Jim Lee is standing inside his ominously quiet chicken processing plant.
Running at full tilt, Cami International Poultry Inc. of Welland, Ont., would normally be slaughtering, cleaning and chilling as many as 15,000 chickens a day.
Instead, the plant is closed. All but a handful of Cami's nearly 60 workers are at home collecting employment insurance. A 1.6-kilometre conveyor belt that snakes through the $5.5-million plant sits idle. A few stray feathers on the floor near the loading dock are the only obvious hint of the plant's usual vocation.
Cami has operated just three days so far in March and six in February. "It's frustrating as hell," said Mr. Lee, 55, a second-generation chicken processor who studied agricultural science at the University of Guelph.
"We have so much potential to go serve the market and we're being hand-tied. And the worst thing is I'm being punished for doing the right thing."
The simple answer why the six-year-old factory is running on empty is that Cami can't get enough live chickens. The Chicken Farmers of Ontario, which parcels out quotas for birds to processors, won't let him buy more live chickens. And he's struck out importing more from Quebec, or anywhere else.
Cami's struggles are a microcosm of what's wrong with a large swath of Canada's agri-food industry. Supply management – the system that tightly controls every facet of dairy, egg and chicken production in Canada – is thwarting companies like Cami from doing all the good things Ottawa says it wants from businesses – innovating, exporting and taking risks.
Critics of supply management have typically focused on the high cost paid by consumers. Cami's predicament demonstrates how lost export opportunities and the stifling of agricultural innovation is harming a much broader swath of the economy. Supply management is sapping economic growth, jobs and productivity, up and down the food chain, not to mention the hit on government revenues.
Canadians may not know what they're missing. The global market for protein is exploding as the middle class grows in emerging markets such as China, India and Indonesia. And it's driving demand for milk, cheese and chicken, and to a lesser extent, pork and beef.
The Canadian agricultural sector is severely limited in what dairy and poultry products it can export because of the protectionist regime Canada maintains at home to prop up incomes for an ever-shrinking number of farmers.
Economists say the benefits to farmers pale next to the billions of dollars in lost exports – today, and in the coming decades. Instead, the United States, Australia, New Zealand and the European Union are grabbing a vast market that could be Canada's.
A land of plenty – and constraint
Canada has all the competitive advantages to be a food-export colossus, including land, climate, feed and genetic technology. But it has consciously decided, through its policy decisions, to forsake the fastest-growing part of the market, lamented Colin Carter, a professor and director of agricultural economics at the University of California-Davis.
"That's where the action is in terms of economic growth, in these emerging markets," explained Prof. Carter, a Canadian, and an expert on global commodity markets. "It means there will be a shift in global demand for agricultural products, and trade. And for the most part, Canada is not participating in that market."
Canadian exports of processed agricultural to emerging markets are stagnant, and aren't likely to grow in the future because the country isn't selling what the world is buying, according to Prof. Carter. Global demand for milk products, for example, is expected to grow by 34 per cent by 2021. Demand for chicken is forecast to increase 30 per cent over the same period. Canada's exports of processed agricultural products, including such items as fresh meat, vegetables and sweeteners, totalled $13.7-billion (U.S.) in 2011, with 80 per cent destined for the U.S. and Japan.
"I'm not harping on what we've lost in the past," Prof. Carter said. "It's about looking forward and seeing where the opportunities are, and identifying what constraints are in place. And it's supply management."
The result is that chicken and dairy production is growing rapidly in countries that don't manage the supply, such as the U.S., Australia and New Zealand. In Canada, output is completely stagnant – a vivid reminder of the lucrative business Canada is losing out on, Prof. Carter explained.
Canada is still a major player in selling commodities, such as wheat, to the world. But it has a large growing trade deficit in processed agricultural products.
Other countries are getting the spoils, and Canada will forever be playing "catch up," said Richard Barichello, a professor of food and resource economics at the University of British Columbia.
"It's very clear where the future lies," Prof. Barichello argued. "The potential gains from exports are growing, and it's only a matter of time before it exceeds the domestic market. We're talking billions of dollars."
It's not just theoretical. Mr. Lee's frustrations hint at the vast lost opportunity for Canada's agri-food industry. Until a few months ago, Cami had a thriving business selling specially prepared chickens for Chinese and halal grocery stores in the Toronto area. The company hand-slaughters and air chills its birds, and to meet the custom of the fast-growing Chinese-Canadian population, the birds are sold with the head and feet intact.
But Mr. Lee is thinking much bigger. From his plant, located across the street from a shuttered former Stelco Inc. pipe-making factory, he wants to ship chickens as far away as Vancouver, New York City and Hong Kong.
