Colin Busby and William Robson discuss possible solutions to the damage caused by supply management to Canada’s food economy. Here’s an excerpt from their opinion piece in the Financial Post, titled “Free up our food supply — phase out farm quotas“:
“Since the early 1970s, “supply management” has subjected Canadian dairy, poultry and egg production to government-mandated cartels. Introduced to increase producer power vis-à-vis intermediaries and consumers, and thus raise farm incomes, supply management supports higher-than-market prices by administering producer prices and restricting farm output through production quotas, while high tariffs prevent food processors and consumers getting alternative supplies from abroad.
The initial allocation of quotas in the 1970s was free; today, most farmers trade existing quotas to one another through provincial exchanges. Generally speaking, national bodies oversee the overall system and the distribution of quotas to each province. Provincial boards oversee most of the pricing of supply-managed goods, the annual sale of quotas on exchanges and the enforcement of quota limits.
Primary producers who received production quotas at the outset, or bought them subsequently, benefit from these schemes. Consumers, and much of the domestic food industry, face higher-than-free-market prices and a more limited selection of products. As standard analysis of monopolies would lead one to expect, these arrangements impose losses on consumers that exceed the gains to producers.
The complexity of this system has increased over time and the context surrounding it has changed. Initially, proponents feared that without supply management there would be a decline of family-sized production and significant vertical integration. But these shifts have happened anyway, in both supply-managed and other agricultural sectors.
The system hurts the interests of Canada as trading nation because high, inflated tariffs effectively undercut Canada’s potential role as a positive force in multilateral trade liberalization talks. The defence of production limits at home, combined with, for example, tariffs on dairy imports of as much as 250%, leaves our negotiators in an hypocritical position.
At home, government control of entry has blunted competition, hampered innovation, and slowed entrepreneurship.
Meanwhile, production quotas have enormous market value — a fact that inhibits abrupt abolition of the system, yet at the same time suggests a route toward phasing it out over time. Because quota provides the right to produce a cartel-controlled good — fluid milk, poultry, and eggs, for example — the quota itself is valuable.
Many factors determine a production quota’s value: product prices; interest rates; perceptions of risk; expected growth of demand, and assessments of the likelihood of trade liberalization. At $28-billion in 2008, the aggregate value of production quotas in Canada was up threefold from 1995, with the average supply-managed farm holding some $1.5-million of paper permits.
For farmers of supply-managed products, the income associated with owning quota can be assessed in comparison with the return from investing in alternatives, such as financial instruments. One alternative would be long-term federal government bonds — a relatively risk-free investment with a yield of about 4%. If quota holders held those instead, the resulting income would have been a minimum of $1.1-billion in 2008.
The distortions created by supply management are worsening as the system entrenches. To the extent that farmers borrow against the value of quota, the cartel generates political risk for financial institutions, giving them a vested interest in maintaining a damaging system. Delaying ameliorative action would not help….”