Let me set the scene for my movie – Captain Canada with his red and white cape is standing on a small island in the middle of the ocean. The island is surrounded by sharks whose fins are the flags of countries including the USA, New Zealand and China. In the ocean you can see shipwrecks flying the flags of countries like the UK, Germany and Ireland. Now picture Captain Canada’s tiny island shrinking so that when we fade out he is left with a tiny patch of beach in an endless sea of churning, white capped international trade. The name of my movie is “The Future of Supply Management” and, yes I have an overactive imagination as well as a flare for the dramatic.
In the mad rush to secure a new Asia-Pacific trade deal Canada’s supply management (SM) sectors are being put under the microscope. SM farmers are being portrayed as the privileged few standing in the way of a great bounty for the rest of the country. Rather than argue the merits of SM, which most readers will be as well versed in as I am, let’s take a minute and play out the not-impossible scenario where SM (dairy) gets traded off in order for Canada to be full member of the TPP. Let’s assume for this discussion that all of the other member countries hold up their end of whatever the final deal ends up looking like (this would be a first) and that there are, in fact, some real, international trade gains for Canada.
It has been suggested that dairy farmers themselves would benefit from deregulation. Gone would be the high costs of quota required to get into the industry as well as the barriers to growth, allowing farmers to rapidly expand their herds. Having traveled and worked in the US Northeast, I have seen first hand how hard it is for a young farmer to start milking cows. They either need to have family in the business or they work off farm, save up a few hundred thousand dollars and continue to work off farm, while milking cows in a rented facility. Sound familiar? One key difference I have seen is that without a predictable price for milk, banks are less willing to extend credit and as little as a few bad months can be enough to bury the eager, young entrepreneur, so it appears that young farmers don’ t really win. What about farmers ability to expand? As with most business models, there are generally economies of scale if your business is larger than your competitors. Therefore, one of the keys to non-SM success seems to be constant expansion so that you are always bigger than average. Unfortunately, everyone else will also be expanding, so your efficiency edge will likely disappear unless your follow the expansion cycle similar to the US where 5,000 cow farms are commonplace. So, unless that’s your goal, not really a win either.
The other place that farmers are supposed to hit the post SM jackpot is a big increase in exports, particularly to China. Currently, New Zealand has the largest share of this market and in order to produce milk in that country a farmer must purchase shares in Fonterra, the dominant dairy processor in that country. The number of shares a farmer buys dictates how much milk they can ship….. sound familiar. And what dairy products is China looking for? High value fluid milk or fresh dairy products Canada is known for? Not likely – China is in the market for bulk, powdered milk, which is, you guessed it, a low price commodity and the country that can produce it the cheapest will fill the demand. Not likely to be a country with Canadian winter.
Well, if farmers don’t win, then consumers must, right? If we can just do away with the evil dairy quota, retail prices for milk are bound to go down, right? Think again. Since deregulation in Australia, retail milk price increased from AUS $1.15 to $1.54/Land price paid to farmers dropped from $0.53 to $0.34/L. But maybe that’s just Australia – surely the US consumers, with their free dairy market pay less for milk – wrong again. Dairy products in the US vary from region to region, but in general, are very comparable to prices in Canada. Take into consideration that the US pumps about $4 billion per year into direct dairy subsidies, looks like Canadian consumers are getting a pretty good deal. The fact that Canada doesn’t subsidize dairy farmers goes largely overlooked. I wonder what Barrie McKenna would say if we get rid of quota and, instead institute direct subsidy payments. He’d probably be fine with that.
So if dismantling supply management isn’t a win for farmers and it isn’t a win for consumers, who does that leave? I’m willing to bet that Kraft, Parmalat and Saputo would not be unhappy to see the dairy market deregulated. They could, in fact, drive down the price paid to farmers, ship all of our high quality dairy products around the world and jack up retail prices due to a product shortage. Oh well, maybe we can fill the demand with New Zealand milk powder. Changes to SM are inevitable, that seems to be the direction we are going. Perhaps we should take the path down the hill rather than drive off the cliff….