Introduction

Background

1. The Canadian Dairy Commission is a Crown corporation established in 1966 under the Canadian Dairy Commission Act. Its mandate is to provide efficient producers in the dairy industry with the opportunity of obtaining a fair return for their labour and investment and, at the same time, to provide consumers with a continuous and adequate supply of high-quality dairy products.

2. The corporation reports to Parliament through the Minister of Agriculture and Agri-Food and advises the Minister on matters related to the dairy industry.

3. Canada’s dairy industry operates under a supply management system involving the federal and provincial governments. The system has 3 elements: planning national production, setting milk prices, and controlling imports.

4. Among the most important roles that the corporation performs in this system are

• managing price setting for milk at the farm and helping ensure that production can meet demand
• performing calculations that determine how producers share markets and revenues
• conducting compliance audits of industry stakeholders
• facilitating the functioning of national and regional dairy committees
• administering programs on behalf of the industry that encourage innovation and market growth
• importing butter according to Canada’s World Trade Organization commitments
• administering domestic seasonality programs, which help the dairy industry cope with seasonal fluctuations in domestic supply and demand

5. The dairy industry is a major contributor to Canada’s economy. In 2019, the country had approximately 10,400 dairy farms. Of these, 81% were located in Quebec and Ontario, 13% in the West, and 6% in the Atlantic provinces. Aside from producers, other industry participants include federal government organizations, such as Agriculture and Agri-Food Canada; provincial milk marketing boards; processors; and consumers.

6. The dairy industry is facing new market conditions. These include uncertainties associated with Canada’s recent ratification of 3 major international trade agreements:

• the Comprehensive Economic and Trade Agreement with the European Union
• the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, with 10 countries in the Asia-Pacific region
• the Canada–United States–Mexico Agreement, replacing the North American Free Trade Agreement

The corporation estimates that when the agreements are fully implemented, the market access granted to foreign competitors will amount to approximately 10% of Canada’s dairy production.

7. Another source of uncertainty is the impact of the coronavirus disease (COVID-19) pandemic. With lockdowns imposed in Canada, milk demand shifted rapidly from food service businesses to retail purchases by consumers. In late March and early April 2020, Canadian dairy marketing boards asked producers to dispose of milk at the farm. The boards also put in place strict production control measures to halt such disposals. Milk production in Canada dropped by 5.5% in April, compared with March, to align with the pandemic’s impact on demand.

8. The corporation’s fiscal year runs from the beginning of August to the end of July, consistent with the industry’s dairy year. For the fiscal year that ended on 31 July 2020, the corporation’s administrative expenses amounted to $9.6 million. The government funded $3.9 million of these expenses. The balance was funded by amounts recovered from dairy producers, marketplace levies, and commercial operations.

9. The corporation had 72 employees at the end of the 2019–20 fiscal year. It is located in Ottawa, Canada (Exhibit 1).

Focus of the audit

10. Our objective for this audit was to determine whether the systems and practices we selected for examination at the Canadian Dairy Commission were providing the corporation with reasonable assurance that its assets were safeguarded and controlled, its resources were managed economically and efficiently, and its operations were carried out effectively, as required by section 138 of the Financial Administration Act.

11. In addition, section 139 of the Financial Administration Act requires that we state an opinion, with respect to the criteria established, on whether there was reasonable assurance that there were no significant deficiencies in the systems and practices we examined. We define and report significant deficiencies when, in our opinion, the corporation could be prevented from having reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively.

12. On the basis of our risk assessment, we selected systems and practices in the following areas:

• corporate management practices
• management of operations

The selected systems and practices, and the criteria used to assess them, are found in the exhibits throughout the report.

13. More details about the audit objective, scope, approach, and sources of criteria are in About the Audit at the end of this report.

Findings, Recommendations, and Responses

Corporate management practices

The corporation had a significant deficiency in corporate governance caused by a board vacancy and it needed improvements in performance measurement and risk management

14. We found a significant deficiency in the systems and practices for board appointments. We also found areas for improvement in board oversight; performance measurement; and risk mitigation, monitoring, and reporting.

15. The analysis supporting this finding discusses the following topics:

• Corporate governance
• Strategic planning
• Corporate risk management

16. The board of directors is formally called “the Commission” in the Canadian Dairy Commission Act. Its responsibilities include overall stewardship of the corporation. The act provides for the board to consist of a chairperson, the corporation’s chief executive officer, and a third member. They are appointed by the Governor in Council^{Definition 1}. Appointments are therefore outside the corporation’s control.

