able to make a healthy profit margin – just like Coca Cola does.

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