Q&A Regarding the September 1, 2022 price increase
Q: How many price adjustments to the farmgate price of milk happened in 2022?
By the end of 2022, there will have been two adjustments to milk component prices.
1. The first was announced on October 29, 2021 and was implemented on February 1, 2022. This adjustment stemmed from regularly timed annual pricing consultations carried out in fall 2021.
2. The second will occur on September 1, 2022. This second adjustment stemmed from a mid-year stakeholder request for price adjustments due to exceptional cost increases observed on-farm during spring 2022.
Q: Is it normal to have two price adjustments in a year?
The norm in the dairy sector is to have one price adjustment per year, which goes into effect on February 1. The process to calculate a price adjustment occurs four months before the prices take effect (e.g., during October).
Q: Why will a second adjustment be made on September 1, 2022?
In spring 2022, dairy farmers experienced a significant increase in on-farm costs that was not captured in the available cost of production (COP) data. The available COP data reflected costs from the year 2020 indexed to the year 2021, used to establish the February 1, 2022 prices.
In winter 2022, the significant increase in feed costs along with many other variables including fuel and fertilizer, meant that the price for milk set on February 1, 2022 did not reflect the cost of production on-the-ground. As such, a process for mid-year increases was initiated by industry.
Q: How will the September 1, 2022 price adjustment affect future price adjustments?
The September 1, 2022 price adjustment will be considered as an “advance”. In other words, future price adjustments in 2023 will not compound on the September 1, 2022 adjustment. Rather, the February 1, 2023 adjustment will be net of the September 1 adjustment.
This process ensures that milk prices to do not change beyond the adjustments dictated by cost of production and consumer price indices.
Q: On what data are price adjustments based?
Price adjustments are based on a combination of the indexed cost of production for milk, the overall consumer price index in Canada, and other Statistics Canada indices. Given that cost of production data has a delay, StatsCan indices are used to index the overall cost of production forward to the current year.
Q: What is the goal of the COP study?
The goal of the COP study is to accurately measure the on-farm cost of producing a hectolitre of milk (100 litres). Given that the cost of production is based on volume, productivity gains are always accounted for in the cost of production figure.
There is a lag between the time the COP survey is completed and the time the COP data is used in pricing calculation. To ensure COP data is representative of the time period in which it is applied, results are indexed forward to the latest available data. The indexed cost of production figures are used for pricing purposes.
As an example, the cost of production study conducted in the year 2020 was indexed forward to mid-year 2021 for application towards February 1, 2022 price adjustments. The September 1, 2022 price adjustments were based on the 2020 cost of production and indexation data available, up to April 2022.
Q: When will the final indexed cost of production study be published?
The CDC receives raw data in June of each year. The CDC shares COP results (unindexed) with stakeholders in July/August for information.
Once all monthly StatsCan indices have been received in early October, the CDC publishes the final indexed COP results. These results are used in the price adjustment process.
For example, the 2021 indexed cost of production survey, which will be used to determine an adjustment on February 1, 2023, will be published in October 2022. This will coincide with the annual price adjustment process. In order to use 2021 cost of production data for 2023 pricing, the data must be indexed forward using StatsCan indices to reflect changes in the economy over time.
The results of previous cost of production surveys including indexation can be found on the CDC website.
Q: Has the cost of production for milk increased over the last 5 years?
Yes. The indexed cost of production used to establish price adjustments for milk has increase over the last years.
Q: How will the change in COP from 2020 to 2021 affect any upcoming pricing results?
The next price change is planned for February 1, 2023. Currently, the final indexed figure for the COP survey conducted in 2021 is not yet available. Final indices will be available in October 2022.
The baseline for the change to COP effective February 1, 2023 is $92.20/hl, as seen in the graph above. It represents the expected increase in COP for 2021 (COP 2020 indexed). This figure will be compared to the 2021 COP indexed to 2022 to measure the net % change in COP for 2023. As such, February 1, 2023 price adjustments will take into account not only the expected increase in COP for 2022 but also any correction from the previous year.