It’s Time to End Supply Management

Commentary, Elmira Aliakbari, Ross McKitrick

Conservative Party of Canada leadership candidate Maxime Bernier has come out against the long standing practice of agricultural supply management for dairy, poultry and eggs. It is rare for a Canadian politician to take on this issue, but the evidence is overwhelming that policy reform is needed and can be done in a way that yields widespread benefits while minimizing the economic risks to those farmers currently inside the system.

Bernier echoed what many other commentators have argued, that the system is “inefficient and fundamentally unfair.” Supply management was originally intended to shield a specific group of farmers from price volatility and market risks. Quotas were issued to restrict production, which resulted in higher prices, but also required imports to be controlled through high tariffs on agricultural products. While this guaranteed stable profits for farmers, it artificially inflated consumer prices. The OECD recently reported that Canadian consumers, on average, paid an extra $2.6 billion per year from 2001 to 2011 due to supply management.

The most unfortunate aspect of the system is the way inflated prices hit lower income families hardest. A study published last year by the University of Manitoba reported that supply management acted as an implicit income tax of 0.5% on wealthy families, rising to 2.3% for poor families. This kind of regressivity is one of the strongest reasons to look at reform, but not the only reason.

Supply management also breeds inefficiency. Because it guarantees stable profits for protected farmers, it leaves them with no incentive to innovate or find ways to increase productivity. It also harms farmers who are not protected and who want to innovate and reach new markets. Supply management has been a huge barrier to Canada reaching trade agreements because of the high tariffs it requires us to impose. Canada inevitably has to make concessions at the negotiating table to keep them in place. In effect, supply management protects one group of farmers, while putting a larger group at a disadvantage. It ends up limiting opportunities for agricultural and food companies by restricting them to slow-growing domestic markets. For instance, beef, pork and grain farmers in Canada – who are not protected by supply management – have lost the opportunity to seek out new markets and expand their exports to fast growing emerging markets.

Bernier touched on many of these issues in his announcement, echoing years of critique. Fortunately he also put forward a realistic plan to reform the system, one that has already been successfully applied in Australia and New Zealand.

Farmers who hold quota in the current system need to be compensated when the market is liberalized and tariffs removed, since quota values would largely collapse. It would cost between $18 and $28 billion to do this. This cost could be covered through temporary levies on supply-managed products, while still yielding lower consumer prices in both the short and long runs.

A number of further details would need to be worked out, especially regarding the pace of reforms. Tariffs should be lowered gradually to give industry time to adapt. Farmers who stay in the market may need assistance to embrace new technologies and equipment to lower their production cost, expand their capacity, and enhance their competitiveness.

We know that this process can not only work but can turn out to be a new engine of growth for the agricultural sector. In 2001, after decades of supply management, New Zealand moved to a free market. Within six years, they had removed their tariffs and were open at the borders. Farmers started learning how to change, diversify and adapt to the new environment. It wasn’t always easy. Some farmers did not react quickly enough and did not survive. But enduring a tough period of transition and working through the industry’s fear of change allowed the New Zealand dairy industry to become the country’s largest export earner. Abolishing supply management prompted New Zealand’s dairy industry to grow 17 times faster than Canada’s. Exports constitute only 5 percent of Canada’s dairy output, compared to 95 percent of New Zealand’s.

It may once have been true that supply management benefited farmers, but it now hurts the majority of Canadians through higher prices, protectionism and technological stagnation. Even farmers would benefit overall by a shift to a free market system, as they would be able to expand their production and exploit export opportunities.

Like New Zealand, we need to work through our fears and get on with the process of promoting the liberalization of supply managed agriculture. Of course there will be challenges but in the long run they will be in Canada’s national interest.

This op ed was originally published by NewsHubNation on Monday, June 20, 2016: http://newshubnation.com/VJX39VQbBb/Its-Time-to-End-Supply-Management