This article has been published in the Fraser Institute Blog found at SUPPLY MANAGEMENT AND THE INTEREST OF CONSUMERS AND FARMERS
A leading politician recently explained to me why the last Conservative government in Ottawa did not abolish supply management: “It was not in the party’s interest”, implying that in fact it would have been in the public interest to have done so.
Why all governments since the inception of the system in the 1970s allowed the party over the public interest to dominate is easy to explain. The beneficiaries of the system spend large amounts of money lobbying politicians to retain it and punish those who do not. On the other hand, for the vast majority of voters the existence of supply management and the costs it brings are of relatively little importance and politicians would expect few electoral gains from ending the system. In fact, the results of a recent Angus Reid poll revealed that 58 percent of Canadians had “no idea” and 38% “knew little” on how the system works and therefore how much it costs them.
However, the status quo is now threatened by President Donald Trump’s demand for an end to Canada’s supply management system during the renegotiation of the NAFTA treaty. As a result, Prime Minister Justin Trudeau’s Liberal government faces a problem. If it insists on maintaining the system, US negotiators will demand reciprocal concessions that decrease Canadian exports, the exchange rate, employment and economic growth.
If, on the other hand, the Liberal government agrees to abolish supply management, consumer prices will fall and the present level of US restrictions on Canadian exports will be maintained or even lowered and bring other benefits to the middle class the Liberals have promised to help.
The loss of the current electoral and financial support from the beneficiaries of the system can be made up by a government program explaining to voters why this policy is in their interest. The focus of such a campaign should be the simple explanation of how this system operates and how it affects their cost of living.
The explanation should start by pointing to a very important and simple fact: Anyone in Canada who wants to produce or import dairy products, poultry and eggs and sell them must buy a quota from other farmers or face persecution resulting in fines or jail. With the ownership of the quota comes the right to sell a specified amount these products at prices fixed by a government-sanctioned association of producers.
By controlling the quantity of quotas in the market, this association determines the total amount produced and thus the prices at which demand equals supply in Canada. These prices are supposed to allow farmers to pay their capital and running costs and earn a normal profit. In fact, however, they are higher by amounts farmers need to pay the interest on the loan they had to take out to purchase the quota. Recently, according to a non-profit organization that represents Alberta’s dairy producers, the cost of a quota in Alberta came to $36,000 per cow or $3.9 million for an average-sized dairy herd of 108 cows.
The very existence of the quota price, which is found on the internet, is incontrovertible evidence that consumers in Canada pay more for dairy products, poultry and eggs than it costs farmers to produce them and that without supply management consumer prices for these products would be lower. How much lower would these prices be? According to one recent peer-reviewed publication the average family in Canada would save $444 annually. This burden is greater for the poor and families with children smaller for the rich and childless.
One reason why politicians may have been reluctant to end supply management in the past is that it will conflict with Canadians’ sense of fairness and will bring financial hardships or even bankruptcy to farmers whose income is curtailed but whose debt obligations remain, all caused by governments and for reasons beyond their control.
The government can deal with this problem by creating a financial adjustment program, the basic features of which are found in Australia’s recent experience. That country in 2000 had ended supply management and assisted farmers through quarterly payments over eight years. Farmers leaving the industry were paid a lump sum.
An important feature of the program was that its cost was covered not by funds drawn from general government revenue but by the imposition of a surcharge of 11 cents per litre on the buyers of milk scheduled to last eight years. These costs in effect are an investment lasting eight years, which will bring a return of lower milk prices into the indefinite future.
It was not easy to design a compensating package that was fair to all Australian farmers and it would not be easy to do so in Canada, especially since the termination of supply management will impact farmers differently, depending on the time and price at which they had obtained their quotas. Some had received them free of charge when the system was created in the 1970s while the rest have enjoyed gains in the ever increasing value of their quotas depending on the time of their purchase. Most seriously hurt would be farmers who had bought their quotas recently.
However, these issues of compensation can and will be overcome simply because ending supply management will bring large and lasting benefits to Canadian consumers and in addition, will remove one of the greatest irritants in Canada’s relations with its global trading partners, increase economic and personal freedoms and allow free market forces to improve through time the quality, variety and costs of all agricultural products.
Alberta Milk (2017), “How much does quota cost for a 108 cow dairy?”, found at https://albertamilk.com/ask-dairy.../how-much-does-quota-cost-for-a-108-cow-dairy/
Canadian Dairy Information Center (2017), Monthly Milk Quota Exchange, found at http://www.dairyinfo.gc.ca/index_e.php?s1=dff-fcil&s2=quota&s3=qe-tq
Cardwell, Ryan, Chad Lawley and Di Xiang. 2015. “Milked and Feathered: The Regressive Welfare Effects of Canada’s Supply Management Regime.” Canadian Public Policy 41(1): 1-14.
Edwards, Geoff (2003), “The story of deregulation in the dairy industry”, The Australian Journal of Agricultural and Resource Economics, 47:1, pp. 75–98 *
Globerman, Steven and Christopher Sands (2017), The Fate of NAFTA: Possible Scenarios and their Implications for Canada, The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/fate-of-NAFTA-possible-scenarios-and-their-implications-for-canada-execsum.pdf
Grubel, Herbert and Richard Schwindt (1977), The Real Cost of the BC Milk Board, The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/real-cost-of-the-bc-milk-board.pdf
Reid, Angus (2017), “Supply Management: Most Canadians say scrapping system should be on the table during NAFTA talks”, found at http://angusreid.org/supply-management-nafta-renegotiation/
 See Reid (2017)
 For a discussion of the demand and broader issues surrounding it see Globerman and Sand (2017).
 For an early study of supply management and its cost see Grubel and Schwindt (1977)
 See Alberta Milk (2017)
 See Canadian Dairy Information Center (2017)
 See Cardwell et al (2017)
 See Edwards (2003)