Supply management (Canada)

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Milk for sale in a supermarket in London, Ontario. Supply management restricts the supply of milk in Canada.

Supply management (French: Gestion de l'offre) is a catch-all term for marketing boards that control the price of milk, cheese, eggs, chicken, and turkey in Canada. This system was previously used in other countries, for example, New Zealand, and Australia but has since been removed due to deregulation and trade liberalization. It restricts the supply of these products by controlling the amount produced domestically and limiting imports with high tariffs. The regulated and restricted domestic supply and lack of foreign product increase prices for the end consumer, estimated to be 38% to 300% higher retail prices than what is paid in most other countries for the same commodities.[1] It is considered a cartel and critics have pointed out that their actions would be considered illegal if there supporters were not militant. Also, called the Canada’s milk tax.[2]

The controls provided by supply management have allowed the federal and provincial governments to avoid subsidizing the sectors directly, in contrast to general practice in the European Union and the United States. Though, recently these countries have gotten rid of these subsidies and start relying the global market. Instead, consumers subsidize farmers in these sectors through the significantly higher supply managed prices paid for the end products.[3] Other agricultural sectors in Canada (grain, beef, pork, etc.) do not have similar controls or subsidies, and for the most part compete as a normal product on the international market.

Supply management, though supported by all four major political parties (but there are critics within these parties), is the subject of much debate in the farm communities, politicians, academia, and think tanks. Critics argue that supply management is an unduly protectionist policy that creates corruption, lack of consumer choice, poorer quality products, and inefficiencies in the market to the detriment of the consumer. As well as creating an ideological fallacy for these parties and politicians to support SM but trying to defend free markets within and outside the country.

The system's controls on imports from other countries (e.g. 285% import tariff on some SM commodities) was a major stumbling block in international trade negotiations, such as the free trade with the European Union, Trans-Pacific Partnership and renegotiation of the North American Free Trade Agreement. It has also been pointed out that SM restricts inter-provincial trade in Canada and is an issue during the Gerald Comeau case.

In total, there are about 17,000 Canadian farms that operate under Supply Management; this is about 8% of all farms in Canada. The dairy industry is the largest of the three supply-managed industries in Canada, with about 13,000 farmers. There are about 2,700 poultry farmers, and fewer than 1,000 egg farmers.[4] Supporters reportedly spends about $120 million per year on public ad campaigns and political lobbying.[5] Around 133,032 to 189,278 Canadians (or 67,000 to 79,000 households) are effected by SM.[6] For simplicity, parts of this article will focus on the dairy industry, though the general principles apply to the other two industries as well.[4]

Formation[edit]

Supply management in its current form dates from Federal legislation passed in Dec. 1971 under the Pierre Elliot Trudeau government ( though he had advocated since 1949 as an assistant to Robert Gordon Robertson),[7] however some politicians objected the implementation of the 1971 bill due to memories of the second world war and how farmers had to be liberated from a similar system enforced by Nazi Germany.[8] However, its origins trace to the formation of the Canadian Dairy Farmers’ Federation in 1934. The group became Dairy Farmers of Canada in 1942, and its mandate was to stabilize the dairy market and increase revenues for dairy farmers.[9] In the face of lobbying, government programs were instituted in the 1940s and 1950s to increase prices and limit imports. 1958 saw the creation of the Agricultural Stabilization Board, though it was not limited to dairy.[4] In the 1950s and 1960s there was significant volatility in dairy prices, dairy producers had too much bargaining power relative to dairy farmers, and the United Kingdom was poised to enter the European Common Market, resulting in the loss of Canada's largest dairy export customer. These challenges led to the creation of the Canadian Dairy Commission, whose mandate was to ensure producers received a "fair" return on investment, and to ensure the quality and supply of milk, (though without concern for consumer prices).[10]

In 1970, the National Milk Marketing Plan came into effect to control supply, with the federal government and the governments of Ontario and Quebec, the two largest provinces, signing on. By 1974 every province except Newfoundland had signed on. Following dairy, a national supply management system was implemented for eggs in 1972, turkey in 1974, chicken in 1978 and chicken hatching eggs in 1986.[4] Concurrently with the domestic controls on supply and price, the high tariffs on imported products were put in place to protect Canadian producers from competition, and keep foreign imports to very low levels.[11]

