Canada adopted the system of supply management for industrial milk in the early 1970s to address the unstable prices, uncertain supplies and fluctuating producer and processor revenues which were common in the 1950s and 1960s.
The current elements of supply management evolved from the initiatives of provincial marketing boards active in Canadian agriculture. First coming together in groups, farmers started to act in unison to guarantee themselves greater market stability in the face of unpredictable production cycles. For example, they set common floor prices which their members respected.
Early farm organizations lacked leverage, however, and therefore turned to provincial governments to create marketing boards. These boards were either government-sanctioned producer groups or appointed bodies, with legally binding, province-wide authority to conduct such marketing activities as pricing and production management to meet demand through marketing quotas.
These groups were only able to implement programs at the provincial or regional level. Their effectiveness was undermined by a lack of regulatory control over marketings that crossed provincial boundaries and national borders. In many instances, despite local management of supply, surpluses from other areas could easily disrupt their orderly marketing and undermine their attempts to regulate prices. This situation led to the call for co-ordinated marketing plans and national marketing boards.
In 1966, the Canadian Dairy Commission was created and, in the early 1970s, dairy became the first commodity in Canada to operate a national supply management system.
All industries, from car manufacturers to shoe factories, attempt to strike the most accurate balance between supply and demand. Under supply management, farmers attempt to do the same thing. They manage their production for a certain period so that it coincides with forecasts of demand for their products in the same period. By effectively controlling production, costly surpluses are avoided. Surpluses result when the total market demand turns out to be less than what has been produced. Any excess production generates storage and disposal costs.
Managing supply is more complex in agriculture than in many other industries, primarily because of the large number of production units involved. Weather and other uncontrollable factors also affect production cycles. Given the high degree of planning and investment required for efficient production, stability of markets and returns from sales are of paramount importance.
In dairy, balancing supply with demand largely implies balancing milk production from all farms with domestic consumption of dairy products. Controlling national production at the farm level is achieved through the establishment of marketing quotas through the framework provided in the National Milk Marketing Plan. Supply management also takes into account certain imports which enter Canada, as well as some production which is shipped to export markets.
Over the years, the supply management system has provided a stable environment within which the dairy industry has evolved to meet the challenges of changing domestic markets and international trade rules. Given the significant market globalization and issues which continue to emerge, the Commission believes that the co-operation and collaboration among stakeholders which characterized the creation of supply management remain the industry's greatest strength in ensuring the viability of Canada's dairy industry in the years ahead.