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Saturday, March 8, 2014

Why does our government tax every glass of milk we drink?

The Conference Board of Canada has issued a report titled Reforming Dairy Supply Management: The Case for Growth, which pretty much condemns Canada’s system of supply management of  dairy products. Authors, Michael Grant, Richard Barichello, Mark Liew, and Vijay Gill, say their report “makes the case for growth and suggests an equitable way to wind down supply management of dairy products.”

Unfortunately, even this latest learned challenge to our antiquated system governing the dairy segment of our agricultural economy is likely to fall on deaf government ears—wilfully deaf ears, I might add.

Back in 2011, I quoted from the Conservative government’s throne speech, as follows:

In all international forums and bilateral negotiations, our Government will continue to stand up for Canadian farmers and industries by defending supply management.” [Emphasis mine]

 

Since that time, the prime minister has given no indication of having changed his mind. To the contrary, indications from Ottawa are that Canadians will be expected to continue financing our wrong-headed model of agricultural quotas and tariffs, which was implemented in Canada in the early 1970s and that continue to cost average and low-income Canadian consumers so dearly.

According to the Conference Board:

“The OECD [The Organization for Economic Cooperation and Development] calculates that ‘market price supports’ cost Canadian dairy consumers [families] an average of $2.6-billion per year in the decade to 2011: roughly $200,000 per dairy farm per annum and around $276 per family every year.

Furthermore, as I said in a Feb. 2013 essay, the OECD “found that Canadian milk prices have been two to three times higher than world prices since 1986. And the OECD estimates support to Canadian dairy producers … [are] equal to more than 60% of the value of total dairy production that year [2003].”

Because Canadians must pay more for dairy products than they would on the open market, they are being “taxed” and the low-tax Conservative government seems to believe that’s OK.

Moreover, it seems to be OK that Canadian families with average household net worth (in 2011) of $363,202 are subsidizing dairy farmers with a net worth of more than $2 million on average.

So why don’t we reform our market‑distorting system, don’t we Conservatives still pride ourselves on supporting free markets? Well, I don’t know for sure, but I have a theory.

It goes like this: Canada is expanding its trade and economic presence in Asia—the rapidly-growing Asia-Pacific market is seen as critical to Canada’s growth and economic prosperity. For example, Canada is reportedly about to sign a free trade deal with South Korea.

To that end, Canada is involved with a sweeping free trade agreement with a dozen Pacific Rim countries—Trans-Pacific Partnership (TPP), covering about 40 per cent of global economic output and about one-third of world trade.

A TPP entry price is, apparently, Canada’s supply management regime. Member states like Australia and New Zealand—our long-time allies—absolutely insist on it, even moving to exclude Canada from the agreement.

As Ian Lee, professor, Sprott School of Management at Carleton University put it in a Toronto Star article in 2012:

Supply management benefits fewer than 14,000 Canadian farmers, mostly in rural Ontario and Quebec, and is preventing Canada’s 34 million citizens from participating in the most important trading agreement in modern history with the most dynamic and populated part of the globe—Asia-Pacific.”

Isn’t supply management a dandy bargaining chip to hold back, while all the time planning to give it up “reluctantly” in exchange for something of significant value, whatever that may be.

Give it up prematurely and we’ll get nothing in return—timing is everything. Maybe Stephen Harper is the smartest politician in Canada.

18 comments — This is a moderated blog and comments will appear when approved. Please don’t resubmit if your comment doesn’t appear immediately, and please do not post material that is obscene, harassing, defamatory, or otherwise objectionable.

  1. Socialism at it's best in Venezuela
    thanks to Kate at SDA
    http://weaselzippers.us/178536-lines-to-buy-food-are-now-hundreds-of-yards-long-now-in-venezuela/
    fh

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    1. You've lost me, Anon 2:05 PM (fh). What does this have to do with the my blog post. I'd prefer if you stayed on topic. Thanks.

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    2. I wondered the same thing Russ.

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  2. Maybe. But I too, along with everyone else on the planet, have a theory about why no government of any political stripe has ever mentioned supply side management: I believe that much of the industry is owned by the old guard of Canada; the McCains, Bronfmans. Bombardiers, Desmarais, Irvings , Aspers, Westons, etc., and between them,they exercise enough influence that no politician who ever wants to do business with them or any of the multitude of corporations they own, will ever do anything to upset their applecart.

