Most Canadians drink milk. Most of us, however, are unaware of the elaborate machinations involved in getting that glass of milk on our tables.
I am not talking about milking cows, which is surely hard work. What I am referring to is the almost forty-year government policy of “dairy supply management”. In essence, the system limits milk production and keeps dairy imports out, in order to provide producers with higher milk prices.
Canadians cannot be faulted for not understanding this system. It is mind-bogglingly complex. We must become more aware of it, however. Why? Because, whether we eat pizza in a restaurant, or are trying to sell cheese, grains, or even engineering services in global markets, it affects us all. A just-released Conference Board report breaks down the system’s complexity.
Essentially, the economics work like this. By limiting domestic milk production and keeping most imports out, producer interests can set high dairy prices. Dairy officials then limit milk production to demand at those ‘policy’ prices. They set a national production quota. And farmers must own shares of that quota to be able to sell milk. Quotas values are astronomical, reflecting high and consistently increasing producer milk prices. Last year, it cost at least $28,000 for the right to produce the milk of roughly one cow. That works out to 20 times the cost of the cow itself.
What about cheaper imports that undercut domestic production and prices? Ottawa has rules to keep them out. For example, only one teaspoon of yogurt per person is allowed in; the rest is subject to a 238% tariff.
The system has been largely successful at boosting dairy producer incomes, one of its original aims. It earns producers very high and stable profits, far above their peers on average. These high profits and quota values explain why dairy producers have lobbied vigorously to maintain the status quo.
It is easy to see why those producers that plan to retire in the short-term and cash out their quotas have a stake in the status quo. But what about those that expect to continue in dairy farming over the next 20 years? Or those that want to pass the farm (and any quota-related debt) on to their children?
These producers would seem to benefit from the system’s constant high prices to justify high quota costs. But the system faces intensifying pressures. These include new types of dairy imports that have found ways to circumvent tariffs, continued declining Canadian milk consumption per capita, and increased use of non-dairy substitutes by processors and consumers. These pressures make it difficult and more complicated to sustain high milk producer prices without having to limit production more and more each year.
The system has also created disincentives to innovate or be more efficient. For one, high quota values make it difficult for farmers to reach the most efficient herd sizes. For another, dairy prices are based primarily on covering farmers’ production costs. This weakens incentives to innovate to control costs or to respond to changing demand.
The WTO has reacted to the current system by restricting Canadian dairy exports. When combined with the factors above, this means that milk producers cannot seize expanding global opportunities. For example, as China and India’s growing middle classes consume more dairy products, Canadian dairy farmers will be unable to capitalize. And Canada’s dairy prices are simply not competitive in global markets. Even if farmers are willing to give up these opportunities today, eventually Canada will have to—at least partly—open up its dairy markets. The system fails to prepare them for this.
High milk policy prices also come at the expense of opportunities for all other Canadians. Buyers of dairy products – processors, restaurants, retailers, and consumers – effectively subsidize dairy producers. The OECD estimates the subsidy at $175,000 per dairy farm. Processors that use milk or butter as inputs pay double or triple their competitors in peer countries. This renders them uncompetitive in global markets.
Restaurants that serve pizzas must buy “white gold” -- or mozzarella cheese – that is made from milk that costs cheese processors at least two times more than the same raw milk used to make other dairy products (an example of one of the system’s idiosyncracies). Canadian consumers consistently pay more for a one-litre carton of milk (60 cents more this year) and a 454 gram package of butter ($1.50 more this year) than they do in Australia, which has a free dairy market. And those that wish to enter dairy farming have a hard time doing so due to the prohibitive quota costs.
Perhaps most importantly, Canada is giving up broad trade opportunities to defend domestic supply management. Ottawa’s ability to expand markets for more outward-oriented agricultural products, such as grains and meat, as well as for other goods and services, has been severely compromised in bilateral, regional and multilateral negotiations. At multilateral trade talks, Canada has been pushed out of the circle of influence it once occupied.
Under pressure from dairy farmers, Ottawa is publicly insisting that dairy is not up for negotiation in the just-launched Canada-EU talks. But the Europeans insisted on everything being up for negotiation—including access to Canadian dairy markets—as a precondition for talks, and Ottawa had agreed.
Canadian dairy farming represents less than half of one per cent of Canada’s economy. The EU represents a market of over $18 trillion, or more than 10 times Canada’s GDP. If Ottawa is unable to negotiate better access to that huge market in order to protect the status quo dairy system, that will be a real opportunity lost for all Canadians—and perhaps ultimately for forward-looking dairy farmers too.