Milk price hike good news for producers, but restaurants are crying foul

Restaurateurs are crying foul over a second industrial milk price increase this year set to take effect Thursday, which they say will likely lead to higher food prices.

In July, the Canadian Dairy Commission decided to raise the price of industrial milk—which is processed into yogurt, ice cream, cheese and butter—by 2.76 per cent. That's on top of a 2.2 per cent hike that occurred in February.

It's the first time the CDC has increased prices twice in one year since 2008. The latest hike is being introduced because of a "very unique and unexpected situation,'' Benoit Basillais, CDC's chief of policy and economics, said in an email.

Basillais said the hikes came because producer revenues "decreased rapidly'' last fall, in part due to a decrease in global demand from importing countries and changing consumer preferences—and revenues did not stabilize by early spring as anticipated.

The increase will alleviate producers' financial stress and ensure the fall's high demand for dairy products is met, he said.

Basillais added that the move was intended to be "an advance'' of the CDC's December price decision for next year, though he said it's premature to say there will be no increase next year.

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While the hike in prices may provide a reprieve for producers, it's likely to put a burden on restaurateurs who must decide whether their customers can stomach higher prices.

Bill Pratt owns eight restaurants and four food trucks in the Halifax area under the Chef Inspired Group of Restaurants banner. Their menus boast gourmet burgers, poutine, burritos, tacos and quesadillas.

"We're a heavy cheese user,'' Pratt said, adding that the price increase is "very difficult for us.''

Pratt has already raised prices once this year and doesn't think his customers will take kindly to another one so soon.

He said he'll likely have to absorb the cost, which could be difficult considering restaurant profit margins are low in Canada. In 2012, the operating profit margin for food services and drinking places was 4.2 per cent, according to Statistics Canada.

"I'm the guy down here that's kind of struggling to make a buck in a very tough market,'' Pratt said.

It seems likely diners will end up paying more, according to Pierre Cadieux, vice-president of federal and Quebec government relations for Restaurants Canada, a not-for-profit association representing 30,000 businesses in the restaurant and food-service industry.

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"That (price hike) has to be passed on to the consumer somehow,'' he said. "So, it's reflected in our menu prices. It's reflected in changes to the menu.''

The cost of food that consists of industrial milk may increase or restaurateurs may instead remove some menu items, Cadieux suggested.

Milkshakes, he said, are the perfect example of an item disappearing as few consumers are willing to pay the price shops charge for the diner staple.

Basillais said the difference consumers will see in prices for goods that use industrial milk is difficult to predict because it depends on how much of the final product is made up of the dairy component. Other factors, like transportation, packaging and processing costs, also need to be accounted for, he said.

But, he added, price hikes experienced by consumers won't be more than 2.76 per cent.

The CDC is part of Canada's supply management system for the dairy industry, which is meant to reduce price volatility and ensure supply meets demand, said Basillais.

Restaurants Canada has long championed changing the supply management system.

"We have to reinvent that part of our agricultural system,'' said Cadieux. Though it's not on anybody's political agenda at the moment, he added.

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The poorest 20 per cent of Canadian households pay an extra $339 annually for dairy and poultry due to supply management, a report from the Montreal Economic Institute released Wednesday found.

That premium pushes more than 100,000 Canadians below the poverty line, according to the study.

"A reform plan that would phase out production quotas and import duties would benefit all Canadian consumers,'' the authors write, "but it would especially benefit poorer individuals, raising their living standards and effectively lifting many of them out of poverty.''

This management system does mean consumers pay higher prices, said Jim Fisher, a professor at the University of Toronto's Rotman School of Management. But he added that it also helps protect Canadians from an insufficient supply of products, even if they pay more for them.

"So we can all sleep well in our beds tonight knowing that ... there will always be a supply for us.''