Dairy and poultry supply management in Canada

Milk for sale in a supermarket in London, Ontario. Supply management raises the price of milk in Canada.

Supply management (French: Gestion de l'offre) is a Canadian policy to control the price of milk, cheese, eggs and poultry in Canada. It restricts the supply of these products by limiting and controlling the amount produced domestically and starkly limiting imports with high tariffs. With a restricted supply, the prices increase, increasing profits for the farmers. Though this system allows the federal and provincial governments to avoid subsidizing the sectors directly, consumers instead subsidize farmers in these sectors through artificially high prices paid for groceries. Other agricultural sectors in Canada (grain, beef, pork, etc.) do not have similar controls, and for the most part compete fairly on the international market.

Supply management is the source of frequent criticism. Criticism centres on the higher prices consumers pay, the reduction of consumer choice and the fact that the higher prices are disproportionately paid by the poorest Canadians to wealthy farmers. Because supply management is fundamentally a protectionist policy, the government's unwillingness to allow imports from other countries is a major stumbling block in international trade negotiations. Negotiations harmed by the government's defence of supply management include free trade with the European Union and the Trans-Pacific Partnership.

Parts of this article will focus on the dairy industry, as the dairy industry is the largest of the three supply-managed industries (13,000 farmers vs. 3,000 poultry farmers and less than 1,000 egg farmers), though the general principles apply to the other two industries as well.

How it works

Dairy cattle in a barn in Quebec

Supply management is based on three policies: price-setting, protection from foreign competition and control of supply. The end result is that consumers pay higher prices, with the higher profits going primarily to farmers. A second result is that by shielding farmers from variations in the price of their goods, farmers' profits stay stable.

Price setting

Producers create the goods (milk, poultry or eggs), and sell them to either processors or consumers. The price that the processors or consumers must pay is decided upon by a board. Factors considered when setting the price include production costs, the current market price for the goods, and how much money the board thinks farmers should make. In the case of milk this board is the Canadian Dairy Commission, composed mostly of dairy farmers.

Protection from foreign competition

The prices that processors and consumers are forced to pay to Canadian farmers is much higher than the price on the international market. As a result, supply management must block purchasing from international farmers. This was originally accomplished by a total ban on imports, but international trade rules forbade this. Instead there is a tiny import quota, around 8% of the cheese market or 1% of the yogurt market – the equivalent of around one teaspoon of yogurt per Canadian per year. Past this amount, tariffs are exceptionally high – as low as 168% for eggs, ranging up to 238% for chicken, 246% for cheese and over 300% for butter. These high tariffs render imported food unable to compete.

Control of Supply

Dairy, poultry and egg farmers are guaranteed profits – the median gross income for a dairy farmer is C$250,000 a year – and protection from competition. This would make it extremely desirable for newcomers to join the industries or for existing farmers to increase their output. This, however, would result in problematic overproduction, so quotas have been instituted, and no farmer is allowed to produce more than their quota allows. Because the dairy industry is so lucrative, the right to own a single dairy cow is worth $28,000 (this does not include the actual price or value of the cow itself), and an average farm has $2,000,000 worth of quota.

Impact of supply management

Dairy, poultry and egg farmers

The most obvious impact of supply management is that on the farmers themselves. Supply management is effective at keeping revenue stable and guaranteeing profit for farmers. For this reason, these farmers lobby heavily to protect supply management from challenges, both domestic and international.

Proponents of supply management claim that it is effective at keeping small family farms viable instead of having them crowded out by large factory farms. This is, however, not borne out by the facts. From 1971 to 2011, the number of dairy farms in Canada has dropped by 91 percent. Nonetheless, in the same period of time in the United States, the number of dairy farms dropped by 88 percent without any system of supply management, demonstrating that supply management has done little for the preservation of small family farms.

For farmers wishing to enter the market and start a new farm, the price of the quota can be prohibitively expensive, and up to 75% of start-up costs. This leaves those farmers entering the industry with a heavy debt burden.. The Return on Investment (ROI) for a quota-based small broiler chicken farm would be around 3%, but without having to pay for quota, the ROI would be about 18%.

