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

Does Subjectivity Improve Foreign Investment in Canada?

The level of attention and investment geared toward natural resource development in Western Canada has increased over the last several years, particularly from foreign state-owned enterprises (SOE). Concerns regarding SOE acquisitions in Canada include the perceived loss of sovereignty, in addition to uneasiness about allowing governments with questionable human rights records to profit from exploiting resources in a democratic country.

In Canada, acquisitions involving foreign buyers, including SOEs, are subject to a so-called “net benefit test,” which is defined in the Investment Canada Act. The public does not understand this process very well and it has drawn severe criticism for its subjectivity. For example, Petronas, a Malaysian resources firm, acquired shale assets in 2012 from Progress Energy in British Columbia, while CNOOC, a Chinese SOE, received permission to undertake similar investments in Canadian firm Nexen shortly thereafter. Both deals were subject to lengthy bureaucratic scrutiny.

What should the net benefit test look like and should Canadians be concerned?

It is well know that uncertainty about subjective regulatory hurdles can deter investment, potentially steering it elsewhere. In this way, the “net benefit test” could discourage foreign capital inflows. With this in mind, many have called for transparent, black-and-white criteria for investment approvals, if not scrapping the net benefit test altogether.

On the other hand, concerns surrounding SOEs seem to be driving the federal government’s insistence on subjective, case-by-case evaluations. The fear, presumably, is that an SOE tied to an oppressive government, such as China, could meet the criteria and be able to set up shop in Canada. By allowing leeway in the approval process, the federal government presumes to be able to choose whether investments are “good” or “bad.”

However, defining SOEs is a complex process. For instance, Ottawa could consider publicly traded companies that receive subsidies from a foreign government to be a private entity or it could determine that it is an SOE.

Lastly, there are political aspects that contribute to the federal government’s desire to evaluate each application subjectively. Canada is currently in the process of negotiating a sweeping free trade agreement with a group of Pacific Asian countries and it could hurt these negotiations to have rejected the CNOOC-Nexen acquisition in 2013.

In summary, the foreign investment “net benefit test” remains a topic of debate. While the regulatory subjectivity appears to deter investment, it may also provide the federal government with room to maneuver on political and human rights grounds.

Michael Craig 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