17. When the previous chairperson’s term ended in July 2019, the third board member acted as interim chairperson until February 2020. At that time, a new chairperson was appointed to serve until December 2021. The chief executive officer is one of the board members; the incumbent’s 3-year term will expire in May 2021. The third member, who acted as interim chairperson, is serving a second 3-year term, which is due to expire in February 2023.

18. The board has an audit committee consisting of all 3 of its members.

19. Our recommendations in this area of examination appear at paragraphs 26, 31, and 36.

20. Analysis. We found that the corporation had a significant deficiency in the systems and practices for board appointments. Despite the constraints posed by the appointments process, the corporation had good practices in board independence and providing strategic direction. However, board oversight needed improvement because of weaknesses in corporate risk management (Exhibit 2).

21. Significant deficiency—Board appointments. We found that given the small size of the board and the qualifications set for different members, the vacancy in 1 position (discussed in paragraph 17) increased the risk that the board would be unable to hold meetings when necessary or make decisions.

22. The corporation’s rules of governance specified that many motions must receive at least 2 votes to pass. The vacancy increased the risk that the motions would not receive the minimum number of votes in 2 ways. First, if 1 member was unable to attend, a meeting could not take place. Second, an abstention by 1 member would cause a motion not to pass.

23. The board profile required members to have significant dairy industry experience, including in the milk production sector for one member and in the dairy processing sector for another member. However, relationships formed through members’ experience in the industry may pose a risk of real, potential, or perceived conflicts of interest. Another possible source of conflict of interest was the fact that while serving on the board, the Chief Executive Officer was responsible for managing the operations of the corporation. As a result of these circumstances, a board member was more likely to abstain from making certain decisions, and consequently decisions would not receive the 2 required votes. Because the Governor in Council appoints members to the board, appointments are outside the corporation’s control.

24. Our 2011 special examination report raised the outstanding issue of the difficulty for a 3-person board to have the full range of skills needed for strong governance. We recommended that the board periodically assess members’ skills and seek outside expertise as needed. The latest board profile had been established in 2012. Recently, the board engaged an external advisor to provide additional expertise when needed.

25. In the current audit, we did not find that board meetings were cancelled or that decisions were not resolved. However, this significant deficiency matters because it poses a significant risk that the board would be unable to make decisions and operate effectively. This is especially important for the corporation because the board consists of only 3 members, 1 of whom is also the chief executive officer.

26. Recommendation. Given the small size of the board, the corporation should continue engaging with the Minister of Agriculture and Agri-Food on a timely basis to help ensure that the board continuously has a full complement of its members. It should also update its profile of potential candidates more regularly and provide it to the minister.

The corporation’s response. Agreed. The corporation is already in communication with the office of the Minister of Agriculture and Agri-Food as well as the section of Agriculture and Agri-Food Canada that is responsible for appointments, especially as the term of 1 of the board members is almost over. The profile of potential candidates will be updated by July 2021 and provided to the minister.

27. Analysis. We found that the corporation had good practices for strategic planning and performance monitoring and reporting, but performance measurement needed improvement (Exhibit 3).

28. Weakness—Performance measurement. We found that the corporation did not establish specific performance indicators to measure the achievement of some of its strategic objectives.

29. The corporate plan identified goals, strategies, objectives, and performance indicators for each of its 4 strategic themes. We found that performance indicators were presented for each of these themes rather than for specific strategic objectives. Many performance indicators could reasonably be linked to certain strategic objectives, but no performance indicators were set to measure the achievement of some strategic objectives. For example, 1 of the objectives was to acquire better expertise on current markets and regulations, and to share this information with the industry. The corporate plan did not have performance indicators that would demonstrate how the corporation was achieving the objective.

30. This weakness matters because without specific performance indicators and targets for strategic objectives, the corporation cannot systematically measure, monitor, and report on the achievement of those objectives. As a result, the board and management could not readily determine that the strategic objectives contributing to the intended outcomes had been met as planned.

31. Recommendation. The corporation should set performance indicators for each of its strategic objectives.

The corporation’s response. Agreed. The corporation will develop performance indicators for each of its strategic objectives during the 2021–22 strategic planning exercise, which started in January 2021.

