Milk and Money

Agriculture, Frontier Centre, Uncategorized, Worth A Look

The price of milk in Canada recently popped up by an average of 7.8% and if there were any protests, they were certainly muted. That is unfortunate. The price increases should have reminded consumers that we weave a terribly tangled web when first we practise to deceive.

A national self-deception enables Ottawa to artificially prop up prices and control the markets for dairy and poultry products in Canada, using a program known as agricultural supply management. Consumers are encouraged to deceive themselves into believing that high prices and limited choice are the price they pay for reliable supply. Producers are eager to deceive themselves that stable prices and assured returns are better than the vagaries of competition. And politicians delude themselves that the price of reform is too high.

There is a way out of this mess. But first Canada must stop decades of self-deception. Two precedents indicate what course the nation should follow: the transformation of the Canadian wine industry following the Canada-U.S. Free Trade Agreement from a weak, inward-looking industry to a prize-winning international competitor, and the successful elimination of an agricultural supply management regime in Australia following the Uruguay Round of global trade talks.

In the case of wine, the results of ending decades of counterproductive protection are on display in the Niagara and Okanogan regions and, increasingly, elsewhere: enterprising vineyards producing quality wines and Canadians consuming increasing quantities, both domestic and imported. Everyone is ahead: farmers, vintners, importers and consumers. Protectionism really served no one well.

The example from Australia may be even more pertinent. There, the industry and government got together and ended decades of supply management in 1999. Five years later, Australian dairy farmers are operating in a completely deregulated industry environment and all over Asia and Eastern Europe, consumers are enjoying Australian yogurts and cheeses, markets that Canadians could also serve.

These experiences hold lessons for the Canadian dairy and poultry sectors. It is not hard to imagine what would happen if the federal and provincial governments followed similar courses. There are some farmers doing well under supply management, but others, particularly small farmers, barely make ends meet. So long as markets are controlled, consumer choice and competitive prices will take a back seat to producer preferences.

As with the wine industry, no one wins; all but a few producers remain committed to the system and invest more in political activity than in modernization. Predictably, in the absence of a strong consumer lobby, politicians cater to the producer lobby rather than to broader interests.

As with the pre-free-trade wine industry, trade negotiations offer an opportunity to escape from this trap by providing countervailing political forces: Canada’s trading partners; the producers of grains, red meat, and other internationally competitive commodities; the food processing industry, and consumers. All would support a phased elimination of supply management, particularly if it were made part of a World Trade Organization (WTO) Doha Round package that included significant reforms and improvements in market access for the full range of farm products, as well as a sensible adjustment program funded by the federal and provincial governments.

A liberalization program, accompanied by a modest adjustment package compensating farmers who want to leave the business, would drive the marginal farmers out of business a little faster (since the Second World War, the number of farmers producing milk for market has dwindled from about 500,000 to 18,500), leaving the rest able to compete and produce a wider range of products at more competitive prices. Most such farms would be larger than current operations, but smaller units could survive by producing specialty products for niche markets. This is not a bad prospect, with winners all around, including marginal farmers who are holding on to their operations to their own detriment because the incentives to get out are not sufficient.

Is this scenario plausible? Perhaps not in the short term. The perceived political costs still weigh heavily, particularly in current political circumstances. Minority governments are not known for their political courage. But in the long run it will become increasingly difficult for a dwindling number of dairy and poultry farmers constituting less than 1% of the Canadian economy to continue to hold out against both domestic and international pressures.

If these farmers thought about it, however, they would see the Doha Round less as a threat and more as an opportunity. Today their numbers and their circumstances remain sufficiently potent to provide scope for gaining a useful adjustment package from federal and provincial governments. History, however, is not on their side. Five or 10 years from now, when they may face the next round of pressure from bilateral or multilateral negotiations, their numbers and their circumstances are likely to be a lot less interesting. Now is the time for dairy and poultry farmers to screw up their courage and see what they can negotiate. And we should all wish them well.

Michael Hart, a former federal trade official, holds the Simon Reisman Chair in Trade Policy at Carleton University. His C.D. Howe Backgrounder, Great Wine, Better Cheese: How Canada Can Escape the Trap of Agricultural Supply Management, is available at www.cdhowe.org
© National Post 2005