Supply Management isn’t all it’s Cracked Up to be

Frontier Centre, Media Appearances, Uncategorized

Recently, Canada’s dairy lobby has been singing the praises of “supply management” — a system that limits production and inflates prices in an attempt to bring stability to the milk market. The federal government has also voiced its support of the system, even while it has agreed to enter Trans-Pacific Partnership trade negotiations, which suggest supply management is on the bargaining table.

I am not convinced that most Canadians are satisfied to pay a hefty premium for their dairy products in return for price stability. But perhaps the dairy farmers are on to something.

Why should consumers benefit only from stable dairy prices when there are so many other sectors that could benefit from supply management?

How about the Auto Assemblers of Ontario? Premier Dalton McGuinty might like the concept, as would the Canadian Autoworkers. Each assembler would get an annual quota, divided among one or two models. (The number of choices available today confuses consumers and is wholly unnecessary.) Imports would be strictly limited and quotas to import would be provided to the assemblers. Prices and quotas would be set by a Canadian Auto Commission.

There are so many possibilities with this particular economic model that should provide broad appeal.

International trade as we know it would have to come to an end, and Canada would need to withdraw from the WTO, but the dairy lobby has long told us the WTO is a nuisance. We would rely on supply-managed Canadian production for most of life’s needs, as organized by a wise government and a series of commissions dedicated to determining the right size of the market and the appropriate price to ensure a fair return. Not only would prices be more stable, but so would supply and employment.

Wait. Was this not the Soviet economic model? How did that work out? No kidding, it collapsed. Pity.

As in the Soviet Union, so in Canada, the confused logic of supply management is beginning to show signs of strain.

The market is shrinking.

Even with tariffs in the 200-to 300-per-cent range, more competitive foreign suppliers are making inroads. Australian and New Zealand dairy farmers, who gave up on supply management a decade ago, have geared up to serve global markets and have found them quite lucrative.

Canada has its own example of what happens when markets are allowed to work. The Canadian wine industry was sheltered by analogous protection until the late 1980s. It produced high-priced, indifferent products for a market that seemed to prefer beer and spirits. Once protection was removed, however, the entrepreneurial parts of the industry responded. The result is a competitive industry serving a growing market at home and abroad.

The number of dairy farms is shrinking — fewer than 12,500 now remain in the business, compared with 120,000 in the 1960s. At quota prices approaching $30,000 per cow, entry costs are prohibitive. Even a modest farm with 100 milking cows faces capital costs of at least $5 million. The average dairy farmer could count on a 13-to 14-per-cent profit in recent years, proudly claiming that they are doing so without government handouts. Nope. Just a government organized monopoly.

The collateral damage to the rest of the economy is not trivial. A stubborn determination not to give up on supply management has undermined the government’s ability to be an effective voice in multilateral and region-al trade negotiations.

The time has come for both industry and consumers to speak up. The government interprets silence as consent. Recent critical assessments by think tanks — from the Montreal Economic Institute and the CD Howe Institute, to the Conference Board of Canada and the Frontier Centre for Public Policy — have fallen on deaf ears. The economic logic remains clear. It is up to all of us to make sure that the political logic is re-calibrated.