32. Analysis. We found that the corporation had good practices for identifying and assessing risks. However, we also found that risk mitigation, monitoring, and reporting needed improvement (Exhibit 4).

33. Weaknesses—Risk mitigation, monitoring, and reporting. We found that some of the corporation’s risk mitigation strategies or action plans lacked necessary detail or were not up to date. This included not having clear risk appetite statements or setting risk tolerances. As a result, the board and the corporation faced increased difficulty in fully assessing implementation of mitigation strategies.

34. For example, the mitigation strategy for 1 risk involved implementing a certain policy. Progress reports indicated that implementation had begun, but it was not possible to readily assess the pace of progress or the actions required, because the plan had not been updated and did not include a target date for completion. In another example, the corporation had a business resumption plan but had not updated it in a timely manner or provided for periodic testing to ensure the effectiveness of planned responses.

35. These weaknesses matter because without appropriately defined or updated mitigation strategies or action plans, the board and management could not ensure that the corporation had effective practices to mitigate risks to the achievement of its objectives.

36. Recommendation. To strengthen monitoring and reporting for risk mitigation strategies, the corporation should integrate risk appetites, tolerances, and timelines into its action plans, and it should update action plans regularly.

The corporation’s response. Agreed. The corporation will articulate its risk appetites and set appropriate tolerance levels, to help guide and monitor implementation of mitigation strategies. The corporation will also include timelines in all action plans and will update the plans regularly.

Management of operations

The corporation had good practices for managing its operations

37. We found that the corporation had good practices for operational planning, performance monitoring and reporting, and managing operations.

38. The analysis supporting this finding discusses the following topics:

• Operational planning and performance monitoring and reporting
• Operations

39. To help align supply with demand in Canada’s dairy industry, the corporation works with key industry stakeholders, such as the Canadian Milk Supply Management Committee (the national body responsible for policy development and discussions of Canada’s dairy industry). The corporation monitors national production and demand monthly and recommends necessary adjustments to the national production target. The corporation also provides forecasts that help the dairy industries in individual provinces set production quotas.

40. Furthermore, the corporation carries out domestic seasonality programs, which in recent years have involved mostly purchases and sales of butter (Exhibit 5). When milk production outstrips demand, processors turn the excess into butter. Under domestic seasonality programs, the corporation buys the butter from participating processors, stores it, and then sells it back when demand exceeds production. Loans from the federal government to the corporation enable these purchases. At the start of the 2019–20 fiscal year, the corporation was allowed to borrow up to $300 million from the government. Late in the fiscal year, the borrowing limit was increased to $500 million; this indicated the government’s commitment to helping the industry deal with the coronavirus disease (COVID-19) pandemic. As of 31 July 2020, actual loans from the government to the corporation amounted to $95 million.

41. The price that producers receive for their milk is regulated and varies according to the end use of the milk. For example, milk sold to make cheese is priced differently than milk sold to make butter. One of the key inputs for setting some prices is the average national cost of producing 1 hectolitre (100 litres) of milk. The corporation calculates the cost annually and uses it to set the price of butter for its domestic seasonality programs.

42. The corporation undertakes compliance audits to ensure that industry stakeholders adhere to dairy system rules. Audited stakeholders include provincial boards and private sector participants in various programs. For example, provincial milk marketing boards are audited to verify whether revenues are appropriately shared with producers in all 10 provinces. Audits of private sector participants, such as processors, include verifying their reporting of milk usage, which is important for ensuring that producers are fairly compensated. Other audits verify whether program participants that have access to competitively priced dairy products for further processing adhere to program requirements.

43. The corporation chairs the Canadian Milk Supply Management Committee and 2 regional committees. The corporation also administers 3 federal–provincial agreements for the sharing of revenues and markets among Canadian milk producers.

44. We made no recommendations in this area of examination.

45. Analysis. We found that the corporation had good practices in operational planning and performance monitoring and reporting (Exhibit 6).

46. Analysis. We found that the corporation had good practices for managing operations (Exhibit 7).

Conclusion

47. In our opinion, on the basis of the criteria established, there was a significant deficiency in corporate governance, but there was reasonable assurance that there were no significant deficiencies in the other systems and practices we examined. We concluded that except for this significant deficiency, the Canadian Dairy Commission maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.