In 1995, World Trade Organization agreement forced Canada to remove several of its export subsidies. That decision effectively led to a major consolidation among dairy producers, and spurred the Canadian Dairy Commission, along with the federal government, to craft a new, much tighter pricing system, which remains largely in place.[12]

How it works[edit]

Dairy cattle in a barn in Quebec

Supply management is based on three policies: price-setting, control of supply, and protection from foreign competition. The end result is that by shielding farmers from variations in the price of their goods, farmers' profits stay stable. A second result is that consumers pay higher prices.

Supply management is a shared jurisdiction between the Federal and Provincial governments. For example, on a Canada-wide basis, there is the Canadian Dairy Commission, composed mostly of dairy farmers.[4] In Ontario, there is the Dairy Farmers of Ontario, with similar local boards in each of the other provinces.

Price setting[edit]

Producers create the goods (milk, poultry or eggs), and sell them to either processors or consumers at farm gate prices. Farm gate prices are set by "negotiations" between the farmers and downstream processors and ratified by the Local Marketing Board (one for each Province or Territory). While these two parties negotiate the relative split of the profits between themselves, it is the consumer who ultimately has to pay the entire bill. The farm gate price that the processors or consumers "must" pay is the minimum legal price, but the farmer could negotiate a higher price with one or more of their customers. Factors considered when setting the price include production costs, the current market price for the goods, and a "reasonable return" on the farmer's efforts, risks, and capital employed. There is great debate as to what is "reasonable" under the circumstances, for SM farmers typically earn significantly more than their non-SM farming counterparts; up to 21% more.

For farmers wishing to enter the market, the price of the quota can be up to 75% of start-up costs. This can leave farmers entering the industry with a heavy debt burden, or effectively exclude them from ever starting.[13] Critics say the only way for the next generation of farmers to break into supply-managed farming is by inheriting it, or marrying it. The return on investment (ROI) for a quota-based small broiler chicken farm would be around 3%, but without having to pay for quota, the ROI would be about 18%.[14]

Control of supply[edit]

Dairy, poultry, and egg farmers are guaranteed profits – the median gross income for a dairy farmer is C$250,000 a year[15] – and protection from competition. To avoid overproduction, farmers are allotted a quota of production. This quota is an asset that can be sold, subject to regulations from the respective board. The right to keep a single dairy cow, for example, is worth $28,000, and an average dairy farm has $2,000,000 worth of quota (approximately 70 cows).[4] Due to the value of the quota and the government created monopoly, most banks will loan Canadian dairy farmers up to $30,000 per cow, while banks in the USA (non-SM) will only loan $3,000 per cow; enabling significantly higher financial leverage for the Canadian dairy farmer. That higher leverage carries with it the potential for higher profit margins, as well as elevated risk during times of instability. Dairy quota has a book value of $3.6 billion to $4.7 billion but a current market value of $23 billion.[16]

Under supply management, consumers, as taxpayers, do not need to pay "explicit" subsidies to dairy, poultry and egg farmers; the paying of often substantial subsidies to farmers is common in many developed countries, though Canadian farmers in other sectors, including grain, beef, pork, food oils and pulses, receive few if any subsidies. The OECD estimates the subsidy equivalent in 2012 (producer support estimate) paid to all of Canadian agriculture as 18% of the value of the industry; a majority of this goes to the supply managed sectors although they account for only a small part of Canadian agriculture, meaning that the supply managed sectors have a much higher effective subsidy. In the European Union, the effective subsidies are 27%, with the United States at 10%, Australia (6%), New Zealand (1%), Brazil (6%), and China at 9%.[4] A study pointed out that subsidies and support measures to producers outside supply management account for less than 3% of gross receipts, compared to 43% for milk production subject to supply management.[17]

Supply control enables marketing boards to have sweeping powers regarding the feeding, treatment, and conditions of animals on farms, as the board is in direct control of the quota allotted and can directly sanction farms who violate board policy.[14]

Protection from competition[edit]

