We teach our MBA students about effective strategies that interest groups can use in dealing with government. These include complexity, rent seeking, and artificial barriers to trade.
The classic example that combines all three of these strategies is dairy supply management.
Supply management has remained basically unchanged since its inception more than 40 years ago. It has enriched dairy farmers, blackened Canada’s reputation as a free trading nation, forced Canadians to pay a hidden regressive tax on dairy products at the checkout counter and undermined the efficiency of both dairy farmers and commercial users of dairy products.
Now that our dollar is almost at par, compare the cost of cheese at your local Costco or Wal-Mart to the prices at Costco or Wal-Mart in Buffalo. You cannot buy dairy products at U.S. prices in Canada because the government granted dairy farmers a monopoly on milk production. It’s called supply management. Tariff walls in the 200% to 300% range prevent the import of supply-managed commodities.
So who sets the price of milk in Canada? It’s the Canadian Dairy Commission (CDC), established by the federal government to serve the needs of dairy farmers. Two of the three commissioners of the CDC represent dairy farmer interests. The chief executive of the CDC, John Core, is a former Ontario dairy farmer and dairy bureaucrat.
The CDC reviews the price dairy farmers can charge for milk, based mainly on their costs of production, which include labour and depreciation. Canadian farmers producing other commodities can only drool at such a generous formula. Following its annual review on Nov. 19, the CDC will set the price of milk for the coming year. In other words, the dairy farmer representatives decide what dairy farmers can charge the public for milk.
Under supply management, each province is allocated milk quota, which is distributed among its dairy farmers. Milk quota can be traded ,
and its price is an indicator of how lucrative it is to produce milk in Canada. The combined value of milk quota today is about $33billion, or $2.3-million on average for each of Canada’s 13,000 dairy farms.
The CDC publishes a thick glossy annual report in both official languages, but the dairy supply management system is so complex that few except dairy farmers and dairy bureaucrats understand it. For instance, the unit of measurement isn’t a litre of milk; it’s a kilogram of butterfat. Try figuring out what that is. There is fluid milk, as well as several classes of industrial milk used in dairy products. The supply management system is too complicated to understand, unless you make it your lifetime vocation, and that’s just the way the dairy farmers and politicians like it.
And speaking of politicians who created this system, it should come as no surprise that all four federal political parties are staunchly in favour of dairy supply management. The fact that the public at large is blissfully ignorant of how the system works, and how badly it is being ripped off, is of great relief to politicians, especially those representing the 80% of Canadians living in urban areas. The cost of dairy supply management is paid for by Canadians via a hidden tax at the checkout counter. This is comforting to politicians because this cost does not appear in government spending estimates.
The cruellest aspect of dairy supply management is that it is a regressive form of taxation penalizing all of us, but especially the poor and needy. Those who can least afford it pay the same inflated prices for milk and dairy products as everyone else. With elections looming on the horizon both provincially and federally, now is a good time to raise this issue with your MP and MLA.