Thursday, April 9, 2015

Canada’s participation in TPP jeopardized by communist-style supply management

Canadian governments of all stripes have traditionally supported the communist-style regime used to regulate prices and production of Canada’s dairy, egg and poultry industries and to protect them from foreign competition.

Since mid-2012, however, U.S. trade officials have made it clear that the system has to go if Canada wants to be part of the Trans-Pacific Partnership (TPP), a new free trade zone of twelve countries representing 40 per cent of the world’s economy.

The TPP, which would also include the United States, Japan, Australia, Brunei, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, has the potential to be one of Canada’s most lucrative trade deals. Here’s an excerpt from the federal government’s website:

The rapidly-growing Asia-Pacific market is critical to Canada’s growth and economic prosperity. 

“The Trans-Pacific Partnership is one of the most ambitious trade and investment initiatives being negotiated in the Asia-Pacific region. TPP members want an ambitious, 21st-century agreement that will enhance trade and investment among the partner countries, promote innovation, economic growth and development, and create jobs.”

It is no secret that Canada’s dairy and poultry farms are artificially supported by an archaic, costly, anti-consumer supply management system. Moreover, these farms—only about six per cent of Canadian farmers—have been singled out from among all of Canada’s food producing farms and other operations to be a regulated cartel that is supported by price fixing practices and by imposing extremely high tariffs to support high prices.

I’ll not go into detail about this egregious system, but I strongly suggest you read former Liberal MP, Martha Hall Findlay’s excellent three-part series on the subject at Maclean’s website if you haven’t already done so. And here’s a link to her research paper published by the School of Public Policy, University of Calgary.

Hall Findlay’s research shows there are little more than 12,000 dairy producers in Canada, fewer than 3,000 poultry farmers and fewer than 1,000 egg farmers. Furthermore, they represent less than one-half of one per cent of Canada’s economy.

Because of supply management, there is a massive transfer of wealth from low and middle income Canadian families to these few farmers whose average net worth ranges from $2.5-million for dairy farms to almost $4-million for poultry/egg farms.

Moreover, Hall Findlay tells us that:

There are only 13 ridings in Canada with more than 300 dairy farms. And to put things into relative electoral perspective, these are ridings which have an average of 80,000 registered voters each. Eight of these are in Quebec, three of which (based on both the 2008 and 2011 elections) are held comfortably by Conservatives. Three are held by the NDP, two by the Bloc Quebecois, but in four of these, the Conservatives did not even come second, so the situation is
not likely to change one way or the other. The other five of this group of 13 are in Ontario, strongly held by Conservatives, each by over 10,000 votes in 2011.”

So there would be limited political fallout should the Tories decide to scrap this artificial system, or so one would think. But the Tories continue to argue in favour of retaining it—against all logic, even if it impedes trade negotiations that might be of benefit to other industries and even though it must stick in the craw of many free-market conservatives in the House.

The Tory stand confounds me and offends my sense of fairness. There must, I tell myself, be some clever strategy behind such a stubborn refusal to give low- and middle-income families a break by phasing out supply management. And perhaps there is.

Consider that in trade negotiations one must give something up to get something in return. By refusing so resolutely to keep our dairy and poultry business more or less closed to foreign competition, we have created an area for countries like the U.S., Australia and New Zealand to target. So are the Tories really holding out on supply management only to have it as a prize they will “reluctantly” give up when forced to do so in return for trade concessions not otherwise available to Canada?

I hope so. Other explanations aren’t very flattering to our Conservative champions of free-enterprise.


  1. Successive governments have opted for status quo on SM ( M Hall Findlay didn't do so well in the leadership race), there are a couple of possible reasons for this.
    As you suggest Canada needs to get substantial trade concessions before dismantling this program. It is disingenuous of the Americans to complain of our dairy sector. Historically they have erected elaborate direct and indirect subsidies on various crop production sectors which would dwarf anything Canada was capable of supporting.

    The Dairy SM system as introduced about 1972 actually performed as promised; it eliminated costly and inefficient support price and storage programs, for butterfat, and got the government out of direct subsidies for the sector. The cost is born indirectly by the consumer
    By contrast any dismantling scheme would immediately focus on a compensation plan for current quota holders, which would be very expensive and come directly from government revenues. M Hall Findlay is pretty vague on how compensation would work (can't link to study just the Macleans stories) but the current quota market value is $23B. The Conference Board recommends negotiating with holders on a book value of $3.6-4.7B.
    good luck with that! Her buy back total seems an absurdly low estimate of $5M; just recall initial Liberal estimates for the Gun Registry.
    Any government initiating an end to SM could face dramatically escalating costs, combined with irate consumers objecting to any compensation for "fat cat" dairy farmers.

    Consumer prices are notoriously sticky to dramatic declines in farm prices, recent evidence is supplied by supermarket beef prices during the the Mad Cow crisis.
    So dairy products, cheese and yogurt could be expected to decline as tariffs came off but probably not by the same percentage. Fluid milk being a very perishable product would continue to be supplied by local farmers and not greatly affected by imports. So prices would decline, but to expect fire sale rates for milk as reported in some US stores is simply unrealistic. No one is going to invest in herd, equipment, management and labour to sell milk at less than cost of production.
    I have no stake whatever in SM, by all means let's study a reasonable plan for ending it, including appropriate references to the NZ experience. I have not seen such a plan, including realistic buy back costs proposed by anyone yet.

  2. I suspect if an election were held last year the Tories might be more open to the fact. While your article that Martha Hall Findlay wrote is interesting, when you crunch the numbers you can see the reason. In Rural Ontario, Tory support can range from narrow wins in bad elections like the last provincial one or in 2004 federally to massive wins like 2011, but at least they always win thus even if they lose next election if they won 60% of the seats in Western Canada plus Rural Ontario it still gives them a strong base to comeback from. If they scrap supply management, it won't hurt them if they are well ahead in Ontario, but could hurt them if they are trailing thus costing them rural Ontario seats meaning it will be harder to launch a comeback. Also during campaigns, you only have so many resources and the Tories would like to put those into the 905 belt not have to defend Rural Ontario ridings. The other fact is if they want to get a majority, they can only afford to lose 18 seats. With them trailing massively in Atlantic Canada, likely to lose some urban Ontario seats, possibly some urban Prairie seats and BC being a wildcard, they need to find a place to win new seats to compensate for losses and Quebec is the only province the Tories can realistically gain seats. They won't win any in the Montreal area so that means Quebec City and rural Quebec will be their focus thus the other reason. So it really comes down to politics.

    Also the Liberals may say they support it, but I really see no reason they couldn't be in favour of scrapping it. The NDP obviously with their preference for an interventionist government and strong base in Quebec, I would expect to support no matter what. Besides we already have free trade in Mexico and United States while Japan is facing similar problems as they have a similar system for rice and much as dairy is a big export for New Zealand, rice is a big export for Vietnam. Nonetheless I believe we should put supply management on the table, but also not agree to scrap it without concessions in order to use our bargaining power. Likewise it should be phased out over 10 years and all tariffs for imports used to assist farmers displaced by it. That is what Australia and New Zealand did when they phased out supply management.