Killing the sacred subsidized cow
At last, a real plan to end supply management
Born in the aftermath of the Second World War, Canada’s dairy supply management regime is a known burden on Canadian consumers, a trade irritant of the first order, an obstacle to economic growth and export expansion, an abomination to economists across the land and a routine target of editorial writers and commentators. And yet the antiquated structure, hiding behind 300% cheese tariffs and a price-fixing bureaucracy so tangled no mortal can grasp its features, remains steadfastly in place.
Until now. Today Canadians have before them what appears to be the first coherent, top-tobottom supply management reform plan. If adopted, the plan could relieve Canadian consumers of high dairy prices, eliminate obstacles to free trade and create an opportunity for growth. Imagine Canada as an exporter of dairy products, part of a growing global industry rather than a stagnant backwater. Imagine milk and cheese selling at discounts of maybe 30%, more in many cases.
All this and more is wrapped up in a tidy report Thursday from the Conference Board of Canada titled Reforming Dairy Supply Management: The Case for Growth. The first tired news headlines on the report — “Conference Board slams dairy rules”— completely missed the revolutionary changes that could, in relatively short order, deliver Canadians from a costly 60-yearold regime that has no relevance in a modern globalized agricultural economy.
The plan, crafted by research director Michael Grant and others for the board’s Centre for Food in Canada, proposes three core reforms to be carried out more or less simultaneously: removal of the high tariffs on dairy products, adoption of market prices and elimination of farm quotas.
Mr. Grant and has associates believe the entire dairy supply management system could be replaced within five years. “I think it is realistic,” he said in an interview.
Reform would take political will. But if Canada’s three main political parties can unite in general agreement around the Ukraine crisis, surely they can come together in joint recognition that dairy supply management — which costs Canadian consumers $2.3-billion a year in excess product prices — can be reformed to the benefit of all, including farmers.
The boldest part of the plan, an innovative one that carries a price, is to have Ottawa buy up the value of the artificial quotas that farmers now carry on their books. The nominal market price for quota — a kind of licence that gives a farmer the right to milk one cow — has recently been as high as $25,000 or more.
Nominally, the current market value of all quotas appears to be worth upwards of $23-billion. But that value, based on little trading, is largely fictional. Much quota would have been bought years ago at much lower prices. The fair option, says the report, is to have the government buy all outstanding quota at book value, or the price the owner originally paid, minus depreciation. The cost to Ottawa, estimated at between $3.6-billion and $4.7-billion, would be fair compensation to farmers and quota owners.
To cover the cost, Ottawa would impose a small levy on dairy products. Annual revenues from the levy would pay down the cost of the quota purchases, so the net cost to Ottawa would be zero. The levy would not likely show up in consumer prices, because it would be imposed concurrent with a reduction in tariffs and a move to market pricing. Australia imposed such a dairy adjustment levy when it deregulated more than a decade ago and phased it out in 2009.
With the quota payments in hand, Canadian dairy farmers would be able to upgrade their operations. The report documents the impact of supply management on the Canadian dairy industry — small operations, insulated from competi- tion, unable to expand beyond Canada. The graphic below plots Canada’s dismal — make that nonexistent — export performance over the past decade compared with other countries. Within Canada, growth is slow due to high prices that push consumers to reduce purchases of dairy products.
An open market, free of the wasteful burden of quota investments and the hamstrings of bureaucratic control, should give the Canadian dairy industry an opportunity to expand through export. The second element of the graphic projects potential Canadian exports of dairy products in a post-reform world. “It’s possible for the consumers to win here, and the farmers. The big change is to have a growth mentality,” said Michael Bloom, the Conference Board’s vice-president of industry and business strategy.
Reform proposals have been numerous in the past, but the Conference Board’s report is a groundbreaker because it reaches for comprehensive reform. Most if not all earlier reviews have aimed at piecemeal changes and incremental adjustments. Those have not caught on and, in any case, would not succeed, said Mr. Grant. There is no way to nibble Canada out of a system that is so deeply entrenched and so heavily tangled in costs, regulations, transfers and distortions.
The only out, as the Conference Board report suggests, is to bring in across-the-board reforms over a brief period. Trade barriers, price supports and quota values must all be eliminated at the same time. Partial options won’t work. “The worst-case scenario is one where the Canadian market is opened to dairy imports before fundamental structural reforms have taken place.”
By tackling all three issues — trade, prices and quotas — at the same time, Canada can end an outdated and repressive system and create opportunities, and do it in as little as five years. “I’ve spoken to people in the processing sector, the Saputos of the world, and they tell me that’s actually realistic,” said Mr. Grant.
With this report, Canadians now have something of a plan to reform a system that just about everybody knows needs reform.