The prices that processors and consumers are forced to pay to Canadian farmers is substantially higher than the price on the international market. To enable price controls, supply management must block purchasing from international farmers. This was originally accomplished by a total ban on imports, but international trade rules forbade this. Instead, there is an import quota, around 8% of the cheese market or 1% of the yogurt market – the equivalent of around one teaspoon of yogurt per Canadian per year.[4][13] In addition to import quotas, foreign producers face tariffs on their products, that range from 168% for eggs, up to 285% for chicken, 246% for cheese and over 300% for butter. These high tariffs hamper imports in the general food market.[13][11] In 2015, the three top dairy imports into the country were specialty cheeses, milk protein substance and whey products. The largest suppliers into Canada were the United States, New Zealand, France and Italy [18]

It has been pointed that Supply Management also intervenes in trade between provinces due to strict restrictions on inter-provincial shipments.[19] It has been pointed out that if this is removed it could make it easier to buy cheaper milk from any provinces.[20]

Processors of dairy, poultry, and eggs benefit from predictable supply from the system, while having to pay higher prices for their inputs, which can generally be passed on to the consumer. However, this means they are at a disadvantage on the international market, because their inputs are comparatively expensive. Total dairy exports in Canada amount to only 5% of production. For New Zealand by contrast, which has phased out subsidies and does not have supply management, 95% of dairy is exported.They pointed to New Zealand which ended its SM-based dairy infrastructure in 2001, going to a non-subsidized free market system that exports about 95% of its dairy products. New Zealand dairy industries grew 17 times faster than Canada's.[4]

Impact of supply management[edit]

Politics[edit]

Supply management is considered to be one of the most powerful lobbies in Canada by supporters and critics alike.[21] However, critics have pointed out that their tactics are similar to the NRA , a pretty influential lobbies in the USA, by using propaganda and fear-mongering to push the interests of a small group of highly motivated actors at the expense of overall national well-being. It has been reported that the supporters spends about $120 million per year on public ad campaigns and political lobbying.[5]

Critics have pointed out that it is hypocritical for politicians from both spectrum to support SM from politicians who support "progressive, or who claims to support "social justice" to "free-trade" politicians.[5] Even supporters admitted that SM is not synonymous with free trade principles.[22] Critics, in addition have also pointed out if people are outraged by any price-fixing incident then they should be more outrageous with SM due to its legality.[23][24]

They considered it to be bad policy to support SM and pointed out it give more electoral clout to 13 ridings with more than 300 dairy farmers.[25] A politician explained that he could not support "true" free trade within Canada due to the influence dairy and poultry farmers had on his riding.[20]

Supporters are advocating to the Supreme Court of Canada to rule against a dispute with Gerard Comeau and the province of New Brunswick over Section 121 of the constitution.[26] It was reported that Yoplait, Danone, Asana used SM as a way to prevent Chobani,from establishing a manufacturing plant in Canada.[27]

In 2007, then Trade Minister David Emerson suggested ending SM but was quickly  silenced by the PMO.[28]

Dairy, poultry and egg farmers[edit]

The most obvious impact of supply management is that on the farmers themselves. Supply management is effective at keeping revenue stable and guaranteeing profit for farmers. For this reason, farmers lobby to protect supply management from any challenges, both domestic and international.[4] It have pointed out that supply management represent 8% of all farms in the country.[29]

Proponents of supply management claim that it is effective at keeping small family farms viable instead of having them crowded out by large factory farms.[30] Critics have pointed out that from 1971 to 2011, the number of dairy farms in Canada has dropped by 91 percent (from 135,000 to 13,000 farms), number of chicken farms has declined 88 percent; while in the same period of time in the United States, which uses subsidy the number of dairy farms dropped by 88 percent.[4][31] Also, the average dairy farm’s net worth was well over $4 million (up from $2.5 million in 2010) and the including a net income after family wageswas more than $130,000. This is considered to be far higher than the average Canadian family to whom they are paying subsidies.[4][32][5]

Supporters have argued that SM protects farmers but critics say that there are other ways for the government to impact farmers without removing SM such as changing Canadian food guide (such as moving from dairy-based diet to a plant-based diet).[33]

