Spilt milk – some thoughts on supply managementPosted: May 9, 2013
Criticizing Canada’s system of supply management is almost too easy. We’re told at literally every turn that we pay far too much for dairy. A free market system, and the dismantling of the system, would offer a significant benefit to consumers. If you’re not familiar with supply management, it was created in the 1970s by the Ontario government to smooth out prices and enable a measure of stability for farmers in the dairy and poultry sectors. As it stands the price you pay at the till is established not by free competition but rather based on the costs of production in a protected market. I don’t pretend to be an expert on the issue but have come to be interested in it due to its relevance to trade issues.
The lineup of those seeking to reform/repeal supply management is long. For example, in her campaign to become the leader of the Federal Liberal Party of Canada, Martha Hall-Findlay noted that “Canadians are forced to pay 1 ½ to 2 times as much for whole milk as Americans.” Her 2012 report (“Supply management – problems, politics and possibilities,” found that the US average for a gallon of milk was $3.50 vs $6.48 in Canada. Columnist Andrew Coyne writes “Canada’s system of supply management has led to higher prices, fewer farms, less product innovation, and general inefficiency up and down the value-added chain.” He notes that we may 2 or 3 times what our neighbours to the south pay. Another columnist, Barry Mckenna, references a right-wing economic thinktank (the Frontier Centre for Public Policy) and their findings that “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.” And a perhaps more well reasoned, well researched argument from the Conference Board of Canada estimates that supply management costs each Canadian $70 per year.
Sounds convincing doesn’t it?
I have no horse in this race, and in fact I’ve been a proponent of such policy prescriptions in the past, believing that liberalization would offer significant price relief to low-income Canadians who spend more of their incomes on essentials.
However after a recent research trip to the US, one which included a cursory look at US agriculture, I began to question how accurate the aforementioned price differences really are. For while my gallon in the US did indeed cost about half as what I pay here in Waterloo, the system of dairy subsidization means those nominal costs don’t provide the full picture.
In particular, US taxpayers subsidize every litre of milk produced through a direct subsidy, as well as a plethora of marketing, price support and other programs. In short, US consumers (and EU consumers) pay twice. Once at the cashier’s till, and once via their taxes. The cost of these dairy programs are estimated at 31 cents a litre. Taking the average prices noted by Hall-Findlay, we then add $1.20 (for a gallon) and the US average is now $4.70.
A second issue, albeit far more complicated, is that while wages on Canadian dairy farms average $14/hr, in the US a heavy reliance on undocumented labour provides what one might term a hidden subsidy to the industry, and to consumers. The US National Dairy Producers Federation estimates that were immigration reform to regularize these employees, dairy prices would increase 61%. That transforms our $3.50 US gallon into a $5.50 gallon. For the sake of random objectivity, let’s shave that down a bit and assume it might move by 33%. The $3.50 gallon is now $4.65, with another $1.20 in taxpayer subsidies, so the full apples-to-apples price is $5.85. Now some might say this is irrelevant and that wages are wages regardless of their form, however, if regulation (or in this case non-regulation) provides an implicit trade advantage we should call it what it is (let alone the values-related implications around labour and compensation).
Now this is relative to the US, what about the rest of the world? Luckily AC Nielsen has this handy visual of world milk prices available. As you can see, Canada doesn’t stack up that badly. While more expensive than the US (based on nominal and not the expanded prices I show above) and Germany, it’s cheaper than the usual comparisons of Australia and New Zealand, both of which liberalized markets.
In case you’re eyes can’t out the figures listed, here are the AC Nielsen listed prices:
This is interesting. It’s become orthodox that Canada should follow Australia and New Zealand lead into full liberalization, with Coyne noting that they have “transform(ed) their formerly supply-managed sectors from protected backwaters into competitive dynamos.” Yet given price levels have increased in New Zealand, to whom do the benefits of liberalization actually accrue? (In academic speak, qui bono, who benefits?) Apparently not consumers. In Australia, retail prices dropped after the initial liberalization but seem to have jumped quite significantly since. I’d love to learn more about this should anyone have information on either to share.
Another argument is made that our protective system limits our ability to participate in trade agreements. As someone who spends many of his days focusing on trade policy, I find this to be an especially empty argument. The EU subsidizes agricultural to the tune of 40 billion Euros a year of which the dairy industry is estimated to receive 6 billion. The US subsidizes its agricultural sector by upwards of $20 billion (USD), with dairy receiving a billion or so of that. Japan and its rice producing sector follows a similar trajectory. In all four cases (EU, US, Japan and Canada), the outcome is a heavily protected agricultural sector, the means for which are unique here in Canada. Our involvement in trade agreements thus don’t hinge on supply management. If anything it gives us leverage to trade access to our market for a lowering of distorting subsidies elsewhere.
After all of this I’m left with several problems. First, our milk apparently isn’t that expensive. Second, while we have a system of restricted supply, other big producers (US, EU) offer billions in taxpayer subsidies that in effect create a similar protective wall. Third, the evidence around the benefits of liberalization (via Australia and New Zealand) isn’t by any means clear.
To be sure, there are other big issues on the table, notably as it relates to innovation in the sector, and our ability to produce for export markets. Moreover, the fact that consumers pay the full cost of production (as opposed to taxpayers) does mean that low-income earners pay a greater share of their income for protected products. These issues need to be addressed. However the simple refrain that Canadians pay “too much” for milk is built on pretty flimsy evidence and seems to provide a rather hollow understanding of how global and local production and politics work.
Some additional reading: