How Canada's dairy quota system works: a walk through the parts

People who did not grow up on a dairy farm usually meet supply management as an argument: in a trade negotiation, in a debate about the price of cheese, in a news story about a quota auction. The argument is easier to follow once you know what the machine actually looks like. It has more moving parts than most people expect, and they sit at different levels, from a federal Crown corporation in Ottawa down to a tank of milk waiting at the end of a farm lane.

This piece walks through those parts in order, from the national plan to the single farm, and finishes with a worked example using round, illustrative numbers. The policy debate about whether the system should change is covered elsewhere, in the milk supply management debate, explained.

Part 1: the national plan

The starting point is a national production target. Canada does not plan milk production in litres or tonnes of cheese. It plans in kilograms of butterfat, because butterfat is the component that best tracks what Canadians buy: cream, butter, cheese and ice cream all depend on it.

The federal piece of the structure is the Canadian Dairy Commission (CDC), a Crown corporation established in 1966 under the Canadian Dairy Commission Act and based in Ottawa. The CDC chairs the Canadian Milk Supply Management Committee, which was set up in 1970 to administer the national Market Sharing Quota. Its members are the CDC and representatives of the provincial milk marketing boards. The Market Sharing Quota is the national target for industrial milk, the milk that goes into products other than table milk and cream. The committee watches demand and stocks through the dairy year, which runs from August 1 to July 31, and adjusts the target when butterfat demand moves.

The CDC also sets support prices for butter. These are the prices at which it buys and sells butter under its own programs, which smooth out seasonal swings in supply. Provinces use the support price as a reference point when they set the price of milk used for butter, cheese and other manufactured products. The CDC reviews the price each year, using an industry formula that draws on farm production costs.

Part 2: from the national target to the provinces

The national target is divided among the provinces. Each province's share is set out in market sharing agreements between the provinces, and changes in the national target are passed down to provincial pools and then to individual farms.

According to Agriculture and Agri-Food Canada's figures on the distribution of total milk quota, Canada's total for the 2022/23 dairy year was 399.05 million kilograms of butterfat. Of that, 296.39 million kilograms sat in the eastern pool and 100.13 million kilograms in the western pool. Newfoundland and Labrador, which has its own arrangement, held the small remainder.

Fluid milk, the kind sold in cartons and jugs, has historically been managed by the provinces rather than through the national target. In practice most farmers hold a single provincial quota that covers both fluid and industrial milk, and the pooling agreements described below tie the two markets together.

Part 3: the provincial boards

Each province has a milk marketing board or producer organization, such as Dairy Farmers of Ontario or the Producteurs de lait du Québec. These boards do the day-to-day work: they license producers, hold the quota register, run the quota exchange, collect milk from every farm, sell it to processors at regulated class prices, and pay farmers.

That last point surprises people. A Canadian dairy farmer does not sell milk to a particular plant. The board picks up the milk, assigns it to processors, and sends the farmer a monthly cheque based on pooled prices. The farmer's job is to produce clean milk within quota. The board's job is to market it.

Part 4: quota on the farm

On the farm, quota is a licence to ship a set amount of butterfat per day. It is expressed in kilograms of butterfat per day, so a farm might hold, say, 60 or 120 kilograms. Because quota is measured in butterfat rather than volume, a herd with richer milk fills its quota with fewer litres. A herd whose milk tests lower in fat ships more litres for the same butterfat.

Boards allow some flexibility. A farm can usually ship a little over or under its daily entitlement and carry the difference forward, within set limits. Milk shipped beyond those limits earns little or nothing, and repeated overproduction is penalized. When the national target rises, boards often issue extra temporary or permanent quota to every farm, in proportion to what each already holds, and they may add incentive days that allow extra production for a period.

Part 5: milk classes and what processors pay

Processors pay different prices for milk depending on what they make from it. That is the job of the milk classification system, which the provinces have harmonized so that classes mean much the same thing across the country. In broad terms:

The classes are subdivided further. Nova Scotia's regulations, for example, separate aged cheddar from fresh cheddar and pizza mozzarella from other mozzarella. Class 5 prices are set to help Canadian food manufacturers using dairy ingredients compete with imports. They are accessed through the CDC's Special Milk Class Permit Program.

Prices are set on components, not volume. In the eastern pool, farmers are paid per kilogram of butterfat, per kilogram of protein and per kilogram of other solids, with each component worth a different amount in each class.