He figures his plant could handle up to five times the number of chickens it now processes, selling so-called "Hong Kong-dressed" chicken to affluent Chinese consumers around the world.
Mr. Lee's choice of a company name – Cami International – and the location of the plant in the Niagara Peninsula reflect his ambition to tap the export market. "I always thought I would be exporting into the U.S. and into the Asian market," he said.
But Cami has been stymied on all fronts by a deal struck last year between large processors and the chicken marketing boards in Ontario and Quebec. The deal severely curtailed cross-border shipments of live chickens, virtually shutting out small processors such as Cami. The company's allotment of chickens fell 70 per cent – to roughly 250,000 kilograms every two months from 800,000 kilograms. That explains Mr. Lee's empty plant.
Supply management depends on tightly controlling the volume of chickens flowing into the market. Processors can only buy the amount of chickens allocated by their provincial marketing board. Likewise, farmers can only raise and sell their allotted quota of birds. Similar rules prevail in the dairy industry, where supply management also reigns.
A cultural argument
Desperate for a way out, Mr. Lee is suing the Chicken Farmers of Ontario (CFO) and six large chicken processors, seeking millions of dollars in damages, and more chickens. In a statement of claim filed in the Ontario Superior Court, Cami alleges that last year's supply reallocation agreement violates the company's constitutionally protected rights to freedom of religion and equality by restricting the chicken available to religious and cultural minorities.
Michael Edmonds, director of communications for the CFO, wouldn't comment directly on the Cami case, other than to acknowledge that the agency is aware that the company wants more chickens to process. The CFO has not yet filed a statement of defence in the case.
He insisted that the CFO works hard to accommodate specialty markets, including growing demand from Chinese Canadians. "That's not to say [the system] is without flaws. … If there are new markets, we will look at ways to meet that demand." Mr. Lee's showdown with the Chicken Farmers of Ontario is symptomatic of the dysfunctional supply-managed farm sectors. Prof. Barichello of the University of B.C. said the rich returns generated in the closed system has led to endless squabbles over the allocation of limited supply.
Prof. Barichello has also documented what he says is a growing concentration among dairy processors – the companies that package and process the raw milk into consumable products. The consolidation trend began in the late 1990s and continued through 2005.
The result is that profit margins have soared among the shrinking cluster of large processors who dominate the market. The result is a widening gap in retail prices that isn't benefiting farmers, and is clearly harming consumers, according to soon-to-be-published research by Prof. Barichello.
"When we see the high price at retail, it's not just the farm price that's gone up," explained Prof. Barichello, who grew up on a dairy farm still run by his brother in Langley, B.C. "That's an issue of some concern if we were to face the prospect of exporting."
Dairy prices in Canada were 115 per cent higher than New Zealand's between 1983 and 2010, and 23 per cent more than in the U.S., according to a recent report by the Frontier Centre for Public Policy. And the gap is expected to widen sharply over the next decade. For the average family, that represents a penalty of hundreds of dollars a year.
Mr. Lee is now considering some desperate measures to save his plant from closing permanently. He's applied for a special licence to import U.S. chickens, which he would then process and sell south of the border. He's also looking at the possibility of importing packaged chicken and vegetables, which are allowed into the country without paying the 238 per cent tariff that shields Canadian farmers.
He points out the obvious irony that these unpalatable options wouldn't do much to help Canadian farmers, or the Canadian economy.
Mr. Lee is left scratching his head, unable to comprehend why supply management is throttling his business.
"I love being Canadian," he said. "But I can't service the people who want my product. I can't build a business and I can't help the economy here. It's asinine."
Origin Eager to stabilize volatile prices and restrict supply, dairy farmers began pushing for the creation of provincial marketing boards as early as the 1920s. By the Second World War, there were marketing boards in all provinces. But the system was constantly undermined by interprovincial trade. Under pressure from producers, Ottawa introduced a national supply management system to fix production among provinces, giving them the power to set prices paid to farmers. Chicken and egg farmers joined in 1978, and later turkey producers.
Evolution The number of dairy farms has dwindled steadily every year to fewer than 12,500 from 145,000 since 1970 as producers consolidated to gain efficiencies. Buying new quota is the only way to grow because farmers can't produce more than their allotted quota. Those quotas are now worth nearly $30- billion, making them the most valuable asset of many farmers, and a source of collateral for loans. The high cost of quota pushed up prices and also keeps out new farmers.
Current state Experts say the net result is that inefficient farmers are sitting on production quota that could be used by more efficient ones. And because farmers can earn a comfortable living with the inflated returns created in a managed system, many have little incentive to do the things that would make them more productive.