Supply management (Canada)
Supply management (French: Gestion de l'offre) is a catch-all term for policies that control the price of milk, cheese, eggs, chicken, and turkey in Canada. This system was previously used in other countries, for example New Zealand and Australia but has since been deregulated and trade liberalized. It restricts the supply of these products by controlling the amount produced domestically and limiting imports with high tariffs. The regulated and restricted domestic supply and lack of foreign product increases prices for the end consumer, estimated to be 38% to 300% higher retail prices than what is paid in most other countries for the same commodities.
The controls provided by supply management have allowed the federal and provincial governments to avoid subsidizing the sectors directly, in contrast to general practice in the European Union and the United States. Instead, consumers subsidize farmers in these sectors through the significantly higher supply managed prices paid for the end products. Other agricultural sectors in Canada (grain, beef, pork, etc.) do not have similar controls or subsidies, and for the most part compete as a normal product on the international market.
Supply management, though supported by all three major political parties, is the subject of much debate in the farm communities, academia and think tanks. Critics argue that supply management is an unduly protectionist policy that creates corruption, lack of consumer choice, poorer quality products, and inefficiencies in the market to the detriment of the consumer. The system's controls on imports from other countries (e.g. 285% import tariff on some SM commodities) was a major stumbling block in international trade negotiations, such as the free trade with the European Union and the Trans-Pacific Partnership.
In total, there are about 17,000 Canadian farms that operate under Supply Management; this is about 8% of all farms in Canada. The dairy industry is the largest of the three supply-managed industries in Canada, with about 13,000 farmers. There are about 2,700 poultry farmers, and fewer than 1,000 egg farmers. For simplicity, parts of this article will focus on the dairy industry, though the general principles apply to the other two industries as well.
How it works
Supply management is based on three policies: price-setting, control of supply, and protection from foreign competition. The end result is that consumers pay significantly higher prices. A second result is that by shielding farmers from variations in the price of their goods, farmers' profits stay stable.
Supply management is a shared jurisdiction between the Federal and Provincial governments. For example, on a Canada-wide basis, there is the Canadian Dairy Commission, composed mostly of dairy farmers. In Ontario, there is the Dairy Farmers of Ontario, with similar local boards in each of the other provinces.
Producers create the goods (milk, poultry or eggs), and sell them to either processors or consumers at farm gate prices. Farm gate prices are set by "negotiations" between the farmers and downstream processors and ratified by the Local Marketing Board (one for each Province or Territory). While these two parties negotiate the relative split of the profits between themselves, it is the consumer who ultimately has to pay the entire bill. The farm gate price that the processors or consumers "must" pay is the minimum legal price, but the farmer could negotiate a higher price with one or more of their customers. Factors considered when setting the price include production costs, the current market price for the goods, and a "reasonable return" on the farmer's efforts, risks, and capital employed. There is great debate as to what is "reasonable" under the circumstances, for SM farmers typically earn significantly more than their non-SM farming counterparts; up to 21% more.
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. To avoid overproduction, farmers are allotted a quota of production. This quota is an asset that can be sold, subject to regulations from the respective board. The right to keep a single dairy cow, for example, is worth $28,000, and an average dairy farm has $2,000,000 worth of quota (approximately 70 cows). Due to the value of the quota and the government created monopoly, most banks will loan Canadian dairy farmers up to $30,000 per cow, while banks in the USA (non-SM) will only loan $3,000 per cow; enabling significantly higher financial leverage for the Canadian dairy farmer. That higher leverage carries with it the potential for higher profit margins, as well as elevated risk during times of instability. Dairy quota has a book value of $4.7 billion but a current market value of $23 billion.
Supply control enables marketing boards to have sweeping powers regarding the feeding, treatment, and conditions of animals on farms, as the board is in direct control of the quota allotted and can directly sanction farms who violate board policy.
Protection from foreign competition
The prices that processors and consumers are forced to pay to Canadian farmers is substantially higher than the price on the international market. To enable price controls, 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 an 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. In addition to import quotas, foreign producers face tariffs on their products, that range from 168% for eggs, up to 285% for chicken, 246% for cheese and over 300% for butter. These high tariffs hamper imports in the general food market. In 2015, the three top dairy imports into the country were specialty cheeses, milk protein substance and whey products. The largest suppliers into Canada were the United States, New Zealand, France and Italy 
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, farmers lobby to protect supply management from any 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. Nonetheless, from 1971 to 2011, the number of dairy farms in Canada has dropped by 91 percent; while in the same period of time in the United States, which uses subsidy instead of supply management, the number of dairy farms dropped by 88 percent. Similarly, the number of chicken farms has declined 88 percent in the last 45 years.
For farmers wishing to enter the market, the price of the quota can be up to 75% of start-up costs. This can leave farmers entering the industry with a heavy debt burden, or effectively exclude them from ever starting. Critics say the only way for the next generation of farmers to break into supply-managed farming is by inheriting it, or marrying it. 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%.
Processors of dairy, poultry and eggs benefit from predictable supply from the system, while having to pay higher prices for their inputs, which can generally be passed on to the consumer. However, this means they are at a disadvantage on the international market, because their inputs are comparatively expensive. 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.
New Zealand ended its SM-based dairy infrastructure in 2001, going to a non-subsidized free market system that exports about 95% of its dairy products. After New Zealand got rid of its SM system in 2001, its dairy industry grew 17 times faster than Canada's. Critics of SM say this proves that Canada’s SM monopoly forces Canada and Canadians to give up billions in GDP, exports, prosperity, jobs, and tax revenue.
Canadian consumers pay one and a half to three times as much for dairy, poultry and eggs than they otherwise would without the supply management system, adding up to around C$300 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. The average Canadian consumer earns less than the average dairy farmer, to whom they are paying subsidies.
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 steadily 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. The OECD estimates the subsidy equivalent (producer support estimate) paid to all of Canadian agriculture as 18% of the value of the industry; a majority of this goes to the supply managed sectors although they account for only a small part of Canadian agriculture, meaning that the supply managed sectors have a much higher effective subsidy. In the European Union, the effective subsidies are 27%, with the United States at 10%, Australia (6%), New Zealand (1%), Brazil (6%), and China at 9%.
International trade agreements
Supply management has been a major issue with regard to Canada's position in international trade agreements, as 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.
Supply management was a major issue in Canada's negotiations to enter into 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 initial refusal to negotiate on SM and the opening of the markets protected by supply management led to Australia and New Zealand moving to exclude Canada from participation in the TPP trade negotiations. Once Canada agreed to negotiate on the SM system, Canada was invited to fully participate in the TPP negotiations, but SM farmers and their lobbyists immediately went into action to stop or limit any threats to their lucrative monopolies.
Supply management in its current form dates from Federal legislation passed in Dec. 1971, 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, and the United Kingdom was poised to enter the European Common Market, resulting in the loss of Canada's largest dairy export customer. 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.
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