“Macleans” challenges Canada’s dairy supply management monopoly with recent story about “the $25,000 cow”

From Andrew Coyne, in Macleans:

Headline image and titles from the Macleans story online. Click image to go there.

“I have a proposal I’d like to run by you. As you’re no doubt aware, the Canadian pundit industry has been going through some difficult times of late, not—God knows!—through any fault of our own, but what with the economy, and fluctuating advertising revenues, and that whole Internet thing . . . Anyway, we’re a resourceful industry with a proud history, so we’re not looking for any handouts, but what I was wondering was if maybe there was some way just to bring some order to the marketplace, so we wouldn’t have to deal with these wild swings in market conditions that, I can tell you, make it impossible to plan.

What I have in mind is some sort of scheme whereby the government would restrict the supply of opinion in magazines and newspapers to some fixed number of column inches per year, with a view to propping up—er, stabilizing—salaries at a target rate. Naturally I am sensitive to the concerns of magazine readers, not to mention magazine owners, but I don’t imagine it would raise the cover price of magazines by more than about 200 per cent or so.

No? Foolish? Extortionary? Outrageous? Then allow me to introduce you to the world of supply management: an actual policy pursued by the governments of Canada and the provinces for the past 40 years. Only I’m not talking about comparative fripperies like magazines (we have our own indefensible support programs, though not, ahem, on the same scale). I’m talking about basic foodstuffs, the kind the typical Canadian family eats every day: dairy products (milk, cheese and butter), eggs, and poultry (chicken and turkey), whose prices are maintained, by means of a strict regime of production quotas, at two and three times their market levels.

If it were proposed today to tax food—even at five per cent, never mind such punitive rates as these—it would be instant political suicide: consider the ruckus that erupts whenever some stray academic suggests the GST should apply to groceries. But because it is the status quo, and because the tax is implicit rather than explicit, and because “it’s to help farmers,” the policy is not only tolerated, it is impossible to remove. Or at least, it has been until now.

The system works much as I have described. Different agencies are responsible, and the programs differ in some details, but in essence the federal government sets a national quota, and divides it up between the provinces; the provinces are responsible for allocating quota among farms. The quota is tailored to support a target price, more or less as a function of farmers’ costs. (In Quebec and Nova Scotia, the price of milk is further regulated at the retail level.) Once upon a time, the aim may well have been merely to stabilize prices. But over time, the effect has been to drive prices of supply-managed products relentlessly skyward.

One way to look at this is to compare prices in Canada with those across the border, where no such restrictions apply. (See chart.) From relative parity 30 years ago, prices in supply-managed goods have risen to between two and three times those in the United States. Another yardstick is provided by the external tariffs required to maintain the domestic quota regime, lest it be undercut by foreign imports. These range from 168 per cent for eggs, to 238 per cent for chicken, 246 per cent for cheese, all the way to 299 per cent for butter. (To be sure, these apply only above certain “minimum access commitments” required by the World Trade Organization (WTO), allowing a certain amount of imports to enter at much lower tariffs. But these are minimum indeed: eight per cent of the domestic market for cheese, for example, or one per cent in the case of yogourt—enough, as the veteran Canadian trade negotiator Michael Hart has written, to supply every Canadian with a rounded teaspoon of yogourt a year.)

Because competition, either within or across national boundaries, is so constrained, there is little incentive to control costs, doubly so when prices are set relative to cost. While the consumer price index rose by about a third over the previous decade, according to the C.D. Howe Institute, prices of dairy, eggs and poultry products rose, respectively, by 51, 54, and 61 per cent. Since the measure of costs, moreover, tends to be those of the least efficient producer, two further consequences follow. One, farms in supply-managed sectors are far less likely to fail than their counterparts in other sectors. Just six per cent of dairy farmers, for example, were unprofitable in 2005, according to the Organisation for Economic Co-operation and Development (OECD), versus 33 per cent of all farmers. And two, profit margins tend to be much wider than the norm: operating profits in the dairy industry, at 25 per cent, are twice the all-farm average.

So: expensive for consumers, but a sweet deal for farmers, right? Well, sort of. To the extent that a quota entitles its possessor to a premium over market prices, it has a market value, much as a stock has value based on the profits a company is expected to earn. Indeed, like stocks, quotas are traded on provincial exchanges; their value need not be guessed at, but can be observed directly. As supply-managed prices have risen, so have the value of the quotas, by nearly 10 per cent per year (though there have been efforts to cap prices in recent years). The right to ship the average cow’s production of a kilogram of butterfat a day is currently worth roughly $25,000, meaning an average dairy farm with 60 cows is sitting on an asset worth $1.5 million. All told, supply-management quotas are worth about $28 billion, three-quarters of that in dairy….”

Read it all on Macleans.ca

3 Comments

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3 responses to ““Macleans” challenges Canada’s dairy supply management monopoly with recent story about “the $25,000 cow”

  1. thebovine

    While the content of this story is old news to anyone who’s been following the Canadian agricultural scene, the fact that Macleans publishes a story like this makes one wonder whether this is the start of some anti-supply-management PR campaign. I mean, Canada IS a signatory to international trade agreements obliging us to do away with things like supply management, or so I’ve been told. Perhaps someone out there in readerland knows more about Canada’s international commitments vis a vis free trade in agricultural commodities and can fill us in on the details. Anyone?

  2. Jesse

    Umm, am I just paranoid, or did someone make Macleans pull that article, ’cause your link doesn’t work.

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