Asking the Right Questions about the Dairy Industry

There’s nothing like a few provocative if untrue  bellowings from President Trump to give supply management critics more reason to complain. 

“Dairy and poultry supply-management schemes operate as a combination of cartel and government-enforced monopoly”

Those are some of the nicer sentiments used by the national business press to talk about the regulated marketing system used by dairy, egg and poultry farmers.  Other stories are not so nice:   “If this sounds like an illegal racket, you’re half right: Any other industry…  that conspired to manipulate prices and aggregate supply in this way would be prosecuted under Canadian competition law, with jail sentences meted out to the scheme’s engineers.”  I guess this means the business know-it-alls  don’t like supply management very much.

This hostility towards supply management has been going on for years.  Critics argue that Canadian consumers and food processors pay too much because high tariffs limit the quantity of often cheaper dairy and poultry imports. What they don’t report is the enormous subsidies given U.S. and European dairy farmers that creates the cheaper imports in the first place. In Europe this includes direct payments to farmers and export subsidies when the world price falls too low.  Let’s let trade expert Peter Clark explain what’s goes on in the U.S.:

“………. the only way that US dairy farmers can sell at a loss, as they have over nearly 20 years, is for the government to subsidize and offset the losses.”

In Canada dairy farmers are paid once, based on their cost of production,  by dairy processors, with no further taxpayer funding.  

And we shouldn’t forget that American farmers have access to rBGH, a growth hormone that allows cows to produce milk for longer periods of time, often draining calcium from their bodies and causing hoof problems. That’s on top of  potential health risks to humans. This growth hormone is illegal in Canada.

In the background to this is a falling world price for milk. Reports say that dairy imports to China and Russia are down, while production quotas in Europe are disappearing, increasing the supply.   Again, because of supply management Canada is not adding to this surplus. This is the real price problem U.S. farmers are dealing with.

We’ll also begin to see the impact of the new European trade agreement, CETA.  In return for bigger market access for Canadian beef, pork and seafood, the  Europeans will be allowed to export more than 17,ooo tonnes more cheese into Canada, almost doubling what they can sell now.   Given that European dairy farmers need subsidies to cover their costs, cheese makers there benefit from cheaper milk, and are very competitive on export markets.  There’s no question that small artisanal Canadian cheese makers will be in trouble if Canadian consumers can buy European cheese for less than Canadian upstarts.

What does this mean for PEI’s big dairy ADL?  It’s an important cheese producer in Canada, with most of it going into the big central Canadian markets. If ADL loses market share because of the European imports, it will have to produce more lower valued butter and skim milk powder, which in turn means lower returns to dairy farmers.  The critical issue for ADL and other cheese makers is who gets to sell the European cheese.  In mid February Lino Saputo Jr., an executive with the big dairy processor Saputo,  told a Montreal business meeting last year: ““We’re saying that perhaps the incumbents—those that are part of the dairy industry, those that have import licences already, those that have a vested interest in the industry—should inherit those new licences,”.  The concern is that if food retailers for example control the new cheese imports, their only interest will be to undercut Canadian production.  Processors say they could meter out the imports so that consumers still benefit,  but limit the market shock to processors. 

It’s easy to give in to the hysteria around supply management (how dare farmers actually cover their costs) but don’t forget that professions from doctors to cab drivers to lobster fishermen limit who gets a licence to practice in order to protect their incomes,  and no one says they’re breaking the law.  Maybe once cheaper writers in India start competing for newspaper space with the columnists in the Globe and National Post, the business fire breathers will finally get it: the cheapest isn’t always the best.