How an innovative dairy section can survive

The United States-Mexico-Canada Agreement or NAFTA 2.0, could be the watershed moment Canadian dairy farmers have been waiting for.

The federal government of Prime Minister Justin Trudeau has committed to compensating the dairy sector for either lost sales, higher per-unit costs or the loss in value of quotas.

The government has been clear on intent, but woefully short on details. What we can be sure of, however, is that the amount the feds will come up with won’t be to farmers’ liking.

But giving away billions in compensation would be more damaging to farmers than the effects of the trade deal itself.

If the Liberal government really wants to support the sector in its pursuit for a brighter future, it should think beyond simply compensating for losses that don’t actually exist.

The quota system has artificially created wealth for a small group of farmers. By restricting production and suppressing competition at the border, dairy farmers who received quotas for free when the system was established almost 50 years ago have accumulated assets worth above $5 million — per farm.

For every litre produced, dairy farmers in Canada receive 72 per cent more than the world average. As a result, the average family income for dairy farmers exceeds $160,000, which is well above the Canadian average. Dairy farmers are not part of an underprivileged group — far from it.

Farmers do work punishing hours and should be much admired for the work they do for all of us. But many other Canadians put in the same amount of work and contribute equally to the economy.

For dairy farmers, wealth and salaries are theatrically inflated by a highly protectionist system. Compensating affluent farmers when many other Canadians remain food insecure would be difficult to sell politically.

A sense of entitlement is so entrenched in the sector that it’s impossible to have conversations about the its future and how it could move forward without quotas.

It’s all economic fantasy for most people outside the system.

Supply management thinking has always been based on our domestic needs. Obviously, allowing more imports is only perceived as losses for the industry instead of an opportunity to expand and look for market openings elsewhere.

USMCA adds to the pressure generated by two other trade agreements signed in the last few years. According to Dairy Farmers of Canada, market-share losses from recent trade deals with Asia, Europe and now North America total 18 per cent, or about $1.8 billion to milk producers.

Given that supply management is about producing what the domestic market needs, that would equate to almost 1,800 dairy farms we no longer need. We have had very few conversations about how to repurpose these farms.

Supply management’s legacy is about perceptions of economic relevance. The dairy sector has convinced itself that it’s innovative and forward looking. But it simply isn’t.

Anyone who travels to the U.S., Europe, Australia or Asia sees how limited our dairy offering is in Canada — high quality but uniquely homogenous, a mirror image of our dairy sector. Anyone who has attempted to produce organic or raw milk in Canada, or tried to

market a new out-of-quota product, can testify to how unbending the sector is.

Dairy farmers desperately need to become more market-focused and in sync with an increasingly fragmented market.

With more allergies, intolerances, and different culinary traditions and tastes, consumers are looking for different food products.

Imagine blue moon, banana cream or black cherry low-fat, lactose-free milk. These exist, but not in Canada. Vodka made from milk is also increasing in popularity, but other countries have beaten us to the punch.

The Canadian economy needed this deal. But before we make senseless decisions on how to support our dairy sector, a clear vision and strategy for its future is imperative, with a forward-looking focus on domestic and foreign markets.

The Canadian Dairy Commission will need to entice dairy farms to become more competitive by changing the pricing formula that compensates farmers.

Instead of going with averages, it should create high-performance benchmarks.

A quota system for export markets should be put in place to allow new entrepreneurs and new ways of thinking to enter the market.

As other countries have done before us, an exit program should be created as soon as possible to encourage farmers who don’t see themselves participating in an open economy. Not everyone wants to compete, but this should not be at the expense of hard-working taxpayers.

All of this can be achieved with minimal subsidies. Canadian farmers are in fact less subsidized than American farmers, but just barely. In Canada, 9.6 per cent of all farm revenues are subsidized compared to 9.9 per cent in the U.S., according to the Organization for Economic Co-operation and Development. In Australia, where a similar supply management scheme was dismantled in 2000, only 1.7 per cent of general farm revenues are subsidies. Subsidies can help for a while, but should be considered a stop-gap for farmers, not an industry norm.

Without these measures, any compensation to dairy farmers is just agricultural welfare. Our farmers deserve better. Canadians expect more. It's the only way we can keep some of our Canadian dairy farms.

Sylvain Charlebois is dean of the Faculty of Management and a professor in the Faculty of Agriculture at Dalhousie University.