Why we need supply-management for a healthy dairy industry

Letters to the Editor (The Guardian)
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By Kody Blois

Commentary

Supply-management has once again found its way to the headlines in national newspapers all across Canada. Supply-management is being criticized as a result of an imminent signing of a free trade agreement between Canada and the European Union where they have asked for additional access to Canadian markets. A change in the current system could have dire effects for Canadian dairy farms, including the 193 currently situated in Prince Edward Island.

Supply-management was introduced by the federal government in the 1970s as a way to ensure local farmers could meet domestic demand. The introduction of quota levels helped to control supply while creating stable prices for Canadian consumers. Prices for milk worldwide had led to fluctuating prices and instability in Canadian markets. The government sought to fix this by implementing a system to provide milk and poultry for the Canadian market by Canadian producers.

The shift to a neo-liberal mindset during the 1980s has led to the mindset that supply-management hinders trade initiatives from moving forward, and is costing consumers dearly. However, is this belief valid?

Kelly McParland, a columnist for the National Post, acknowledges Canadians are being overpriced at retail stores for the price of milk, yogurt and cheese in comparison to other world markets. While Kelly is certainly right - Canadians do pay more at the cash register - he has failed to articulate why prices are lower in other markets. Simply put, other markets are heavily subsidized. Markets such as the United States and the European Union gloat about free-trade and the positive impact of open markets on industry. What is overlooked is the crutch the government must provide. In fact, as reported by the Toronto Sun in 2012, the European Union spends 40 per cent of its budget subsidizing its dairy industry, the equivalent of $52 billion spent annually. In comparison Canadian taxpayers do not subsidize the industry.

Some Canadians also point to the large discrepancy between the cost of American and Canadian milk as a flaw in supply-management. This discrepancy is also a result of subsidies. The fiscal cliff issue in the United States highlighted the importance of subsidies for the dairy industry; without subsidies, the predicted price of milk was expected to double to between $6-8 per gallon. Those subsidies are provided via the American Farm Bill, which was in danger of losing assistance from Washington.

It's not clear whether or not a free-market system will bring lower prices to Canadian consumers. New Zealand once had supply-management, then switched to a free-market orientation. Prices increased for consumers, and a monopoly was established where one dairy owns 90 per cent of milk farms. The result caused the New Zealand government to have a parliamentary investigation as to why prices increased.

A common misconception is how the price of milk is determined. Prices are set based on actual input costs directly associated with producing milk. Usually this formula allows 50 per cent of producers to break even after labour costs. The farmers, who break even, spend the majority of their profit on paying off existing loans, or investing in capital upgrades. Farmers who do not break even are forced to manage costs more efficiently to reach the 50th percentile or leave the market. This creates a competitive environment where not all farmers are guaranteed to succeed.

The number of dairy farms in Canada has decreased since the 1960s from around 135,000 to roughly 14,000 today. Barrie McKenna, columnist with the Globe and Mail, suggests decline in farms is directly related to barrier of entrance in the industry. McKenna mentions the cost of buying quota, which is the equivalent to $25,000 per cow. Supporters of supply-management argue the high quota shows that the industry is healthy, and that other profitable businesses require high start-up costs, including purchasing franchise fees to begin operations. Neo-liberalization has also pushed many "mom and pop" shops out of business, as increasing economies of scale make it difficult for small businesses to compete; this decline in numbers extends beyond the dairy industry.

In conclusion, economics and policies aside, the issue comes down to values. What do Canadians value? If the elimination of the supply-management reduced actual costs to consumers (which there is substantial evidence it wouldn't) it would put our dairy industry in a precarious position. Given that the average percentage of the Canadian grocery bill spent on dairy is two per cent or less it represents a small portion of the cost of living. The choice then comes down to a potential small increase in consumer savings, or maintaining the livelihood of roughly 14,000 Canadian dairy producers including other dairy-related jobs that would be affected. I, for one, am in support of the latter.

Kody Blois is a Nova Scotia resident pursuing a commerce degree with a minor in political science at Brock University. You can follow him on twitter @kodyblois or his blog kodyblois@blogspot.ca

Organizations: European Union, National Post, Toronto Sun American Farm Bill Globe and Mail Brock University

Geographic location: Canada, Prince Edward Island.Supply, United States New Zealand Nova Scotia

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