Part 6: pooling, where the money is shared

If every farmer were paid only for the class their own milk went into, the farmer whose milk happened to go to a fluid dairy would be paid more than a neighbour whose milk went to a butter plant. Pooling removes that luck. Revenue from all classes is gathered and averaged, and each farmer is paid a blended price. The CDC administers three pooling agreements:

1. The Agreement on Eastern Canadian Milk Pooling, known as P5, covers Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island. It pools revenue from all milk sales, fluid and industrial, along with transport and some market costs, and it harmonizes component pricing and the daily quota system across the five provinces.
2. The Western Milk Pooling Agreement covers British Columbia, Alberta, Saskatchewan and Manitoba. It runs an all-milk pool for returns and markets across all classes, and the four provinces coordinate milk transport and allocation to plants.
3. The Comprehensive Agreement on Pooling of Milk Revenues covers dairy farmers across the country and shares the returns from the special classes, so that the lower-priced Class 5 milk is spread fairly nationwide.

Pooling also explains why a shift in what Canadians buy reaches every farm. If fluid sales fall and more milk goes to lower-priced classes, the blended price falls for everyone in the pool.

Part 7: the quota exchanges

Quota can be bought and sold, but only through the provincial boards' exchanges. Buyers submit bids, sellers submit offers, and the board clears the market at a single price each period. Provinces set their own rules.

The eastern provinces have capped the price. Monthly figures compiled by Agriculture and Agri-Food Canada from provincial boards show quota in Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island trading at $24,000 per kilogram of butterfat per day in every month with sales through 2023. Western prices were not held to that ceiling. In the same data, Alberta's monthly averages in 2023 ranged from about $48,500 to about $54,000 per kilogram, British Columbia's from $35,750 to $37,000, and Manitoba's and Saskatchewan's mostly between about $36,000 and $46,000.

A cap holds the price down, but it does not create more quota. When the price is fixed and buyers want more than sellers offer, the exchange rations what is available, and buyers wait. A cap changes who gets quota and how fast, not how much exists.

A worked example: one illustrative farm

The numbers below are round and illustrative. They describe no real farm.

Take a farm in Ontario holding 80 kilograms of butterfat per day.

• Daily shipments: if the herd's milk tests at 4.0 per cent butterfat, filling the quota means shipping about 2,000 kilograms of milk a day, a little under 2,000 litres. If each cow averages roughly 1 kilogram of butterfat a day, the farm needs something like 80 to 90 cows in milk, plus dry cows and young stock.
• The year: eighty kilograms a day for 365 days is 29,200 kilograms of butterfat a year.
• The milk cheque: suppose the pooled price works out to $90 per hectolitre, an illustrative figure. About 19.4 hectolitres a day at $90 is roughly $1,750 a day, or around $640,000 a year before feed, labour, barn costs and debt payments.
• What the quota is worth: at the eastern cap of $24,000 per kilogram, 80 kilograms is worth $1.92 million on the exchange. The same 80 kilograms in Alberta, at around $50,000, would be worth about $4 million.
• Growing by five cows: adding 5 kilograms a day costs $120,000 in quota at the cap, before the cows, the stalls and the feed. If the exchange is oversubscribed, the farm may wait months to fill the bid.
• A month over: if the herd ships 82 kilograms a day for a month, the extra 60 kilograms of butterfat counts against the farm's flexibility allowance. It is fine within the limits, but beyond them it earns little.

The quota on this farm is likely its single largest asset, larger than the land in some cases. That is the heart of the system's difficulty for people trying to get in.

What a new entrant faces

A newcomer must buy quota at the exchange price, plus cows, a barn that meets current standards, a bulk tank and land for feed. At the eastern cap, even a modest 20 kilograms costs $480,000 in quota alone, and the exchange may fill only part of the bid each month.

The provinces have responded with new entrant programs. Most eastern provinces set aside a small amount of quota each year to lend to selected newcomers on condition that they buy some quota of their own, stay in production for a set number of years and do not sell. Ontario's program, for example, has chosen applicants by draw and matched a block of lent quota to the quota each entrant buys. These programs help a handful of people a year, not hundreds. The wider question of how newcomers get in, including small-flock exemptions and niche markets, is set out in new farmers and alternative markets inside supply management.

Reading the parts together

Every part above links to the others. The national target sets the size of the pie. The pooling agreements decide how the revenue is shared. The class system decides what processors pay. The exchanges decide who holds the right to produce, and at what price. Change one part, say a trade deal that allows more imported cheese, and the effects travel through all of them: lower demand for Canadian Class 3 milk, a smaller national target, less quota issued, a lower blended price and a different value for quota on the exchange. Further pieces on these links are collected on the dairy and supply management issue page.