*Farmers earn great return on their quotas

Agriculture, Frontier Centre, Rural, Uncategorized, Worth A Look

Feeling burned by the stock market and looking for a solid long-term investment? Not a gold bug, you say? Have you considered farming? It’s surprisingly expensive to get started, but the capital gains can be truly extraordinary.

The headlines now focus on the drought across Western Canada but there’s little sign of hard times in Canada’s supply-managed sectors of dairy, egg and poultry production. In fact, the value of quota necessary to produce milk under the government-controlled system is on a tear.

That seems strange, at first glance. Just last month, the World Trade Organization ruled that Canada illegally subsidizes hundreds of millions of dollars worth of dairy exports — which led to another round of speculation that Canada’s regulations blocking imports must eventually be doomed.

Canada’s milk producers seem to think otherwise. International milk prices have been plummeting, but this needn’t affect this country’s 20,000 protected dairy farms — which are concentrated in central Canada and benefit from government-guaranteed prices. The value of milk quotas have risen since January by 18 per cent in Ontario and by 19 per cent in Quebec.

The astoundingly high prices needed to purchase the right to send milk to market is the dirty secret at the heart of Canada’s supply-management system, at least outside the agri-food industry.

In an article in yesterday’s Globe and Mail, former agriculture minister John Wise made a spirited defence of supply management, describing it as a “unique” Canadian achievement “that matches what farmers grow with what consumers need and want.” It’s just like the production of computers or cars, he suggested — industries which also are careful not to overproduce.

Nowhere, however, did he mention the word quota. Individuals who decide to become furniture makers needn’t buy the right from Ottawa to produce each piece. They just get started. Not in farming, though.

The provinces’ milk quotas generally are expressed as the right to produce one kilogram of butter fat daily. In 1998, that was worth roughly $15,000 in Ontario. In 2000, when the stock market was at its peak, it was worth around $20,000. Last month, it was $22,950. In Quebec, in May, it was $29,900.

That translates into some extraordinary statistics. The total value of the milk quota in Canada is now about $20-billion. That means the cost to buy the quota controlled by an average farm is worth just over $1-million.

There are about 1.14 million cows in the country, meaning the value of quota per cow — that is, the right to sell the milk from that cow — is about $17,500. That’s about seven times more than the cow itself would cost at auction.

Getting into the other supply-managed sectors is even more expensive. The average chicken farm in Canada has 28,000 birds — and would require $1.5-million in quota to run. The average turkey farm needs $1.4-million in quota.

The quota for an average egg operation — with about 13,000 hens laying one egg a day — is $1.75-million. The quota of $135 per hen is roughly six times what it was two decades ago, and has risen about 18 per cent just since February. There are a few agricultural economists across the land who regret the day they told their parents they were leaving the farm to pursue academia.

“With supply management, farm income is derived from the marketplace, not from subsidies,” argues Mr. Wise.

Yet, is there anyone but the consumer to ultimately cover the sky-high entry costs necessary to become a farmer — expenses, of course, which are entirely government-created and artificial. The best analogy for city folks is the taxi plate. Municipalities like Toronto restrict the supply of cabs by restricting the supply of cab licences. Naturally, this bids up the value of those licences.

When the supply management system was introduced in the late-sixties and early-seventies, those who already produced dairy, egg and poultry products received their quotas for free. They’ve now passed them along to their children, and sometimes on to the grandkids — often entirely free of capital gains taxes. For most, the quotas are a nest egg, financing their retirement.

Theoretically, these farmers would be left holding quotas as worthless as WorldCom Inc. stock if Ottawa ever agreed to phase out border controls, which now exist in the form of huge tariff walls, and let foreign production into the country.

But the farmers also know that high quota values are just one more incentive for Ottawa to protect the supply-managed system at all costs — even if it may mean making concessions at world trade talks in sectors that could be of greater future importance to Canada.

Dairy farmers, in particular, are politically powerful — especially in Quebec. Any signal that Ottawa was bending would bring forth a torrent of abuse, and demands that — at a minimum — the Canadian government compensate agricultural producers for the value of their entire quota.

Prime Minister Jean Chrétien spoke of the importance of Canada’s agricultural producers this week, as he began a summer campaign to keep his job. He touted Ottawa’s recent farm aid package. He might also have pumped for some big cheques to the Liberal Party. Many of those farmers he met could afford it.