    The guy who brings in legislation to cut free the agri-robbers,will never receive a Board position with any of those companies after he leaves politics,and he'll have to make it on his meager MP's pension.

    Good old boy Brian Mulroney received a torrent of Board appointments after he retired, a just reward for doing just as he was told while in Office, and every other politician from Harper to May covets one of those appointments.

    This is just MY theory,I could be completely wrong,and successive PM's have held off for the good of ALL Canadians, or at least 14,000 influential Canadians.

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    1. I hear you, dmorris. Dairy farmers in Canada, though, are easy to identify and I doubt there's enough money in farming to attract the big names you list above. But, hey, who knows?

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  3. I too have a theory, and it doesn't involve wooing the farm vote; only 13,600 dairy farms don't make that worthwhile.
    From a government perspective, the present dairy SM system works quite well; it doesn't cost anything, as there is no direct subsidy, There is also no need for other income support system for these farmers. Canada spent a fortune in 1960s in direct subsidies to milk prices. also buying up and storing a mountain of milk powder that nobody was interested in buying, Controlling supply does work, prices are stable, there is no over supply, no wild swings in price and quantity. The indirect subsidy is born by the consumer of dairy products, not the government.
    Ending the program would cost the government dearly, the study mentions $4.7B to buy out the quota holders, but it could cost twice that. If many new farmers began producing milk, the price would drop, over supply would soon occur bringing some of chaotic conditions of the 60s back. Calls for the government to support farm incomes would follow. including a return to direct subsidies to match our trading partners

    Would consumers actually see a reduction in table price matching the drop in farm price? Given past experience, this is extremely doubtful. Farmers simply milk the cows, the costs of processing milk into dairy products is born by the dairy industry and grocery chains, they would have to pass along savings to the consumer.
    A dozen years after the end of SM a government could see no dramatic reduction in retail price, but with increased costs for price support along with the cost of quota buyout.

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    1. Martin, the arguments you offer are very similar to those heard when Australia and New Zealand were having their debate. Nothing like what you suggest actually happened, however, when their systems were abandoned. See following from Ottawa Citizen OpEd:

      "Since opening its once-closed market in the 1970s, New Zealand has become the world’s greatest dairy exporter, accounting for nearly 30 per cent of dairy products traded globally. New Zealand exported US$9.4 billion in dairy in 2012… The Bank of New Zealand estimates that dairy income will jump by US$4.7 billion this season, the equivalent of about 2.6 per cent of gross domestic product. … Canada has a unique opportunity to supply the world with dairy products. New Zealand is already struggling to keep up with demand."

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    2. You may well be right, I have no particular axe to grind here. Just that the economic law of unintended consequences suggest everything would not be as rosy as predicted. I think the study greatly underestimated the buyout cost.
      We need to seperate milk, an extremely perishable commodity, from the processed products, cheese, yogurt etc which are storeable. Milk for Ont market, will continue to be produced by local Ont dairy farmers; I don't think huge imports are feasible. Farmers need to meet production costs, heating costs, barns, quality animals, consumers are unlikely to see rock bottom prices for milk as quoted in some US areas.
      Dairy products could see lower prices from simply reducing tariffs, this could be done without touching SM; the lobby here is the processing corporations.
      I agree that Canada should get something significant in return from trading partners, EU in particular has huge subsidies on their farm products which Canada cannot begin to match.

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    3. Martin, I do get your point about "unintended consequences." Supply management itself had unintended consequences: much higher than expected prices and more extensive than expected shrinkage of the number of farmers involved, i.e., the voting block.

      "Farmers need to meet production costs, heating costs, barns, quality animals" -- I agree, but don't underestimate the power of competition.

      If Australia and New Zealand can do it and see their farmers prosper, we can too.

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  4. How much money does the dairy industry give to the Conservative Party?

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    1. Oh boy, another Anonymous drive-by smear. Guess they can't help themselves. No counter argument, of course, just baseless innuendo. [sigh]

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    2. This system has been in existence long before the current government was in power. And some of those "biggies" I mentioned are probably well invested in the processing of agriculture products.

