Fraser Forum

Lobbying helps preserve billions in transfers for Canada's milk producers

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All political parties in Canada during the 2015 election campaign have pledged their ever-lasting support for the maintenance of the existing supply management program, which fixes prices, determines output and imports for dairy products, poultry, eggs and pork.

According to the OECD, the program in 2012 resulted in a transfer of $3 billion to the producers of milk alone, which comes to a burden of $343 for a family of four buying fluid milk and dairy products.

Students of the program had hoped that negotiations over the provisions of the Trans Pacific Partnership (TPP) would put heavy pressure on the federal government to repeal or seriously modify the supply management system in return for concessions by other countries that would bring great benefits to other Canadian producers.

Alas, these hopes for changes were dashed. The only concession made was to allow increased annual imports of dairy products equal to 3.25 per cent of Canadian production, which in 2014 was worth $19.5 billion ($17.3 billion manufactured dairy products and $2.2 billion fluid milk sales) and which in that year would have resulted in imports worth $634 million.

For consumers, the benefits from the added imports will be small if not zero. Prices for domestically produced dairy products will continue to be set by the supply management system according to production costs. Importers will price their product only marginally below the domestic price to find Canadian buyers, mainly retailers of goods such as cheese, yogurt and butter.

For producers, the imports will replace domestic output of consumer products by 3.25 per cent. However, since this lowered production also reduces the need to buy inputs, the only loss to producers is the small profit this output would have generated. In spite of this fact, the government will in future years compensate producers by paying them $2.4 billion in income support, $1.5 billion to maintain the value of production quotas, and $450 million for the modernization of dairy processing facilities.

These developments demonstrate the political influence that farmers in managed industries have in Canada. Their lobbying and financial support of politicians is driven by the desire to preserve the $3 billion they would lose if supply management were repealed. Their efforts are supplemented by the farmers’ suppliers and food processor, and by banks, which finance the purchase of output quotas.

In comparison, consumers have very little political influence. Most don't know the cost of the system and many escape the cost by shopping in the United States. Expected annual savings of $343 per family are not worth the cost and effort to organize lobbying.

The lobbyists for the system tell a great story, arguing that it guarantees farmers a steady income, supports the survival of the family farm, and encourages efficient production methods. They say that the prices the system pays farmers are fair since they are determined by a transparent formula reflecting the costs of production; that consumers benefit from steady supply and high quality; that the system requires no government subsidies and creates no surplus production.

The smoking gun revealing that something is wrong with the system is found in the value of quotas that grant producers the right to sell their output at the official price set by the supply management system. These quotas were given to producers free of charge when the system was first created to ensure that total output equalled total demand. But now, as columnist Andrew Coyne writes, “If you’re a new farmer, (the cost of quotas) is a major barrier to entry: as much as 75 per cent of start-up costs.”

The key question is: Why are quotas so valuable?

The answer is that  the formula used to set prices paid to farmers exaggerates the costs of production, as it fails to take account of efficiency-enhancing innovations like better breeds of cows, improved and changing mix of feeds, and medical care as well as the consolidation of production in large operations enjoying economies of scale.

Dairy farmers argue that this explanation is false. Politicians of all stripes ignore it since policies modifying or ending the system will threaten their election chances. The experience with the recent TPP implies that the artificially high prices charged Canadian consumers will lead to large transfers of money to the producers of supply-managed products for a long, long time to come.


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