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Canada's dairy cartel vs. consumers

Appeared in the Calgary Herald
Authors:
Release Date: November 20, 2011
When Prime Minister Stephen Harper was in Honolulu recently and announced Canada wants in on talks to create a proposed pan-Pacific free trade zone, other countries brought up our anti-free trade “supply management” boards.  Specifically, they are opposed to Canada’s participation because of our protectionist approach on eggs, chicken, turkey, and dairy products.

The Prime Minister and Trade Minister Ed Fast initially offered vague comments on whether such boards could be the subject of negotiation and possible abolishment. Fast later clarified the government stance, saying the federal Conservatives would continue to “defend Canada’s system of supply management.”

That’s unfortunate, as in addition to being a significant irritant in international trade negotiations, these same boards harm consumers.

Some context: supply management boards exist because of powers delegated to them by the federal and provincial governments. In the interventionist spirit prevalent in 1970 when they were created, their three pillars include matching supply to demand (literally, “production planning”), pricing mechanisms and “predictable” imports.

Consider dairy products as an example. The Canadian Dairy Commission, 10 provincial supply management boards and provincial representatives, are all signatories to the National Milk Marketing Plan. Based on that plan, an associated committee determines a quota of how much milk each province can produce. That quota is then further apportioned among individual dairy producers. They in turn must sell all their milk to their respective provincial marketing boards.

In addition, high import tariffs are imposed on imported products. The tariffs range from 202 per cent (skim milk) to 298 per cent (butter) with cheese, yogurt, ice cream and regular milk within that range. 

The net effect of the command-and-control approach to supply and the high tariff wall is that Canada’s 12,965 dairy farmers prosper at the expense of most of the other 34,482,800 Canadians. 

Problematically for those who defend such practices, supply management boards fit the dictionary definition of a cartel: “A combination of independent commercial or industrial enterprises designed to limit competition or fix price.”

The only difference is that most other cartels are outlawed on grounds that such collusion is bad for consumers. It is only when government and agricultural and dairy interests converge that we’re told high, above-market prices are good for us.

Montreal economist William Watson recently compared the average retail price of four litres of milk and found the average price in U.S. cities so far this year was $3.85 (in Canadian dollars). In comparison, according to Statistics Canada, four litres of milk in Canada will set a consumer back between $4.50 (in Regina) and $6.79 (in Charlottetown). All other cities surveyed are within that range. (Statistics Canada does not provide a cross-country average.)

As Watson found, controlling supply and keeping out U.S. imports leads to substantial price differences between American and Canadian milk prices.

In the context of the wider world, Canada’s practices are in contrast to New Zealand. There, and again using the dairy sector as an example, dairy farmers also prosper but do so in a free and competitive market without government protection or subsidies.

As Saskatchewan economist Marvin Painter explained in a 2007 study that compared the two countries, New Zealand dairy farmers “have become world cost leaders in the production of milk and have diversified along the value chain into the processing and marketing of dairy products.”

With reference to New Zealand, Painter writes that “Since 1974, the average herd size has increased while the number of dairy herds has decreased.” He notes how the average New Zealand dairy farm has 315 cows compared to an average of 62 cows on Canadian dairy farms. In other words, New Zealand‘s farms are more efficient.

New Zealand’s free market in dairy products hasn’t led to the obliteration of the industry. Quite the opposite; while that country accounts for just two per cent of world dairy production, New Zealand has approximately 40 per cent of the world trade in dairy products. New Zealand’s dairy farmers have prospered but not at the expense of domestic consumers.

Canada’s cartel-like supply management boards should be abolished and for the same reason other cartels are already illegal: they cement an undesirable nexus between politics and money; they promote crony capitalism, lock out competition and in the case of supply management boards, collude to raise prices on an essential human need: food.

Let’s not forget who that hurts most of all: the poorest Canadians whose meagre incomes are overwhelmingly spent on the basic necessities of life.


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