Supporters have pointed out that SM protects Dairy Farmers due to Canada cold climate, however, critics pointed out that New York and Wisconsin have colder climates than Canada and their industries are thriving without SM.[34]

Supporters of SM says that it protects customers from US milk that has growth hormones that allows the United States to be more productive then Canada. However, critics have pointed to the state of Washington (whose own cows are rbST-Free) which produces 10,800 kg milk per year per cow compared to Wisconsin (using hormones) at 10,000 kg per cow. Canada produces 8,500 kg of milk per year[2]

Supporters states that other countries uses subsidies to support their dairy farmers on the global market. However, Critics have pointed out that Australia, New Zealand – and yes, the United States – have either eliminated or drastically reduced dairy subsidies, and taken advantage of growing global opportunities for their dairy products, which have limited Canada dairy farmers to a small market. [34]

Critics particularity farmers other sectors[clarification needed] express concerns that SM limits potentially economic opportunities and could create new economic barriers.[35] They pointed out are over 10 times as many farmers who grow or raise crops or animals that benefit from increased trade.[31] In addition, critics pointed out that SM make farmers poorer due by to limiting the options for farmers when selling dairy products as well as missing opportunities to prevent food shortages when supplying the growing population.[36][37] Critics of SM say this proves that Canada’s SM monopoly forces Canada, Canadian farmers and Canadians to give up billions in GDP, exports, prosperity, jobs, and tax revenue.[38] In addition, they have pointed out that Canadians farmers that are not supply managed due as well as their American or European competitors, who receive more support from their government.[17]

Manufacturing[edit]

Critics argue Supply Management can be used to deter manufacturing jobs away from Canada. In 2013, Chobani, a yogurt maker from the USA, had to abandoned plans to built a $76 million plant in Kingston Ontario, which would have created 1,300 direct and indirect jobs based on quota limitation.[39][40] Heritage Frozen Foods Ltd, an Edmonton-based perogy maker argues that they have a hard time finding cheese for the filling when making 3 million perogies per day. Critics have pointed that the high cost associated with SM had led to Canada’s food processing industry bleeding market share to U.S. competitors and several major companies such as Campbell Soup Co, Kraft Heinz Co., and Kellogg Co. closing Canadian plants in recent years.[12] In addition, they point dairy processors to establish operations outside the country to meet global demand due saturation in the Canadian market caused by the tariffs.[17]

Consumers[edit]

Canadian consumers pay one and a half to three times as much for dairy, poultry and eggs than they otherwise would without the supply management system, costing up to around C$450/year per household and $600/year for households with children.[4][2] This has been criticized as a regressive tax on the poor (around 37 cents per litre),[2] for whom food is a large portion of their budget, and who are in effect subsidizing well-off farmers.[3]

In addition, a study pointed out that SM was costing Canadian consumers $2.6 billion per year (compare to SM dairy product bringing in $970 Million into the economy).[23][41] It pointed out that A study that SM impacts the poorest households five times (2.4% of income or almost 25% of income on food) more than wealthy families (0.5% of income or almost 6%of income on food) in relative household income, while another study point to that around 133,032 to 189,278 Canadians (or 67,000 to 79,000 households) are pushed into poverty due to burden of SM.[42][6][43]

By managing supply, consumer prices do not fluctuate with swings in international markets. Though one might expect that with a fixed supply of milk that efficiencies of technology and scale might bring the prices down, the opposite has happened; the price of milk in Canada has been steadily rising faster than inflation over the past 30 years. In the same time period, in the United States the price of milk has instead decreased relative to inflation.[4] Another study pointed out that It estimates that dairy input costs for Canadian manufacturers, which produce everything from frozen pizza to ready-made lasagna, are between five and 30 percent higher than what U.S. companies pay.[12]

Supporters of SM says that it protects customers from US milk that have growth hormones. However, critics pointed out that SM has nothing to do with food safety and Canada could demand milk(if they wanted to) to be hormone-free like Europe does with Canadian beef.[44]

Critics have pointed out that SM has attributed to butter shortages in Canada.[45]

Environment[edit]

Critics argue that the quota system in SM forces dairy farmer to dump untainted skim milk into farms or sewer, which supporters of SM stated would not happen.[46]

Trade[edit]

