Pasteurizing the Canadian Dairy Industry

The CBC reported recently that residents of Newfoundland and Labrador pay double for dairy products compared with Ontarians. In Windsor, Ontario, for example, one may expect to pay $3.65 per gallon, whereas in some rural Newfoundland communities, one can expect a similar price per litre. On average, in fact, the price of dairy in Canada is almost 43 per cent higher than in the United States.

For Canadians–including even the lactose intolerant among us–this deal is raw.

Since the 1970s, Canada has run a system of “supply management,” through which provincial marketing boards, sanctioned by the federal government, set the price of dairy products, protect the Canadian industry from foreign competition, and control supply in the domestic market. Each board determines a quota governing both entry into the market and production within it, and requires farmers to purchase producer rights. Producers must sell that milk back to the marketing board, which then distributes the product to stores. Furthermore, the government enforces import quotas and imposes high tariffs on foreign products to insulate domestic production from outside competition.

In essence, this process “protects” both consumers and producers from market fluctuations that come with globalized trade and the associated risk of shocks in the agricultural industry. It also promotes local agriculture and ensures product quality.

Despite these objectives, the reality is different. Firstly, Canadian consumers pay more for dairy products than do consumers in other countries. The Conference Board of Canada estimates that Canadian families can expect to spend $276 more per family on dairy than our counterparts in the developed world. Dairy Farmers of Canada (DFC) claims that Canada, unlike our trading partners, does not devote subsidies to agriculture, implying that consumers do not give domestic producers “special treatment.” Consumers do subsidize Canadian dairy, however, through paying artificially inflated prices: setting the price of dairy products, insulating our industry from foreign competition, and controlling its supply is an indirect subsidy to the industry. Moreover, limiting the supply drives prices upward and higher prices means additional income for those with producer rights. Lastly, limiting entry into the market, while simultaneously enforcing prohibitively high tariffs on foreign products, reduces competition, which affords Canadian farmers an advantage. Indeed, the World Trade Organization (WTO) restricts Canadian dairy exports specifically because they view supply management as a subsidy.

This variety of quota and regulatory system is, essentially, geared to make market entry incredibly difficult and concentrate power in the largest firms. First and foremost, one must purchase quota rights to begin producing. In Newfoundland and Labrador, a scarcity of inputs raises the cost of production even further, while the provincial government pushes aggressively for “pro local” policies, such as an initiative to allot land for homegrown feed, which is the chief expense of Newfoundland and Labrador dairy farms. Unfortunately, these developments have consequences for the market structure: Newfoundland has the most concentrated dairy industry in Canada, with just 34 farms and 174 cows per farm. Even Prince Edward Island, with 200 smaller farms, produces more than twice the milk of Newfoundland.

It is difficult to identify how supply management benefits Canadians. The system is not necessary to ensure quality, and although it may protect producers from unanticipated price fluctuations, several industries fare well without government protection. The foregone benefits of a deregulated dairy industry far outweigh the complications of price volatility. It seems the only remaining claim is that “locally grown, locally produced” is better–a dubious and subjective claim at the very least. After all, many consumers may believe milk imported from the Maritimes, or internationally, is “better.” In any case, it ought not to be the producer that decides what each consumer prefers. Supply management is a net loss for Canadians and a particularly grave loss for residents of Newfoundland and Labrador.

Leo Plumer is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics and political science at McGill University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

DFAA Funding and New Brunswick

The Province of New Brunswick has incurred millions of dollars in damages to highways, bridges, and other critical infrastructure this spring and there are currently over 75 road closures throughout the province, some more severe than others, and the timeline for repair remains uncertain. Many individuals have also suffered losses related to flooding from snowmelt and heavy rains. Yet, while weather is uncontrollable, it is necessary to ask whether the government could have taken steps to lessen the extent of damage. If they could have, it becomes more important to ask why it did not.

The Department of Transportation and Infrastructure’s budget had declined in years past. In 2013, the departmental budget was $272,296,000–although the Department spent $284,265,000–and grew roughly 0.5 per cent in 2014 to $273,447,000. There are several concerns about the Department’s budget, which funds construction, maintenance, and repairs, with some expressing concern about the state of provincial infrastructure and how to improve it.

Though the province has other financial obligations, the risk of damage from spring weather is perennial and poorly maintained infrastructure is very costly to repair. There is another political element, however, that determines how provinces allocate money in their budget: federal transfers.

Ottawa’s Disaster Financial Assistance Arrangements (DFAA) has provided the provincial governments with $2.5 billion since inception in 1970 and eligible expenditures include damage to public infrastructure from natural disasters. The federal government allocates funds using a per-capita cost-sharing formula and the provinces are eligible for assistance once damages exceed $750,000.