      Opponents of monopolies have always claimed "chaos" in the market place, as fear mongering works better than facts. But to us ordinary Canadians, all we can see is that we can cross the USA Border,and buy essential food products for a third the cost in Canada. The US isn't "in a state of chaos" without marketing boards, and I have no reason to believe Australia or New Zealand have suffered that since buying out their MB's.

      Let's end the protectionism that has made so many of our "free trade" agreements so ineffective for ordinary people.

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    3. Slightly lower dairy prices are possible with an end to SM, but consumers should not expect declines of 66%, US enjoys huge economic advantages in heating and in Ont electricity costs, and market size. Note that N Zealand and Australia are isolated somewhat by distance. I mentioned above, Ont producers must at least cover their production costs; no responsible government is going to see elimination of basic food production nationally. In times of war, terrorist chaos and other acts, the border can very quickly be closed. We already saw this with the mad cow scare for beef. In that incident plummeting farm cattle prices in Canada, saw very little price reduction for steak on grocery shelves. There is no marketing boards with beef and trade was free until US closed it temporarily. Retail food prices are very sticky in response to declining farm prices, they do not move down linearly, as any farmer can attest.
      You are right about the huge costs of invested money producers will want compensation for in addition to the quota costs. Such a program for a perceived wealthy class will not play well with urban voters. Perhaps this has something to do with government reluctance to begin the process.

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    4. Beef steak is a good example: no supply management, and yet the price is similar in the US and in Canada. Why wouldn't dairy and poultry be similar?

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    5. I haven't seen comparisons as to beef prices, but I suspect it is somewhat cheaper in US due to economic factors mentioned above, as are a host of other items from books to autos. My main point was the closing of the border can occur suddenly for many reasons.
      The suggestion that milk prices could drop to 1/3 I just can't imagine. Many of the as hoc US price comparisons seen in comments are from peculiar circumstances. Some price reduction, yes, but probably no where near what consumers expect; the problem of the grocery industry passing on the savings remains.
      The government absolutely should be studying the N Zealand experience, I suspect they are. From their viewpoint, getting rid of SM could be enormously expensive, and unpopular because of the compensation to perceived rich farmers, plus if expected prices failed to materialize a further angry consumer class who are financing the buyout.
      Not to say it shouldn't be done, but one can see why governments are reluctant to jump into it.

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  5. http://www.iedm.org/files/cahier0912_en.pdf

    Here is a comprehensive look at supply side management,and why/how it can be ended in Canada.

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  6. Russ, in doing some research into Marketing Boards, I came across the figures on a CBC article that buying out the farm quotas would cost the government $40 billion.

    When you "follow the money" ,that translates into almost 40 billion dollars in bank loans made to farmers to buy the quotas,and the interest paid on those loans to the Big Five Canadian banks IS significant.

    I believe, in amongst all the facts and myths surrounding the myriad of regulations, and marketing boards set up by both federal and provincial boards, and the fact that there are currently 80 Marketing Boards extant in Canada, the most important factor in getting rid of the Marketing Boards,is those billions of dollars in bank loans.

    Add into the mix all the civil service jobs in running the MB's in both Provincial and Federal jurisdictions, bank loans and resultant interest made, and you may have, as Sandy would say,"the crux of the matter".

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  7. I suspect most politicians privately know supply management is a raw deal. The fact is the only groups that seem to defend it are those who benefit from it; left wing think tanks who favour anything that involves greater government intervention regardless of impact, and politicians who may privately oppose it, but are scared of the dairy lobby.

    Despite being a Liberal, Martha Hall Findlay had an excellent publication on why supply management is bad and also pointed out there are only 8 ridings in Canada with more than a 1,000 dairy farms, five in Quebec, three in Ontario, five went Conservative and three went NDP. None of the eight ridings were even close meaning even if the Conservatives lost the dairy farmer vote they would still handidly win the ridings. Australia and New Zealand successfully moved away. Never mind supply management is holding up Canada joining the TPP and the benefits we get from more open markets as a whole far outweigh any disadvantage to the dairy industry.

    I haven't researched it much, but I heard Japan has a similar system in place for rice production so I would be interested in how that works. Thats partly why the TPP also had reservations about them joining.

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