An Investigation of the Marketing of Butterfat by the Canadian Dairy Industry

This study examines the Canadian Dairy Commission’s marketing of butterfat. Previous studies have concentrated on the evaluation of butterfat by using total kilograms of milk. Measuring milk as kilograms is based the assumption of fixed proportions between kilograms of milk and kilograms of butterfat. However, measuring dairy using kilograms may not be a good proxy for the underlying butterfat. In this study we argue that dairy fat maybe an inferior factor of production, whereas kilograms is a normal factor of production. This means that following kilograms within the marketing system may not track butterfat. In fact, butterfat may respond in an opposite direction to kilograms when prices and incomes change. Assuming that butterfat is an inferior factor may explain some of the marketing practices of the provincial marketing boards that on the surface seems to be neither in the interest of consumers or dairy farmers. If the objective of the supply management is to make dairy producers better off, then basing dairy quota on kilograms of butterfat seems logical since the demand for butterfat has been rising over time. In addition, controlling supply at the retail level using minimum milk price supports also benefits producers, although it may not be in the best interest of consumers due to higher dairy prices and increased butterfat consumption.