2. October 10, 2013
About Me:
Assistant Prof. in the Business,
Economics and Public Policy Group at
Ivey Business School / Western
University.
Areas: International Trade, Business
Strategy and Political Risk.
3. 1. What problems did Supply
Management set out to fix?
October 10, 2013
Mike P. Moffatt
4. October 10, 2013
1965 report by the Canadian Dairy
Advisory Committee identified a
number of issues in the dairy market.
5. October 10, 2013
PROBLEM 1: The 1960s saw low and
fluctuating prices paid to dairy and
(poultry) farmers that often fell below
their marginal costs.
ISSUE: Farm livelihoods + how do you
“shutdown” when this happens?
7. October 10, 2013
PROBLEM 2: Regulatory costs placed
on farmers.
While prices going down, costs going
up, making problem 1 worse.
8. October 10, 2013
PROBLEM 3: Difference in negotiating
power between processors and farmers.
Roughly 145,000 dairy farmers in
Canada in 1971 vs. handful of
processors.
9. October 10, 2013
A system was desired to deal with these
issues.
The cornerstone of Supply Management, the
National Milk Marketing Plan was
founded in 1970, with Quebec, Ontario and
the Fed Gov as founding members. By 1974
all provinces except Newfoundland
members.
10. 2. What is supply management?
October 10, 2013
Mike P. Moffatt
11. October 10, 2013
Supply Management has three pillars,
with the final two pillars needed to
correct obvious unintended
consequences from the first.
12. October 10, 2013
Pillar I: Wholesale price targets set by
the Dairy Commission.
The Dairy Commission sets target prices for
milk, with those target prices differing
depending on the end use of milk (table milk
vs. butter, etc.)
Price set to ensure a “reasonable” rate of
return for farmers.
13. October 10, 2013
Pillar I: Wholesale price targets set by
the Dairy Commission.
OBVIOUS UNINTENDED
CONSEQUENCE: Since farmers have
practically guaranteed profits, this provides
incentives for increased production (from
either existing farmers or new entrants).
14. October 10, 2013
Pillar II: Supply regulated through
National Milk Marketing Plan.
To ensure an “excess” supply does not drive
down prices, production regulated through a
quota system. Illegal to produce without
quota.
Initial quota issued to farmers in 1970s.
15. October 10, 2013
Pillar II: Supply regulated through
National Milk Marketing Plan.
If a farmer wishes to obtain more quota (or
enter the market), quota must be purchased
either through new issuance (which is quite
limited) or through purchasing from an
existing farmer.
16. October 10, 2013
Pillar II: Supply regulated through
National Milk Marketing Plan.
OBVIOUS UNINTENDED
CONSEQUENCE: Limited supply and high
prices invite foreign competition through
imports.
17. October 10, 2013
Pillar III: Tariffs.
Initially imports almost entirely restricted
into Canada, but this difficult to do under
WTO rules.
18. October 10, 2013
Pillar III: Tariffs.
This replaced with an “access commitment”
rule, where a set amount of foreign dairy
products are allowed to enter Canada with a
small tariff, for those who hold an import
quota (only 95 importers in Canada hold this
quota).
19. October 10, 2013
Pillar III: Tariffs.
Anything above this amount (or for non-
import quota holders) faces a tariff between
200-300%, depending on the type of dairy
product.
Cheese tariff = 245%. Import $1000 of
Gouda from the Netherlands, pay $2450 in
taxes on top. (Total $3450).
20. 3. State of the Industry and
Consumer Prices
October 10, 2013
Mike P. Moffatt
21. October 10, 2013
Consumer Prices
Since the introduction of Supply
Management, retail dairy prices have risen
faster than the rate of inflation in Canada,
while they have risen slower than the rate of
inflation in the US.
OECD estimates retail milk prices in Canada
as much as double the world price.
24. October 10, 2013
Consumer Prices
The average family pays (an estimated)
$200+ more per year for dairy products a
year thanks to the higher than world prices.
A regressive tax – disproportionately
impacts the poor.
Reduced selection of products.
26. October 10, 2013
Price of Quota
Quota prices have increased substantially,
averaging roughly $25,000-$30,000 per
cow – a doubling of over 10 years.
An average herd is roughly 60-70 cows,
making a farm quota worth nearly $2m.
