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Dairy Supply Management Costs Consumers And Farmers

System prevents efficient Canadian dairy producers from expanding into world markets

Ottawa, February 27, 2014 – Canada’s dairy supply management policy is costly to millions of Canadians — consumers pay higher prices for dairy products to support a small number of farms, and the most efficient farmers are limited to the small Canadian market, according to the first release of findings from The Conference Board of Canada analysis of supply management.

woman at dairy aisle"All Canadians have a stake in supply management," said Michael Bloom, Vice-President, Industry and Business Strategy. "Canadians — including those with lower incomes — pay about $276 per family more for dairy products than consumers in other countries."

"In addition, the policy effectively limits farmers' growth opportunities by focusing them on the slow-growing Canadian market. Canada's most efficient producers are already among the world’s best and there is every reason to believe that they can compete globally. In effect, supply management policy is limiting income and jobs for Canada."

The Conference Board report, Canada's Reforming Dairy Supply Management: The Case for Growth, argues that a win-win reform package needs to be accompanied by a new vision for industry growth. Since dairy consumption in Canada is stagnant, export markets are key to industry growth.

Supply management has existed in its current form for more than 40 years, but its origins date to the post-World War II period, when the Canadian dairy industry struggled with chronic excess capacity and low farm incomes. Supply management policy was designed to provide existing dairy farmers with a “fair” return and stabilize their incomes.

The current policy determines a target price for milk — based in large part on cost of production—and proceeds to restrict supply to generate that price, which is paid by food processors and by consumers. The Organisation for Economic Co-operation and Development calculates that “market price supports” cost Canadian dairy consumers an average of $2.6 billion per year in the decade to 2011, around $276 per family every year.

A contentious issue is whether this target milk price acts as a hidden tax on consumers. Although there is no fiscal cost to governments, if Canadian consumers pay more for dairy products than they would on the open market because of the regulatory system in place, then they have effectively been “taxed” to underwrite dairy farmers’ business risk.

Supply management has also effectively limited Canada's most efficient producers to operating in relatively small and slow-growing domestic markets. Canada is largely shut out of the fast-growing international markets for dairy products for a couple of reasons. First, a large portion of the investment in the industry is tied up in production quotas rather than productive assets. In addition, Canada's dairy exports are limited because the World Trade Organization considers supply management policy to be a form of subsidy.

The next release from this research, scheduled for Monday, March 3, will outline the opportunities for growth in the dairy industry.

The full report with recommended reforms will be published Thursday, March 6.

This report is one of 20 being produced by the Centre for Food in Canada. Since 2010, the Centre has been engaging stakeholders from business, government, academia, associations, and communities in creating a Canadian Food Strategy —one that will meet the country’s need for a coordinated, long-term strategy on industry prosperity, healthy and safe food, household food security, and environmental sustainability.

The strategy will be launched at the 3rd Canadian Food Summit 2014: From Strategy to Action, March 18-19 at the Metro Toronto Convention Centre.

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