Supply management has been a major issue with regard to Canada's position in international trade agreements, as countries with which Canada attempts to negotiate free trade agreements object to Canada's efforts to gain access to their markets while denying them access to Canada's own.[1][4][13][11][47][48] Over all, nearly 60% of Canada’s agricultural and agri-food production is bound for foreign markets, with nearly half of this going to the U.S. market.[17]

Supply management was a major issue in Canada's negotiations to enter into free trade with the European Union, free trade with India, the Doha round and the Trans-Pacific Partnership.[4][13] In the case of the Trans-Pacific Partnership, Canada's initial refusal to negotiate on SM and the opening of the markets protected by supply management led to Australia and New Zealand moving to exclude Canada from participation in the TPP trade negotiations.[11] Once Canada agreed to negotiate on the SM system, Canada was invited to fully participate in the TPP negotiations, but faced protests from supporters of SM.

SM supporters are against the removal of inter-provincial trade barriers, fearing that SM would be dismantled if they are removed.[26] In 2017, the United States filed a trade complaint to the world trade organization on SM. This complaint was backed by New Zealand and Australia.[49]

See also[edit]

References[edit]

  1. ^ a b "The price of eggs and the Throne Speech". The Globe and Mail. October 15, 2013. Retrieved October 19, 2013. 
  2. ^ a b c d "Now is our chance to scrap the milk tax once and for all - Macleans.ca". Macleans.ca. 2017-04-20. Retrieved 2017-11-26. 
  3. ^ a b Kline, Jesse (September 20, 2013). "Help consumers. End supply management". National Post. Retrieved October 19, 2013. 
  4. ^ a b c d e f g h i j k l m n o p Hall Findlay, Martha; Margarita Gres (June 2012). "SUPPLY MANAGEMENT: PROBLEMS, POLITICS – AND POSSIBILITIES" (PDF). The School of Public Policy SPP Research Papers. University of Calgary School of Public Policy. 5 (19): 1–33. Retrieved October 19, 2013. 
  5. ^ a b c d "You're Paying Too Much for Milk". The Walrus. Retrieved 2017-11-17. 
  6. ^ a b "Supply management is literally driving tens of thousands of Canadians into poverty". Financial Post. 2016-08-31. Retrieved 2018-01-08. 
  7. ^ "A novice bureaucrat (and future PM) on supply management - Macleans.ca". Macleans.ca. 2011-11-15. Retrieved 2017-11-26. 
  8. ^ Canadiana. "House of Commons Debates, 28th Parliament, 3rd ... - Canadian Parliamentary Historical Resources". parl.canadiana.ca. Retrieved 2017-12-17. 
  9. ^ "Our History". Dairy Farmers of Canada. Retrieved October 19, 2013. 
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  12. ^ a b c "'Cheese ninjas' to the rescue: Why Canada's supply management system needs reform". Financial Post. 2017-12-20. Retrieved 2017-12-20. 
  13. ^ a b c d e Andrew Coyne (August 15, 2011). "The $25,000 cow". Maclean's. Retrieved October 22, 2013. 
  14. ^ a b "The New Chicken Farmer". Small Flock Poultry Farmers of Canada. 2013. Retrieved February 21, 2014. 
  15. ^ "OECD Policy Brief: Economic Survey of Canada, 2008" (PDF). OECD Observer. OECD (June 2008). June 2008. Retrieved October 22, 2013. 
  16. ^ McGregor, Janyce (26 July 2015). "Supply management in Canada: Why politicians defend farm marketing boards". CBC News. Retrieved 3 May 2017. 
  17. ^ a b c d Des idées pour une société plus prospère (2017-08-21), MEI - Nearly all Canadian farmers prosper without supply management - Alexandre Moreau, retrieved 2018-01-15 
  18. ^ "Trade". Canadian Dairy Commission. Retrieved April 6, 2017. 
  19. ^ "John Manley: If Ottawa truly wants to tear down provincial trade barriers, it should start with supply management". National Post. 2015-01-13. Retrieved 2017-12-10. 
