Canada: It Really Is Time To Kick Canada's $2.6-Billion Dairy Habit

Canadian politicians of all stripes have been rallying behind supply management since ending it became the United States' price for renewing NAFTA. Maxime Bernier even lost his position on the Conservative front bench for describing supply management as a cartel.

Supply management is a cartel. Although lawful, it operates like any price-fixing scheme hatched in a smoky back room. What is more, it imposes costs on Canadian consumers that far exceed the costs of all other price fixing combined.

The basic principle behind supply management and price fixing is the same: a group of producers (in the case of supply management, a marketing board run by agricultural producers) sets the price at which all products must be sold.

Normally, agreements to raise prices above competitive levels reduce demand, leading to excess capacity and an incentive to "cheat." Price-fixing cartels deal with this by reducing output, allocating markets or customers and by punishing cheaters.

Supply-management cartels work much the same way: they restrict output using "quota" — a cap on how much product farmers can sell to a given marketing board. Any excess product must be also be sold to the marketing board, at fire-sale prices. And anyone who cheats by selling outside the supply-managed system is vigorously punished.

The only difference between supply management and price-fixing cartels is the web of laws that support the first and make the second a criminal offence

The only difference between supply management and price-fixing cartels is the web of federal and provincial laws that support the first and make the second a criminal offence.

In a 2012 decision, Federal Court Judge Paul Crampton described price-fixing cartels as "an assault on our open-market economy." Supply management may be lawful, but it is undoubtedly an equal assault on the market.

According to OECD calculations, Canada's "market price support" was an astounding $52 billion for supply-managed products from 2000 to 2017, or an average of just over $2.9 billion each year. Almost 90 per cent of this overcharge was paid for milk: $46 billion, or nearly $2.6 billion every year.

Canadians were justifiably outraged when Loblaw confessed in late 2017 to fixing the price of bread for 14 years. Class-action plaintiffs are claiming $2.5 billion in damages on behalf of consumers. The overcharge may be closer to $5 billion, but whichever number is correct (and assuming, of course, that the plaintiffs' allegations are proved) the cost of bread price fixing pales in comparison with the cost of milk price fixing.

In fact, the supply-management overcharge exceeds that of all unlawful price-fixing conspiracies between 2000 and 2017 — when courts imposed fines totaling $219 million and settlements in price-fixing class actions came to nearly $759 million. Given that we don't know precisely how these numbers correlate to actual overcharges or how much price fixing went undetected, the real cost of price fixing in this period could be as high as $30 billion — but that's still far less than the OECD's $52-billion estimate for Canada's "market price support" over those years.

Why does supply management cost Canadians so much more than unlawful price-fixing cartels? Put simply, milk products: the OECD data yields an average overcharge of 89 per cent for dairy from 2000 to 2017. By contrast, the Competition Bureau calculates fines for price fixing assuming a 10 per cent overcharge. (The allegations in the bread case suggest an overcharge in the 10- to 20-per-cent range. A recent retail gasoline cartel in rural Quebec overcharged only 2.3 to 3.4 per cent.)

Marketing boards and politicians tell us that these cartels are necessary to stabilize farm income, protect family farms and thus preserve rural Canada. Unfortunately, this isn't true.

When quota was first imposed, it was given away for free. Today quota is bought and sold. In Ontario, the price of dairy quota reached a high of $33,805 (per kilo of butterfat, but, roughly, per cow) before being capped and reduced to its current price of $24,000. In Alberta, where quota are traded freely, the price is more than $40,000.

The system that was meant to protect the family dairy farm has led to its withering away

The price of quota creates a huge entry barrier for young farmers who want to start the kind of family farm that supply management is supposed to protect. Buying quota for an average-size herd of 85 cattle costs about $2 million in Ontario and Quebec, and $3.5 million in Alberta. The cost of financing the purchase of quota makes entry unattractive, even at cartelized milk prices.

Capping quota prices hasn't helped, either. In Ontario, for example, our young dairy farmer would not be able buy enough quota for a viable dairy herd because the quota exchange market has dried up. Over the past two years, only 6.7 per cent of the demand for quota is being met by farmers willing to sell, according to data from Dairy Farmers of Ontario.

The impact should come as no surprise: the system that was meant to protect the family dairy farm has led to its withering away. In 1967, Canada had 174,139 dairy farms. By 2017, there were 10,951. These farms have larger herds than ever before, are worth on average $3.8 million (2015), and generate a healthy income ($153,611 in 2014).

Supply-management costs Canadian consumers billions of dollars a year to protect an ever-declining number of ever-wealthier producers. If the NAFTA negotiations fail because of supply management, and the U.S. imposes punitive tariffs on Canadian cars and other goods, the cost of supply management will be catastrophic. It's time to bust these cartels.

Originally published in Financial Post

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