The Supply Management Cartel: Collective Inaction and the Failure of Reform

Agriculture, Australia, Canada, Eric Merkley, Global, New Zealand, Publications, Rural, Uncategorized

Executive Summary

• Supply management in Canada is a marketing board system that sets production and prices for dairy, poultry and eggs. Farmers must purchase quota in order to produce and sell product, which is collectively valued at $25-billion. The benefits of the system include stability and product quality for producers, processors and consumers. These benefits, however, are limited and are outweighed by the cost.

• Inefficiencies in the system ensure, on balance, higher market prices for milk than in the United States at the production level and, to a lesser extent, the retail level.

• Supply-managed commodities limit consumer choice by imposing massive over-quota tariffs. Tariffs ranging from 200 per cent to 300 per cent over quota make imports cost prohibitive. Due to the lack of foreign competition, the incentive for value-added innovation is lessened.

• Non-dairy farmers are negatively affected by supply management’s ability to chill Canada’s market access abroad. More than 90 per cent of farmers are dependent on exports for their living. They benefit from multilateral trade.

• The transfers received by the supply-managed sector dwarfs other agriculture commodities. With the excessive subsidization of its dairy sector, Canada is becoming increasingly isolated on the international stage.

• All political parties enthusiastically support supply management despite their awareness of its flaws. The sector is a concentrated interest. Producer wealth comes at the expense of low-income citizens and, more broadly, consumers, who are poorly organized and ignorant of the costs of the system. There is no political incentive to abandon the system.

• Reform was only possible in Australia and New Zealand because their dairy systems are fundamentally distinct from Canada’s—different incentives are apparent. They achieved reform because their dairy industries wanted to acquire market access abroad.

• The Trans-Pacific Partnership (TPP) negotiations represent the best chance to deal with the supply management issue. The negotiations will form a countervailing interest to supply management— the industries that could potentially lose out if Canada remains intransigent on the issue. The failure of processors to block Chobani yogurt from Canada also presents opportunities.

• Any attempt to dismantle supply management should encourage a soft landing for the sector. The progressive devaluation of quota combined with targeted transition assistance as done in Australia is a promising option.

Introduction

The system of supply management in dairy, poultry and eggs has long drawn the ire of trade negotiators, think-tanks, economists, the media and business leaders. To our trading partners, it is perhaps perplexing that a nation of exporters with a professed commitment to free trade could maintain a system that fixes prices and controls production behind massive tariff walls. Not only does Canada support this system, but the three major parties also jockey for the status of the staunchest defender of the status quo. The Conservatives argue for marketing freedom for wheat and barley farmers but not for dairy, poultry or egg producers. The NDP, which rails against the corporatization of agriculture, supports a system that redistributes wealth from those who spend the highest proportion of their income on staple foods to wealthy producers.

Using collective action theory, this paper will integrate an examination of the costs of supply management with an analysis of the political environment. This theory posits that power and influence within democratic institutions are largely a result of actors competing and co-operating based on cost-benefit calculations. The supply-managed industry can be understood as a concentrated interest that is able to extract ‘rent,’ or benefits from the government in the form of a regulatory environment that creates what is, in essence, a cartel: an arrangement between producers that inflates prices and restricts competition. The cost is product prices above market value, and it is borne by consumers. There is little incentive to organize a countervailing interest against the cartel, as the costs of the system are dispersed evenly among a diffused group that is ignorant of the costs. The organizational costs for consumers outweigh the benefits, as political actors also make cost-benefit calculations. In this scenario, there is little to gain from undermining producers, an organized interest, for little electoral payoff in the form of votes.

Collective action theory explains the relative success or failure of interest groups that seek to maximize their interests. It is in stark contrast to the dominant pluralist model of public policy, which sees policy as the output of various interest groups that compete on an equal footing within the electoral arena for dominance. It also stands opposed to other streams of thought that see policy through the lens of the median voter theorem: political parties design their policies to drift towards the centre to maximize votes. The collective action framework allows a concentrated minority to advance their interests over the interests of a dispersed majority if it the benefits outweigh the costs. Collective action theory best explains how Canadian policy is slanted toward the interests of producers over consumers.

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