Friday, 18 November 2011

Lots of Cliches, Less Common Sense

 Business commentators have been salivating for years at the prospect of putting  the final nail into the coffin of supply management.  It's really because of the public disclosure rules in these national marketing schemes that they have large numbers to throw around to make their case. I suspect if the total "goodwill" value  of any profession (doctor,lawyer,accountant) were added up, the number would be pretty big too. And on the matter of income note below the fact that because dairy farmers make a middle class wage, and even worse, much more than other farmers, it follows that they're making too much. Back in March I wrote about supply management and the fight that was brewing. First a very smart (normally)  National Post commentator  who hammered supply management all week, and I re-posted the March piece.



John Ivison

National Post

Don't bet the farm on dairy quotas

Ed Fast was in typical ministerial doublespeak mode. Yes, supply management will be on the table in any forthcoming talks into a potential AsiaPacific free trade deal, the Trade Minister told reporters in the foyer of the House of Commons.
Yes, the Harper government will vigorously defend the protected dairy and poultry sectors.
No, he would not speculate on the outcome of any negotiations.
So if you are a dairy farmer who has borrowed $1-million to buy the quota that gives you the right to send milk to market, you are reassured, right?
There's no way the Conservatives are going to negotiate away the value of your asset, in order to win trade concessions from other countries at the Trans-Pacific Partnership (TPP) talks, right?
Don't bet the farm on it. Personally speaking, knowing the issue is "on the table" would certainly make me less inclined to pay $28,000 for every cow (or at least the right to sell milk from that cow).
The total value of milk quotas in Canada now is a staggering $30-billion, with many farmers deeply in debt, having borrowed the money to enter the industry from banks. That $30-billion would be the cost of compensating all farmers at current values and creating a free market in dairy and poultry products overnight.
That is unlikely to happen. For one thing, the knowledge that the issue is "on the table" is likely to send quota prices south.
For another, were the government to decide it wants an orderly phaseout of supply management, it is far more likely to start issuing new quotas that would lower prices gradually.
In all trade negotiations there are winners and losers - and the losers in this case appear to be the farmers who have racked up debt to buy quotas that may end up being as worthless as Nortel stock.
One farmer told me that for $1-million in quotas, he would typically gross $230,000. With expenses running at about 70%, he is left with $70,000 on which to live and pay down debt.
Those are pretty generous profit margins, compared to the all-farm average, but it will still create a political firestorm if quota values of dairy farmers in Ontario and Quebec are slashed so Western beef farmers can gain access to overseas markets.
One potential solution could be for governments to use the proceeds from new quota sales to help compensate farmers who want to leave the business.
What's increasingly clear is that the writing is on the wall and it was inscribed by Prime Minister Stephen Harper when he accepted President Barack Obama's offer to explore membership of the Trans-Pacific Partnership.
The Dairy Farmers of Canada are one of the country's most powerful lobby groups and will likely fight a noisy and ugly rearguard action. If the government decides to use up its political capital, we can expect to see herds of Holsteins grazing on the lawn of Parliament Hill and ministers being egged by irate farmers.
But trade liberalization appears inexorable, as countries seek to kick-start their economies. Mr. Harper said in the House of Commons he intends to protect supply management at the TPP negotiating table, but the road to most successful free-trade deals is paved with similarly good intentions.
TPP participants such as New Zealand are determined Canada's protected dairy industry is going to be opened up, by dropping tariff levels to zero over 10 to 15 years.
This should be welcomed by Canadian consumers. More imports mean cheaper prices and relief from rates that are more than double those paid in the U.S. for liquid milk, eggs, butter and cheese. It could even prove a boon for efficient dairy farmers, who would be free to export to expanding markets, rather than eking out a living in a shrinking Canadian market.
The time is right for liberalization in the dairy industry. The Conservatives have just fought - and apparently won - a battle with the monopoly Wheat Board to allow farmers to sell on the open market.
If free trade really is a linchpin of the Conservative growth strategy, as Mr. Fast claimed Tuesday, this relic of 1970s command economics will have to go the way of Soviet-style pre-fabricated concrete architecture and rusty tractors.




March 5

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. 

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  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:

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. 


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. 

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. 

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