Canada’s Sacred Cow
Written by MWR writer Aaron Gao
Maxime Bernier, the MP who narrowly lost the leadership race to Andrew Scheer, quit the Conservatives in late August over supply management and some controversial tweets dividing the party. Months earlier, Donald Trump was threatening (with some controversial tweets) to break up with Justin Trudeau if the latter did not scrap Canada’s supply managed dairy industry. Thankfully, Canada conceded 3.59 per cent of its $19 billion dairy market to the US as part of the new United States-Mexico-Canada Agreement (USMCA)—the romance lives on.
Recent headlines have reignited the debate on Canada’s supply management system. Tudeau’s $682 million sacrifice has drawn the ire of Canadian dairy producers, while others are applauding the “democratization” of this production control program. Egg and poultry producers operate under a supply management program too, but I will only be focusing on dairy farmers, as they seem to be most displeased about it.
Bruce Muirhead, a Canadian historian specializing in post-World War II trade, writes that “[d]airy, it is generally assumed, has been subject to more regulation than other commodities, given its perishability […]. Supply is relatively constant, while demand can be variable.” In fact, the agricultural revolution of the late 1800s sees an exponential increase in productivity. Fast-forward half a century later, rural flight causes the number of farms in Canada to shrink from 450,000 in 1950 to 200,000 in 2000—but productivity only increases. In one generation, the average farm grows from being able to feed 11 people to 123. Because of overproduction, farmers have trouble getting rid of surpluses and resort to selling them for whatever price buyers offer. At the time, this drove prices down and made it difficult for producers to make a sustainable living. After Word War II, floor prices and import control were implemented to curb the issue, but to no avail. By the 1960s, agricultural surpluses plagued global markets.
The government identified two main weaknesses: overproduction and insufficient price support. Farmers were at the mercy of the few powerful market intermediaries in what is known as an oligopsony—a form of market failure where a small number of buyers wield a disproportionate amount of market power. The state had two options to fix this. They could either directly subsidize farmers—increasing their income—or empower them in their relationship with processing firms. In 1958, the Agricultural Stabilization Act was passed with the goal of financially supporting farmers. This ended up being too expensive for the government, so the second option was considered: empowering farmers. The Canadian Dairy Commission (CDC) was created in 1966, with the mandate of providing producers with a “fair” income and assuring the quality of productions by maintaining supply prices and assigning production quotas. Supply management was thus born.
How it works
Supply management aims to decrease the volatility of dairy producers’ incomes by controlling production in an effort to avoid surpluses. The CDC estimates domestic demand and sets the total production quota, which is then distributed among provincial regulatory institutions. These “regional pools” then allocate their shares of what the CDC calls the “Total Quota” to individual producers. The Total Quota is meant to prevent surpluses which can lead to a price collapse.
Supply managed farms are guaranteed a minimum price known as the “farm gate value” for their products. This is the estimated market value of the product directly from the farm, and acts as a price support. Farmers are not paid for the milk produced that exceeds their allocated quota.
Why it works
In the 1980s, the rise of neo-liberalism, along with laissez-faire values fostered hostility towards protectionism and government interventions in free market economies. Recently, many across the nation—including People’s Party of Canada leader Maxime Bernier—have been calling for the abolition of supply management. They say it is unfair to Canadian consumers, makes rich farmers richer, makes everyone hate us, and make other nonsensical assumptions.
To begin, supply management prevents overproduction—which drives prices down—and lets farmers make a sustainable living wage. The average dairy farm’s income in 2015 was $147,775 CAD, an adequate reward for farmers who work long hours, seven days a week. These producers create 112,000 jobs in Canada and contribute to local rural economies. A healthy rural economy is important to economic growth, as primary sector jobs lead to additional secondary and tertiary sector jobs.
The Canadian milk industry is healthy, efficient, and equitable. The same can not be said of American and European markets. Local regulators spend billions of taxpayer money subsidizing farmers. Consumers are therefore indirectly supporting farmers. In 2015, the US government spent $22.2 billion subsidizing its dairy producers, but farm gate prices still failed to cover the costs of production. Surpluses are stagnating in these two regions, farmers are struggling to find buyers, and price wars are driving a race to the bottom. In a supply managed system, consumers directly support producers when they buy equitably priced goods in supermarkets. They end up paying the same amount or even less all while contributing to market stability and better food security.
Supply management shields local producers from the volatile global market. Since Canadian farmers mainly sell their products domestically, our dairy market is protected from unstable and unpredictable price variations. Furthermore, completely deregulating the dairy industry would be economic suicide—there would be a tsunami-like influx of foreign goods into Canadian markets, causing prices to plummet.