  20. ^ a b "Conservatives say 'Free the beer' but not the milk - Macleans.ca". Macleans.ca. 2017-12-06. Retrieved 2017-12-17. 
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  22. ^ "It's time for Conservatives to ditch dairy cow Marxism - Macleans.ca". www.macleans.ca. Retrieved 2017-11-26. 
  23. ^ a b Board, Star Editorial (2017-12-20). "Angry about bread prices? Save some for supply management". The Toronto Star. ISSN 0319-0781. Retrieved 2017-12-21. 
  24. ^ "Loblaw's behaviour is outrageous. But so are other schemes to fix the cost of food". Retrieved 2017-12-23. 
  25. ^ "Time to end Canada's milk, egg and poultry protectionism". The Toronto Star. 2012-06-24. ISSN 0319-0781. Retrieved 2017-11-26. 
  26. ^ a b "Tracadie man's beer case before Supreme Court overflows with potential interveners". CBC News. Retrieved 2017-11-27. 
  27. ^ "Yoplait, Danone battle to keep Chobani yogourt out of Canada". Financial Post. 2012-04-02. Retrieved 2017-12-06. 
  28. ^ "A strong voice challenges an anchor on the Canadian economy". The Globe and Mail. 2014-12-07. Retrieved 2017-10-25. 
  29. ^ "Ending supply management: An opportunity for Canada". www.newswire.ca. Retrieved 2018-01-04. 
  30. ^ "WTO and Agriculture — Supply management". GO5, Coalition for a Fair Farming Model, Supply Management. 2013. Retrieved October 22, 2013. 
  31. ^ a b "Don't fear political fallout from dairy farmers, ex-MP says". CBC News. Retrieved 2018-01-04. 
  32. ^ "Why the dairy industry's defence of supply management is so flawed". Macleans.ca. 2014-05-14. Retrieved 2017-11-26. 
  33. ^ "Charlebois: Milking NAFTA – Why supply management may finally be doomed". Ottawa Citizen. 2017-08-08. Retrieved 2017-12-10. 
  34. ^ a b "Canada's supply management system for dairy is no longer defensible". Retrieved 2017-12-10. 
  35. ^ "Western farmers worry they'll pay the price of saving supply management under NAFTA". CBC News. Retrieved 2017-11-26. 
  36. ^ "Why is Canada letting dairy farmers imperil NAFTA?". Retrieved 2017-12-06. 
  37. ^ "Supply management is expensive, irrational — and doomed - iPolitics". iPolitics. 2015-12-05. Retrieved 2017-11-14. 
  38. ^ "Analysis of the Potential Impacts of the End of Supply Management in the Canadian Dairy Industry" (PDF). Boston Consulting Group. 
  39. ^ "Yoplait, Danone battle to keep Chobani yogourt out of Canada". Financial Post. 2012-04-02. Retrieved 2017-12-10. 
  40. ^ nurun.com. "Chobani sours on Canada". The Kingston Whig-Standard. Retrieved 2017-12-10. 
  41. ^ "There's a global butter boom, but supply management has Canada stuck on the sidelines". Financial Post. 2017-11-01. Retrieved 2018-01-08. 
  42. ^ "Supply management costs poor families five times more relative to household income: study". National Post. 2015-02-27. Retrieved 2017-12-17. 
  43. ^ "Why is Canada jeopardizing NAFTA to protect 13,500 farmers? - Macleans.ca". Macleans.ca. 2018-01-22. Retrieved 2018-01-23. 
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  45. ^ "How Canada's zany dairy system affects daily life, from cheese bandits to dessert-starved Newfoundlanders". National Post. 2016-11-25. Retrieved 2017-12-17. 
  46. ^ "Milk surplus forcing Canada's dairy industry to dump supply". The Globe and Mail. 2015-06-18. Retrieved 2017-10-25. 
  47. ^ Kline, Jesse (September 26, 2013). "The statist's guide to supply management". The National Post. Retrieved October 22, 2013. 
  48. ^ "Canada Supply Management: Free Trade Talks Could End Food Pricing System". The Huffington Post Canada. The Canadian Press. November 20, 2011. Retrieved October 22, 2013. 
  49. ^ Weir, Rod Nickel and Benjamin. "Canada's resilient dairy sector girds for Trump fight". CA. Retrieved 2017-11-03.