For processors of dairy, poultry and eggs, supply management is a mixed blessing. Processors have to pay high prices to Canadian farmers for their goods, but may pass those higher prices on to Canadian consumers, who have no other option. On the other hand, because their inputs are so expensive, they are unable to compete internationally. Total dairy exports in Canada amount to only 5% of production. For New Zealand by contrast, which has phased out subsidies and does not have supply management, 95% of dairy is exported.

Consumers

Another clear effect of supply management is that on consumers. The added profits and benefits reaped by the supply-managed industries ultimately come out of the pockets of consumers. It is estimated that Canadians pay one and a half to three times as much for dairy, poultry and eggs as they should be, adding up to around C$200 per family per year. This has been criticized as a regressive tax on the poor, for whom food is a large portion of their budget, and who are in effect subsidizing well-off farmers. In fact, even the average Canadian consumer earns far less than the average dairy farmer, to whom they are paying subsidies from their grocery bill.

By managing supply, consumer prices do not fluctuate with swings in international markets. Though one might expect that with a fixed supply of milk that efficiencies of technology and scale might bring the prices down, the opposite has happened; the price of milk in Canada has been rising faster than inflation over the past 30 years. In the same time period, in the United States the price of milk has instead decreased relative to inflation.

Under supply management, consumers, as taxpayers, do not need to pay explicit subsidies to dairy, poultry and egg farmers; the paying of often substantial subsidies to farmers is common in many developed countries, though Canadian farmers in other sectors, including grain, beef, pork, food oils and pulses, receive few if any subsidies. Even considering the lack of explicit subsidy, through supply management Canadians still pay more in effective subsidy than many other countries. The OECD estimates the subsidy equivalent (producer support estimate) paid to all of Canadian agriculture as 18% of the value of the industry; the majority of the effective subsidies for all Canadian agriculture are to the supply managed industries although they account for only a minority of Canadian agriculture, distorting this figure further. Though in the European Union, the effective subsidies are 27%, Canada gives more in effective subsidy than the United States (10%), Australia (6%), New Zealand (1%), Brazil (6%), China (9%) or Chile (4%).

International trade agreements

Supply management has frequently been a major barrier to Canada when negotiating international trade agreements. One of the key components of supply management is excluding foreign countries from the Canadian dairy, poultry and egg markets; countries with which Canada attempts to negotiate free trade agreements object to Canada's efforts to gain access to their markets while denying them access to Canada's own. Negotiations harmed by the government's defence of supply management include free trade with the European Union, free trade with India, the Doha round and the Trans-Pacific Partnership. In the case of the Trans-Pacific Partnership, Canada's refusal to open the markets protected by supply management has led to Canada's longtime allies Australia and New Zealand moving to exclude Canada from the agreement.

History

Supply management in its current form dates to the 1970s, though its origins trace to the formation of the Canadian Dairy Farmers’ Federation in 1934. The group became Dairy Farmers of Canada in 1942, and its mandate was to stabilize the dairy market and increase revenues for dairy farmers. In the face of lobbying, government programs were instituted in the 1940s and 1950s to increase prices and limit imports. 1958 saw the creation of the Agricultural Stabilization Board, though it was not limited to dairy. In the 1950s and 1960s there was significant volatility in dairy prices, dairy producers had too much bargaining power relative to dairy farmers, the United Kingdom was poised to enter the European Common Market, resulting in the loss of Canada's largest dairy export partner. These challenges led to the creation of the Canadian Dairy Commission, whose mandate was to ensure producers received a "fair" return on investment, and to ensure the quality and supply of milk, (though without concern for consumer prices).

In 1970, the National Milk Marketing Plan came into effect to control supply, with the federal government and the governments of Ontario and Quebec, the two largest provinces, signing on. By 1974 every province except Newfoundland had signed on. Following dairy, a national supply management system was implemented for eggs in 1972, turkey in 1974, chicken in 1978 and chicken hatching eggs in 1986. Concurrently with the domestic controls on supply and price, the high tariffs on imported products were put in place to protect Canadian producers from competition, and keep foreign imports to very low levels.

See also

• Agriculture in Canada
• Dairy farming in Canada