Total quota value in Canada $25-30
BILLION.
27. October 10, 2013
Price of Quota
This presents a significant barrier to entry,
as well as a significant windfall to quota
holders.
Large consolidation in industry, as smaller
farmers found it more profitable to simply
sell quota and live off of capital gains. Just
over 10,000 dairy farmers left in Canada.
28. October 10, 2013
Dairy Exports
Relatively small, since Canadian exporters
“priced out” of world markets due to higher
prices.
29. 4. “Logic of Collective Action”
and lack of reform
October 10, 2013
Mike P. Moffatt
30. October 10, 2013
If the regulation worked properly…
Given very high retail prices and what
should be happening is that quotas be
significantly increased to ensure prices stay
at “reasonable” levels, ensuring consumers
not gouged but farmers earn a decent rate of
return.
31. October 10, 2013
REGULATORY CAPTURE
Problem is – who sets dairy prices and
supply? An agency primarily made up of the
industry itself!
They have little incentive to keep prices low
and much incentive to keep quota prices
high, as in many cases this is the most
valuable asset they own.
32. October 10, 2013
QUOTA VALUES
Farmers sitting on an asset worth, on
average, $2M per farmer. Furthermore,
many have used this as loan collateral, so
institutions such as Farm Credit Canada
(FCC) have incentive to keep prices high.
33. October 10, 2013
But don’t consumers have incentive to
keep prices low?
Not particularly – only worth $200 to the
average family. No financial incentive to
lobby government, donate to consumer
causes, etc.
34. October 10, 2013
LOGIC OF COLLECTIVE ACTION
Large dispersed groups are at a public
policy disadvantage relative to smaller
groups with concentrated interests.
41. 5. A possible way out
October 10, 2013
Mike P. Moffatt
42. October 10, 2013
The Australian Solution
Australia found itself in a similar
situation to Canada, with a supply
management system in dairy keeping
prices high and restricting trade (most
notably with New Zealand).
43. October 10, 2013
The Australian Solution
Australia opened up the market but
charged a temporary 11 cent a litre tax
on fluid milk prices, which was phased
out over a decade.
Funds went to a transition package.
Worth nearly $2B.
44. October 10, 2013
The Australian Solution
Due to the inefficiency of the existing
Australian system, retail prices for milk
fell between 18-29% inclusive of the
new tax.
Savings to consumers over $100M/yr.
45. October 10, 2013
The Australian Solution
Overall dairy production increased slightly,
outside of the 2002-2004 drought.
However, this was a period of significant
change, with some producers expanding and
modernizing, but others leaving the
industry.
46. 6. What about the issues from the
1960s?
October 10, 2013
Mike P. Moffatt
47. October 10, 2013
Issues from the 1960s
If Supply Management were eliminated
tomorrow (say through an Australian
type system), we still need to consider
how to deal with the issues from the
1960s, which (arguably) have not
disappeared entirely.
48. October 10, 2013
PROBLEM 1: Low and fluctuating
prices paid to dairy and (poultry)
farmers that often fell below their
marginal costs.
SOLUTION: Financial markets and
long-term contracts.
49. October 10, 2013
PROBLEM 2: Regulatory costs placed
on farmers.
SOLUTION: Should be reflected in
market prices. Problem if those costs
not faced by foreign producers.
50. October 10, 2013
POSSIBLE SOLUTION: Tariffs set
proportional to regulatory cost
differentials. HOWEVER, this runs to
the Industry Capture problems of the
existing system.
51. October 10, 2013
PROBLEM 3: Difference in negotiating
power between processors and farmers.
SOLUTION: Less of a problem now
farms are much larger. Competition
Bureau needs to ensure processor
market stays competitive, stomp out
any signs of collusive activity.
52. 7. Lessons for Policy Makers
October 10, 2013
Mike P. Moffatt
53. October 10, 2013
LESSON 1: Regulations invite
unintended consequences, which
become more significant over time, as
markets tend to evolve faster than
regulation.
54. October 10, 2013
LESSON 2: Any regulation or agency
designed to “balance” consumer and
industry needs will almost always
enrich producers at the expense of
consumers thanks to Industry Capture.
55. October 10, 2013
LESSON 3: Problems of Industry
Capture and regulatory inertia difficult
to reform thanks to the Logic of
Collective Action.