For example, in 2015, the European Union abandoned its quota system. Prices dropped, and the conditions of the global markets were so bad the New Zealand government told dairy processing firms to stop building additional milk dehydrators. The European Commission had to respond a year later with a €500 million aid package to “incentivise a reduction in milk production.”
Many detractors claim that consumers in other countries pay less for their milk and frequently use the US as an example. In fact, direct comparison between Canadian and American prices is inaccurate. All Canadian milk sold in supermarkets is hormone-free—in accordance to the law—while US milk is not. An Export Global Action report authored by Adam Taylor and Fion Anastassiades, two Canadian experts on global trade, states that the average price of Canadian milk from October 2016 to October 2017 was $1.50 USD, and the average price of US hormone-free milk was $1.64 USD. It is worth noting that milk is also cheaper in Canada than in New Zealand and Australian, two deregulated markets.
What’s more, supply managed farms are more environmentally friendly and treat cows more ethically. On average, Canadian farms have 85 cows and are family operated. American farms, however, have on average 234 cows, and more than 40 per cent are non-family operated. The intensive nature of American agriculture means that animals are confined to small spaces, receive less individual care, and are more prone to diseases. This factory farming leads to environmental degradation and loss of biodiversity.
American farmers are also allowed to use recombinant bovine somatotropin (rBST)—which is illegal in Canada—to boost the cows’ milk production. rBST is the artificial version of a growth hormone cattle naturally secrete and can increase the amount of milk produced by 11 to 16 per cent. Health Canada banned its use in Canada because rBST increases the risk of cows suffering from breast inflammation by 25 per cent, and of lameness by almost 50 per cent.
Canadians benefit greatly from our supply management system, and there is no compelling reason to change the status quo. As senior research fellow with the Canadian Centre for Policy Alternatives Scott Sinclair put it, “supply management is, like Medicare, a pragmatic, made-in-Canada policy success.” Free markets often do not lead to equitable outcomes, and governments should not be afraid of stepping in when necessary.
Edited by Behraz Rezaie
The Mismanagement of Supply Management
Written by MWR writer Michael Murphy
Some people, particularly farmers who are content with running small farms, adore Canada’s Supply Management system and view it as a barrier against the hardships of overproduction and protection of their local Canadian jobs. However, farmers who seek to expand into foreign markets, as well as consumers —especially less wealthy Canadians —cannot get behind this; they view it as a negative force that drives Canada’s competitive edge into the ground and grocery prices into the sky and condemn the government’s institutional shackling and unfair price fixing. The Supply Management system also sets an irresponsible, and frankly dangerous, precedent of disrespecting the free market the country prides itself in.
First, this type of systematic meddling in the free market poses a danger to Canada’s least fortunate as they often end up paying the price for the lack of competition. In accordance with what Montreal Economic Institute’s Mario Dumais said, “Supply management disproportionately hurts the poorest Canadians.” This is due entirely to the 240%-300% tariffs put on all non-Canadian dairy products. While these tariffs are heralded and welcomed by some farmers, the Canadian government must question what is most important; the wealth of a few farmers or the masses of Canadians struggling to make ends meet and pay their grocery bills.
Moreover, supply management is not conducive to expanding one’s farm and reaching into foreign markets. Farmers are shackled by laws that prevent them from producing more dairy products than the government will allow, so they cannot bring their products into other countries. They are thus forced, by law, to forego the enormous profits they could otherwise make. Naturally, this increase in profits would result in financing more Canadian jobs and paying taxes to Ottawa. Despite this, the government cannot help but part from tradition and scrap this unfair doctrine.
One of the strongest factors in favour of keeping the Supply Management system is its protection of hardworking Canadian farmers. This, however, is neither entirely true nor fair as it only protects those who do not have ambitions to expand into foreign markets. The notion also implies that Canadian farmers are the only hard-working citizens who deserve absolute protection and guaranteed sales. While I have utmost respect for our farmers and recognize their necessity in our society, I also hold the same sentiments for the technology industry, the aeronautical industry and the Canadian beer makers and wheat harvesters. These are all fields that require hard work to make a go of it and are subject to foreign competition. Nonetheless, their resilience helps them persevere and succeed in bringing products to foreign markets while keeping prices as competitive as possible for the Canadian consumer. Why, then, is it fair for the government to hold such a double standard for farmers against other industries, whose workers toil as hard as any other and whose ambition cannot be bound by a state that refuses to take any risks?
To conclude, it is evident that the Canadian Supply Management system is failing the people of the country from coast to coast. It drives up costs at the grocery store — much to the detriment of poorer Canadians who cannot afford the premium — and harnesses the ambition of hard-working Canadian farmers who seek to bring their high-end products to foreign markets. As a country, we should support our farmers and help them reap the rewards of decades of service to the public by allowing them the expansion they long for.
Edited by Behraz Rezaie