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Taking control of their dairy future

For this young couple, the future means a multi-pronged business strategy, with cost control, diversification and a focus on efficiency

Just as the Trans-Pacific Partnership agreement was being signed last fall, Cam and Stephanie Murphy were signing a very different sort of partnership agreement. They were becoming part owners of a 45-cow dairy farm near Hastings, two hours east of Toronto.

Together with Stephanie’s parents, Dean and Carol Warner, they took on a seven-figure debt to buy out a retiring uncle and start building a future. Taking this step during tenuous trade negotiations took an unbelievable level of trust in the system and each other, a love of their industry, and big dollop of bravery.

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It also took a clear vision of a future they have already started to work toward.

Throughout Dean and Carol’s 30-year career as dairy farmers, trade deals such as NAFTA raised periodic doubts about supply management, but the couple hoped that as long as the Canadian government supported supply management, it would be safe.

They knew, though, that the TPP negotiations could mean the death of supply management and the end of their retirement and succession dreams.

“Since I’ve been dairy farming, there’s always been that fear,” says 62-year-old Dean.

Local dairy meetings buzzed with rumours. News reports claimed Canada would give up 10 per cent of its dairy market, and Carol admits there were times when she felt sick at heart.

As the bookkeeper for the farm, she knew how devastating such a high import level could be.

Then, when the agreement was announced, and the total access to Canadian markets was set at 3.25 per cent of Canada’s 2016 milk production, although it definitely meant a loss of income, it seemed relatively acceptable, and it helped that the banks quickly came forward with promises to still leverage debt on quota values.

In that context, you might imagine that the ride was even more anxious for the younger generation. It was their future being negotiated and publicly debated.

That’s not quite how it played out, however. Their youthful approach to risk helped them keep it in perspective. “It didn’t worry me,” says 32-year-old Cam. “We’d just start again. We’ll work with whatever system we’ve got.”

Even if supply management fell apart, Cam thinks he and Stephanie could still make it farming, as long as they weren’t carrying too much debt. “We’d just have to increase capacity, efficiency and lower our costs somehow… as long as we can cash-flow our debt.”

Stephanie and Cam Murphy.

Stephanie and Cam Murphy.

The irony is that Cam’s home country is New Zealand, and he had worked on dairy farms there and around the world before ending up on a sheep farm in Canada and meeting Stephanie.

Now, New Zealand was the country leading the charge against Canada’s supply management system.

In fact, Cam grew up in the era when the Kiwis chopped their own lucrative subsidy programs and many farmers there were still figuring out either how to adapt or get out.

Since then, the dairy Fonterra, owned by 13,000 New Zealand dairy farmers, has surged ahead. It takes and processes the majority of New Zealand milk, and it has become the largest dairy exporter in the world, not to mention that it is where Cam’s mother works.

Indeed, New Zealand’s milk exports today are booming, especially since UHT (ultra high temperature) milk has extended shelf life, allowing liquid milk to be shipped anywhere in the world, and the dairy co-operative now accounts for 25 per cent of all exports of any kind from New Zealand.

“At home,” Cam says of New Zealand, “the farmers are expanding all the time, quickly. Just add more cows, more land and they grow.”

However, with trade disruptions, increased exports and volatile oil prices, the world milk price has plummeted. New Zealand farm prices went from nearly $10/kg a few years ago to under $5/kg today, Cam points out. “You can’t budget a 10-year plan with fluctuations like that,” he says, shaking his head. “Heck, with prices like that you may not be able to pay your bills.”

Production per cow in New Zealand is about half of what it is in Canada, but thanks to year-round pasture and the use of palm kernel extract as a supplement, their cost of production is among the lowest in the world.

Conversely, according to a recent German-based study, Canada’s average cost for milk production is the highest in the industrialized world, second only to Switzerland.

Producing 100 kg of milk in Canada costs US$37 more than on farms south of border.

For Canadian farmers, part of the risk from open trade starts with our climate and geography, especially our proximity to the U.S. This puts our dairy and feather sectors in a much weaker position than countries close to places with growing milk and protein demand, like New Zealand’s proximity to Asia.

“Canada can compete in dairy globally, but it certainly won’t be easy. The gap needs to be narrowed,” said University of Guelph economist Sylvain Charlebois, in a recent newsletter article called “The Land of Milk and Wine.”

Added Charlebois: “The only way to achieve higher levels of productivity is through economies of scale.”

As he looks at daughter Stephanie and son-in-law Cam, Dean agrees, but he doesn’t think the odds are as bad as many outside the industry might think.

Dean has travelled widely as a respected cattle judge, and he says many U.S. dairy barn buildings are in poor condition, and family farms will go out of business quicker there.

Dean also doubts the US$37 number, saying it ignores the cost of complying with government programs in the U.S. “Price-wise, we can compete,” he says.

Farms in the U.S. tend to be bigger than his, Dean agrees, and they support fewer families per herd. Currently his family milks 45 cows in a tie-stall barn with 220 acres owned and 220 rented, and they own 52.09 kg of quota. The price is capped in Ontario at about $24,000/kg.

Since Dean started farming in the early 1980s, he has seen many changes, including in the early ’90s when the Ontario board combined fluid and MSQ (industrial milk) into one quota, which meant he and Carol had to milk four more cows to get the same gross revenue.

They have survived other major changes too, including the hit they took when the closing of the borders due to BSE led to the loss of livestock sales. Those sales never came back, and now milk makes up 90 per cent of their revenues. Before BSE, it was 70 per cent.

Dean has seen changes in quota prices too. By 2000, prices had reached $30,000 per kg, but during the last decade dairy product consumption has slowly declined. “In Ontario, the board has set a goal of two per cent growth,” says Dean. “The marketing boards have to create growth.”

To turn that boat around and keep the industry strong, Dean and Cam agree that processors, producers, transportation, government and consumers — everyone along the supply chain — must somehow work better together. “If we were all more team players — with the processors and with all the provinces — and have the whole country stand together, there would be more power to do things,” says Cam.

Still, the future is ahead of them. Dean passed his livestock knowledge and passion on to his daughter and Stephanie’s goal is to win another Master Breeder award for the herd.

Cam meanwhile is more business oriented, focused on improved profit margins and growth, including expansion into other livestock. “Eventually we want to milk more cows, have sheep and a herd of beef cows,” he says.

Cam is interested in ways to integrate these three separate enterprises to maximize land and labour efficiencies, and he says diversity of enterprises on the farm should help mitigate risks, including volatile markets and trade issues.

One month into their succession, milk production was already up, likely due to good forages and applying knowledge that Stephanie gained in her now essential off-farm job as dairy and beef specialist for Grand Valley Fortifiers. Both she and Cam are looking for ways to tweak efficiencies and improve profit margins so they can be in the position to update their facilities.

Farms are not grown from economic philosophies or trade negotiations. It takes farmers who dream and make it happen, the family believes. Today it also takes leveraging and predictable cash-flow projections. “No system is perfect,” says Dean. “But at least this ensures a fair, stable price for everyone.”

This article was originally published as, “Taking over” in the March 2016 issue of Country Guide

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Senior Business Editor

Maggie Van Camp

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