Ownership structure and financial status of Canadian dairy operations

Abstract

The ownership structure and financial status of Canadian dairy farms is described using Statistics Canada 2016 Census of Agriculture data. As herd size increased, family corporation became the most common ownership model after accounting for herd location by region. Regardless of location, gross farm receipts, operating expenses and profit margin increased significantly with herd size. Western Canadian dairies occupied significantly larger land bases and had significantly higher profit margins compared to all other regions. New trade agreements could affect the financial stability of Canada’s dairy industry; these data provide a baseline for future comparison.

The Canadian Dairy industry operates under a system of supply management (1). This differs from free-market systems wherein milk price is determined by supply of and demand for dairy products. Under supply management, milk prices are based on the cost of milk production, milk processor margins, consultation with industry stakeholders, and an evaluation of economic indicators (2). Stability of supply management is ensured by allocating domestic milk production according to demand while also limiting milk product imports (1). The Canadian dairy industry, however, operates under an economic model that is applicable to all agricultural industries in that resources (e.g., cows, crops, and water) are converted to value added goods for human benefit (3). As a result, dairy operations remain subject to economic challenges similar to those of other agricultural industries.

The Canadian Dairy industry is undergoing a period of consolidation characterized by fewer but larger dairies (4), which may affect the economics underlying cost of production. The Canadian Dairy Commission captures data regarding the cost of dairy production (5). In 2017, these data were based on a random sample (n = 229) representing approximately 2% of the Canadian dairy farm population (5). Some provincial milk boards capture these data as well (6), but data on a national level are lacking. Statistics Canada captures these data every 5 y as part of the Census of Agriculture, which includes all producers who sell dairy products.

Recently ratified and upcoming free trade agreements will likely affect the Canadian dairy industry. The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) entered into force provisionally on September 21, 2017 and the Canada-United States-Mexico Agreement (CUSMA) was tentatively agreed to on November 30, 2018. These agreements allow for increased imports of dairy products to Canada and have the potential to impact dairy finances. Given that cost has been reported as an impediment to making use of veterinary services (7), these changes may affect veterinary services to dairy operations. For veterinarians to provide services that maximize dairy herd productivity, it is important to understand the financial status and ownership structures of dairy operations. The purpose of this study was to describe the ownership structure and financial status of Canadian dairy farms using data from Statistics Canada’s 2016 Census of Agriculture (8). This study will provide an opportunity to capture these data before CETA and CUSMA come fully into effect, which will allow the future impact of these agreements to be determined.

All source data were derived from Statistics Canada’s 2016 Census of Agriculture. Statistics Canada was contracted to perform a custom data extraction. Dairies were defined as agricultural operations that produced milk intended for sale. Farm operators were defined as those persons responsible for the management decisions in operating the farm including owners, tenants, and hired managers (8). Data were provided on the number of dairy operators stratified by gender (male, female), age (< 26 y, 26 to 30 y, 31 to 35 y, 36 to 40 y, 41 to 45 y, 46 to 50 y, 51 to 55 y, 56 to 60 y, and > 60 y), herd size (< 51, 51 to 100, 101 to 200, 201 to 300, 301 to 500, and > 500 dairy cows and replacement heifers > 1 year old) and region (Canada, Atlantic Canada, Quebec, Ontario, western Canada). Data regarding land use were reported according to land owned, leased, rented, crop-shared, or used. Data regarding ownership structure were reported according to the number of operations reporting sole proprietorship, partnership without a written agreement, partnership with a written agreement, family corporation, and non-family corporation. For multi-operator dairies, data were also reported by age group (< 35 y, 35 to 54 y, and > 55 y). Data regarding gross farm receipts and total operating expenses were also reported. Profit margins were calculated by subtracting total operating expenses from gross farm receipts. The datasets were subject to random rounding in that data cells with < 5 producers were randomly rounded so that data could not be associated with a specific dairy operation. Data were analyzed with commercial software (Stata/SE 15.0; StataCorp, College Station, Texas, USA) using linear or logistic regression with a random effect to adjust for clustering of herd outcomes within region. Where appropriate, potential confounders were evaluated and included in multivariable models if the effect estimate of interest changed by more than 20%.

Gross farm receipts, total operating expenses and profit margin all increased with herd size across all geographic regions (P < 0.001) (Figure 1). This was expected because a central tenet of economies of scale is that larger dairies will have greater operating expenses, but also a larger profit margin. Dairies of all sizes in western Canada (n = 3396) had profit margins per farm ($268 641) that were more than double those in Atlantic Canada (n = 783; $112 065) (P = 0.008), Quebec (n = 6136; $117 147) (P = 0.025), and Ontario (n = 5699; $116 310) (P = 0.04), where the comparisons accounted for differences in herd size. After accounting for herd size, western Canadian dairies also used more land (1691 acres/farm) than dairies in Atlantic Canada (530 acres/farm) (P = 0.001), Quebec (419 acres/farm) (P = 0.001), and Ontario (363 acres/farm) (P < 0.001). The Census of Agriculture questionnaire, however, does not differentiate income generated by different agricultural enterprises on the same farm. Thus, the increased land use and profit margins of western Canadian dairies may be due to different enterprises (e.g., arable farming) being operated by the same farm rather than any difference in profitability of the dairy operation itself.

Figure 1.

Gross farm receipts, operating expenses, and profit margin by herd size. Financial data are reported on an annual basis from the number of dairies (N = 15 914) reported by Statistics Canada (2016) on the national level.

Ownership structure was related to herd size (Figure 2). Of the smallest dairies, 43% were operated by a sole proprietor. As herd size increased, family corporation became the most common ownership model (P < 0.001) after accounting for herd location by region. Presumably, sole proprietorship may become more challenging for the larger operations due to increased size of the operation.

Figure 2.

Ownership structure by herd size. Data are reported as percentage of operations by size under each structure. Data were calculated from the number of farm operators (N = 26 935) reported by Statistics Canada (2016) on the national level.

Analysis of the income, expenses, and margins of dairies by ownership structure was confounded by other factors such as herd size and region. When adjusted for herd size or region, differences in average annual profit margin did not differ between single and multiple operator dairies (P = 0.62).

To better anticipate the future of the industry, a subset of dairy operators that merits analysis is that of producers > 60 y of age (n = 5465) since these operators are most likely to retire in the near future. Of these operators, 28% (n = 1505) were sole proprietors, representing 11.7% of all Canadian dairies. The vast majority (83%; n = 1245) operate dairies with < 51 cows. Of the dairies with operators > 60 y of age and < 51 cows, sole proprietorship was more common in Atlantic Canada (60%) than western Canada (53%), Quebec (39%), and Ontario (50%). These data have significant implications for consolidation of the dairy industry. It is likely that large numbers of small dairies will cease to operate due to the retirement of the sole proprietor.

The data have important implications with respect to the provision of veterinary services to Canada’s dairies. Future dairies will likely be larger with increased profit margins. Larger, more efficient dairies will have decreased financial resources allocated to each cow (9). In order to remain profitable, dairy operators will expect veterinary services that can provide increased herd productivity rather than the treatment of individual animals. Veterinarians are likely to provide advice that can result in significant financial consequences for the operation depending on the decision taken and the outcome. Analysis of herd health and productivity will involve significant data analysis and interventions may be based on economic models that account for the range of risks and benefits associated with an intervention. Beyond economic modelling, veterinarians will have to continue to retain the trust of dairy operators through providing information that is personalized to the specific operation and operator (10) in a manner that is likely to be accepted and implemented (11). CVJ