The $25,000 Cow: That’s the average value of a milk quota per cow under a supply-management system

Agriculture, Frontier Centre, Rural, Uncategorized, Worth A Look (historic)

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.

Dairy drain

Getty Images; Chart source: OECD

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.

If you’re one of those farms that were around in the early 1970s, when quotas were first handed out, gratis, that’s a nice retirement package. But if you’re a new farmer, it’s a major barrier to entry: as much as 75 per cent of start-up costs. So even with their wider operating margins, supply-managed farmers earn a comparatively meagre return on equity. Moreover, many had to go into debt to purchase quota, leaving them bearing heavy interest costs (though quota, once paid, can also be used as collateral to borrow more—another reason Canadian farmers tend to carry heavier debt loads than their U.S. counterparts).

Partly as a result, the number of farms in supply-managed sectors has been shrinking at a quite extraordinary pace, much faster than for the agricultural sector as a whole. At the end of the Second World War, there were half a million dairy farms in Canada. By 1971, when supply management in dairy went into effect, that figure was down to 122,000. Today, there are fewer than 13,000 dairy farms in Canada, roughly half of them in Quebec, another third in Ontario. (There are just 2,800 farmers in the chicken business, and 550 turkey farms.) A policy that was enacted in the name of saving the family farm has instead led to its near extinction. Those that remain are typically much larger than farms in other sectors.

Such is the industry’s decline that, even with the productivity gains that come from such consolidation, milk production is actually lower than it was four decades ago. Which is fine, in a sense, because consumption of dairy products has been declining steadily for decades, at a rate of one per cent per capita annually—perhaps in response to rising prices, perhaps because of the relative lack of innovation and variety on offer in an industry that is almost entirely cut off from the outside world. Less than five per cent of Canadian dairy shipments are imported; an even smaller proportion is exported. The figures are comparable for other supply-managed commodities. Farmers in these sectors might find they could grow their business by expanding into other countries. Instead, they prefer to hang on to a monopoly of our own shrinking market, their numbers shrinking along with it.

Of course, it isn’t only their own horizons that are limited in the process. Higher prices for primary producers translate into higher costs for those further downstream, who use their products to make processed foods, and who then complain, with some justice, that they cannot compete with their foreign rivals. To be sure, special dispensations are made to accommodate them, for example, allowing the makers of frozen pizza to import more mozzarella than would otherwise be permitted. But that only leads to complaints from their rivals in the pizzeria business. Vast sums are wasted in this way, lobbying and counter-lobbying, putting patches on patches: just another of supply management’s many inefficiencies. Though it costs consumers, according to OECD calculations, nearly $3 billion annually, the benefit to farmers has been estimated at little more than half of that. The rest is what economists call “deadweight loss”: sheer waste.

To sum up: Canada’s system of supply management has led to higher prices, fewer farms, less product innovation, and general inefficiency up and down the value-added chain. Naturally, it enjoys all-party support. And not just all party: every member of every party swore undying support for supply management in a House of Commons vote in 2005.

Small though their numbers may be—supply-managed sectors account for just 10 per cent of Canadian farmers, who are themselves less than three per cent of the workforce—supply-managed farmers, dairy farmers in particular, wield disproportionate support. In part, that’s because rural ridings tend to be overrepresented; in part, it’s because of the Quebec factor. The last time a federal government attempted to rein in dairy supports, in the mid 1970s—remember that picture of Eugene Whelan, federal agriculture minister at the time, splattered with milk—it was credited with helping to elect the first Parti Québécois government. Though it holds only five seats in Quebec, the current Conservative government is as foursquare in support of supply management as any of its predecessors, as is every party in every provincial legislature—east of Manitoba, that is.

This is another oddity of the current regime. Not only does supply management only apply to certain sectors, but these sectors are heavily concentrated in certain parts of the country. This puts the federal government, this one in particular, in a bizarre situation. Even as it is taking up the cause of grain and cattle farmers in the West, who export most of what they produce and desire only to expand their access to world markets, it is attempting to preserve an essentially autarchic regime in the supply-managed sectors of the East. The same government that boasts of its commitment to dismantling the Wheat Board’s monopoly, in the name of allowing farmers to sell on the open market, takes enthusiastic part in preventing other farmers from doing the same. It’s a profoundly hypocritical position—though no more so than the “progressive” opposition’s support for a system that, by driving up the price of food, costs the poor much more, proportionately, than the rich.

And there we would remain, were it not that our trading partners have grown weary of the game. Canada may have been able to exclude supply management from the Canada-U.S. Free Trade Agreement, as it did later in NAFTA. But the continuing attempt on the part of the world’s fourth-largest agricultural exporter to have it both ways, demanding greater access to others’ markets while essentially prohibiting access to ours, has already resulted in our exclusion from negotiations on the new Trans-Pacific Partnership trade area; it contributed to stalling the Doha round at the WTO; and it remains one of the major obstacles to signing trade deals with the European Union and India. Once, when countries like Australia and New Zealand maintained similar regimes, we might have had allies. Today, we are literally alone.

With all of these negotiations on tight timetables—there is a renewed push to complete Doha by year’s end, while the European and Indian agreements are scheduled for each of the next two years—Canadian business is growing alarmed. In an open letter to the new government shortly after the recent election, the president of the Canadian Council of Chief Executives, John Manley, pointedly noted that “the time is right” to phase out supply management. Indeed it is: because, one way or another, it is going to happen. Eventually, Doha will be signed, bringing with it steep cuts in the tariffs on which the system depends. The question is not whether supply management will be reformed, but how: chaotically, amid drastic declines in quota values, or gradually, with appropriate compensation and adjustment times.

Australia and New Zealand have shown it can be done, transforming their formerly supply-managed sectors from protected backwaters into competitive dynamos. (Oddly, this is used as an argument by the farm lobby against reform, as in: “If we let New Zealand’s exports in, they’d ruin us.”) The federal government could, as the C.D. Howe Institute has suggested, sell more quota on the open market, allowing more efficient farmers to earn back some of what they give up in lower prices via higher sales. The proceeds could be used to help others to exit the industry, and to compensate quota holders, with a view to completing the process in 15 to 20 years.

In the end, however, the question cannot be avoided: why we should have one set of rules for some farms, and another for the rest; and why, if our aim is to keep farmers on the land, we should have chosen the most inefficient, unjust, counterproductive, and internationally obnoxious way to go about it.