Rural provinces like New Brunswick have a lower threshold before the federal government steeps in to help cover the cost of repairs because the funding uses a per-capita formula. They also have a very high ratio of infrastructure-to-population, which could theoretically incentivize them to allocate less in their budget to keeping infrastructure in good condition. Even though preventative measures help avoid some of the devastating effects of weather-related damage, the provincial government may benefit from spending less on infrastructure and using financial aid from the federal government instead. Furthermore, the fund covers damages to private property and compensates individuals for damage to their houses or land, creating more incentive issues. For instance, some individuals have received financial assistance multiple times and critics are questioning whether it is wise to subsidize living in risky areas. This is why it is important to look deeper into the DFAA program and analyze how it influences provincial expenditures, which also entails asking whether it is the best program for assisting the provinces during crises.

Rachel Lowe 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

Against farm subsidies

Many countries, especially those in the West, support their farmers with generous agricultural subsidies. In 2011, for example, Canada spent $6.9 billion on them. These programmes, however, create inefficiency and lead to morally questionable outcomes.

Farm subsidies artificially reduce the cost of farming. In other words, farmers produce more in jurisdictions with subsidies than those without, i.e. subsidized farmers produce more than what would otherwise be profitable under purely competitive market conditions.

For instance, consider a developed country without farm subsidies. Farmers would use land that allows them to earn as much, or more, money than they could by renting it to the highest bidder. If this country introduced agricultural subsidies, farmers would purchase or rent additional land, since it would increase their revenue from the additional land above its market price (which, all things equal, was uneconomical before subsidization). Under competitive conditions, farmers would not utilize the additional land, whereas providing subsidies encourages them to do so.

Now, imagine a farmer who plans to purchase land in one of two countries. He must choose between Country A, which has extremely fertile land, and Country B, which has only passable land. If the cost of doing business and renting land were equal in both countries, he would likely choose Country A. However, if Country B offered subsidies that compensate him for utilizing less productive land, then he may opt to operate there, instead. In other words, agricultural subsidies are inefficient, in that they encourage farming on land that could be useful for building shopping malls, restaurants, or movie theatres. Moreover, subsidies create inefficiencies between countries with different agricultural policies.

These subsidies are more pervasive in the developed world than in its developing counterpart. Farmers in poorer countries are unable to compete with farmers in richer countries that offer artificially low factor prices resulting from lavish subsidies. As a result, these subsidies encouraging production in areas that are not especially suitable for agriculture, while discouraging production in areas that are suitable for farming. It is in the interest of developing countries to end agricultural subsidies, as it would allow them to expand their agricultural industries, which currently underperform due to subsidies in rich countries, and would alleviate rural poverty by boosting production and prices. Currently, however, richer countries “dump” their subsidized products in poorer countries, not only deteriorating their ability to generate economic activity, but also creating a dependency trap. From the perspective of richer countries that provide billions in annual subsidies, it is more efficient to stop transferring wealth to their agricultural industry and, instead, purchase foodstuffs from abroad.

Agricultural subsidies additionally affect wealth distribution at the domestic level. Policymakers fund the subsidies using tax revenue, which they transfer to farmers and landowners that tend to be wealthier than most; in 2011, the average income of a farm family was $93,426. That is, they redistribute wealth from the general population to a small group of wealthy individuals and firms. Indeed, contemporary “farming” is much different from its predecessor: most “farmers” are wealthier individuals and many farm operations involve large firms that use factories.

Farm subsidies also have a tendency to remain politically relevant–the special interest group behind farm subsidies is very powerful. It is politically expedient for governments to stay these benefits, as they require little funding per capita, yet, provide massive benefits to a small group. In other words, the cost of fighting these subsidies exceeds to cost of providing them in the first place. Moreover, when subsidies increase, this group begins to sense that they can generate more profit by lobbying the government than by actually producing foodstuffs or agricultural commodities.

Lastly, the farming lobby provides a massive obstacle to potential trade deals. In 2007, for instance, American and European governments’ objected to limiting their agricultural subsidies, which threatened the World Trade Organization’s Doha talks. India and Brazil, the countries proposing that western farm subsidies recede, in turn, refused to open their markets.

Proponents of agricultural subsidies typically defend their position by arguing that they benefit farmers and increase food security. However, in world of institutionalized trade relationships, there is little reason why any country should strive for food autarky at the expense of efficiency. Additionally, the age of rural poverty in rich countries is essentially over: farmers whom subsidies support tend to be quite wealthy. For these reasons, and those mentioned above, all states would be wise to stop subsidizing agriculture.

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