Supply management: a gift to farmers at the consumer’s expense

Supply management, the system by which Canada controls dairy, poultry, and egg production, helps farmers weather market fluctuations and shields them from international competition. However, by creating quota assets for farmers that increase production costs (while boosting income levels), it increases consumer prices for a number of agricultural products, disproportionately harming low-income Canadians.

In Canada’s supply management system, the national Dairy Commission stipulates a price range for various dairy products, which provincial boards use to set exact prices. These boards consider production costs and the “fair level of return” for farmers in setting these prices. The poultry and egg industries operate in a similar manner.

Without trade barriers, foreign competitors could undercut these prices. American dairy products, for instance, cost roughly 30 to 50 per cent of Canadian products. Consequently, the federal government has erected trade barriers for managed products in the form of prohibitive import tariffs.

If farmers could sell their products for higher-than-cost prices without further controls, they would overproduce and create a surplus of these products. This unpalatable possibility explains a third element of the Canadian supply management regime: production quotas. Farmers can purchase and sell these quotas on centralized exchanges made available by the government. By creating scarcity in the dairy, poultry, and egg markets, the government creates economic rents payable to farmers (in the form of higher consumer prices).

Economic rents include all payments to factors of production, whether land, labour, or capital, which rise beyond the minimum payment at which someone would supply the factor.

If, for example, Ottawa abandoned supply management, anyone with the proper resources could enter the dairy industry. Competition among different dairy farmers would drive prices down to a level near cost. The economic rent created by supply management per dairy product would be the price differential between this at-cost price and the actual price charged.

Why is this price higher?

In a roundabout way, it is because the costs are also higher. Supply management creates an implicit cost for producers–the rent attributed to their quotas, which they can sell on an exchange. The price consumers pay ultimately represents the cost of producing managed products–the labour, the feed, the physical capital, and the rent of the land–in addition to the market value of the quota for that given product.

Proponents of supply management claim that farmers deserve prices above cost to compensate them for their work. They also claim that subjecting Canada’s agricultural industries to international competition might threaten food security.

Oddly, Alberta Milk claims that supply management makes subsidies unnecessary. This contention concedes that dairy farmers receive enough revenue to produce under supply management. However, this is because consumers pay above-normal prices, instead of the government providing direct subsidies.

Farmers tend to be wealthy, largely because of the assets that government creates for them in the form of production quotas. In fact, the OECD reports that dairy farmers in the group gross more than $250,000 annually. Yet, higher prices for milk, eggs, and chicken hurts low-income Canadians more than any other group, as they spend a higher proportion of their incomes on these goods. Thus, supply management is a regressive arrangement.

Low-income Canadians are also more likely to spend their money on less healthy products. It is likely that many opt for a $1 two-litre bottle of pop, instead of paying $6 for two litres of milk.

New Zealand and Australia both axes their supply management systems and saw increases in domestic production paired with lower prices. Canada should follow these examples and buyout the quota assets the federal government created for farmers. This would lower prices and reduce the price of essentials for low-income Canadians, instead of subsidizing the farming industry.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

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