Surprise: Some Food Costs Aren't Going Up

Supply management  in a handful of agricultural commodities in Canada (dairy, eggs and poultry) has the same allure as the designated hitter in baseball. Those that care, care a lot. The rest, not so much.  How about if it could save you money at the supermarket in the months ahead?


It's a highly regulated marketing system designed initially to tackle a decades long struggle to stabilize the dairy industry.  The first scheme was set-up in 1974 by the godfather of  supply management, Eugene Whelan, Minister of Agriculture under Pierre Trudeau.  The government had been offering price subsidies to dairy farmers throughout most of the last century, but like the Americans and Europeans now, found that a subsidy, on its own, generally leads to huge surpluses. (see http://www.jstor.org/pss/20001616  if you want to know more.)

Whelan was determined to try something very different: limit the production of milk to what the market demands through the use of quotas , and in return guarantee farmers a fair return. Hence the term supply management.  By law the cost of production formula must use the most efficient farmers. Table milk we use on our cereal is given the highest price, milk used for butter the lowest.  The government would no longer be involved in propping up the price, it would flow through the dairies to the supermarket, and be paid by consumers.  .

To make the system work, Canada had to bring in strict import controls. If say New Zealand butter, or American yogurt  was selling for 10% less than Canadian dairy products, the system would quickly break down. Canada uses high tariffs, and other restrictions to keep most, but not all, imported dairy products out.


Many, many dairy farmers hated the idea at the time, sold their herds and went into pork production. Even Trudeau (so the story goes) had to tell the Liberal Cabinet, you may not like what Whelan's going to propose, but we're going to do it anyway.

Whelan later introduced supply management into egg and poultry production. All three benefit from being able to control production through management practices, unlike many other crops which are weather dependent, and production fluctuates year by year.

The business press hated it then, and hates it now.  Columnists in the National Post, Globe and Mail, etc. repeatedly argue that Canadians pay too much at the checkout,  that supply management only survives because of its importance to the huge Quebec dairy industry, and that it should have disappeared during past trade negotiations like the Americans wanted, but federal politicians didn't have the guts to kill it.


To an economist's eye, supply management is far from perfect. Whelan initially insisted that the quotas would belong to the people of Canada, and be free.  Now the piece of paper with the quota contract is the most valuable thing on the farm. Banks allow farmers to use the quota as collateral to borrow money. More on what's wrong with supply management here:  http://www.iedm.org/files/fev05_en.pdf

Other people,  including myself,  think that supply management is similar to what Churchill famously said about democracy: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time." 

Yes consumers pay more than what an American does for cheese and chicken, but unlike Americans, as taxpayers, Canadians don't pay again with a subsidy check sent to the farmer in the mail.


There are a couple of other overlooked benefits. A PEI dairy farmer can manage a herd of seventy to a hundred cows and make a reasonable living. A dairy farmer in Maine would need  two to three times that number of cows to make the same living.  Supply management also leads to a much more even split of the consumer dollar between the farmer, the food processor, and the food retailer.  Farmers usually  get what's left over from the consumer dollar after everyone else has been paid. 


Supply Management has most recently been vilified in the news because Canada has been refused a seat at on-going trade negotiations called the Trans-Pacific Partnership. It's an ambitious trade deal that includes important growing Asian economies. The hangup, those import restrictions on dairy products, but don't forget that Japan too is insisting it has to protect some parts of it farming community as well. 

See: http://www.embassymag.ca/page/view/transpacific-01-06-2010


Now maybe there's a small reason that Canadians can get behind supply management.  Throughout this week (March 1-5, 2011) there have been many alarming stories about rising food prices.  Climate catastrophes in Russia, Australia, Western Canada, are driving up the price of wheat, cooking oil, sugar, and, wait for it, dairy products. 

http://www.bloomberg.com/news/2011-03-01/milk-powder-prices-jump-15-4-to-record-amid-asian-demand-fonterra-says.html 


But here's the thing. Supply management means dairy prices are established here by domestic rules and regulations, not by international trading forces.   

So when you hear (as you will, even on CBC) or read, that dairy prices are going up because of global climate and insecurity issues, you can think, that's not true. When the dust settles it will be interesting to see where Canadian dairy prices are in relation to those on the world market.  It might not look so bad. Remember that when you read Terence Corcoran in the National Post, or Jeffery Simpson in the Globe and Mail, and a host of other business writers lecturing about the evils of supply management. They probably stopped thinking about this issue twenty years ago. You can bring them up to date.