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Now is our chance to scrap the milk tax once and for all

Opinion: Those concerned about poverty, inequality or middle class living standards should oppose Canada’s milk tax and take advantage of the opportunity presented by Trump.


 
Display of milk in a Quebec supermarket, April 17, 2013. (Mario Beauregard/CP)

Display of milk in a Quebec supermarket, April 17, 2013. (Mario Beauregard/CP)

In a recent Wisconsin speech, President Trump targeted Canada’s dairy sector and promised “fair trade” in a renegotiated NAFTA. If he follows through, Canadians should be thankful.

While we’re not to blame for financial difficulties of some U.S. farmers, as the President suggested, our agricultural sector is highly restrictive—especially in “supply managed” products like milk, poultry, and eggs. We limit production by requiring farmers hold scarce and costly licenses (called quotas), and levy tariffs approaching 300 per cent on imports from abroad.

The result is less competition, lower productivity, and higher prices. This not only harms consumers, especially low income ones, but transfers vast sums to typically wealthy farmers and needlessly endangers our international trading relationships. It shrinks the available market for productive producers on both sides of the border, and the President is right to call us out.

According to recent estimates from the OECD, the artificially high agricultural prices in Canada transfer $3.5 billion from consumers to producers annually — nearly $3 billion from milk alone. Spread over the 8 billion litres of annual production, it’s effectively a hidden milk tax of 37 cents per litre.

For producers, this is a big deal. At the end of 2015, there were just under 11,500 dairy farms in Canada. The $3 billion that supply management allows them to extract each year is equivalent to $260,000 per farm. Much of this is capitalized into the value of the quotas they are required to hold. One quota roughly corresponds to a single cow’s annual production, and in BC and Alberta they’re each currently worth roughly $40,000; in Ontario and Quebec, they go for $24,000. With nearly one million dairy cows in Canada, quotas are collectively worth tens of billions of dollars, an important cause of our country’s higher production costs.

This kind of system is highly regressive. The average dairy farmer had a net worth of more than $3.7 million in 2015, according to data from Statistics Canada, and poultry and eggs farmers were typically worth nearly $6 million. Meanwhile, low-income consumers face a heavy burden.

In recently published research, University of Manitoba economists Ryan Cardwell, Chad Lawley, and Di Xiang show that supply management costs the typical household the equivalent of $450 per year—and nearly $600 per year among households with children. For the poorest 20 per cent among us, that’s roughly 2.4 per cent of income; for the richest 20 per cent, it’s barely 0.5 per cent. Let that sink in. Those concerned about poverty, inequality, or living standards of the middle class (every politician’s favourite group) should oppose Canada’s milk tax.

To be sure, the system keeps some farms afloat. Dairy productivity in Canada is systematically lower than the United States, and open borders would be challenging. Here, the typical cow produces about 8,500 kg of milk per year. Compare this to a Wisconsin cow that produces well over 10,000, according to the USDA. This state produces more milk than all of Canada, is a key electoral battleground for President and the home of House Speaker Paul Ryan, so it’s little wonder that’s where the President made his comments.

Contrary to claims by some, growth hormone use among U.S. producers is not the only reason for their higher productivity. Washington, for example, is rbST-free yet maintains milk production of more than 10,800 kg per year per cow.

The reality is that Canada’s productivity is artificially and unnecessarily low. If we opened our borders and liberalized the sector, productive farmers would expand, unproductive ones would shrink, and others would adapt, innovate, and increase their productivity in the face of stiffer competition. Supply management also misallocates land, labour, and other farm resources away from non-supply managed crops and farmers where Canada has a clearer advantage.

What’s stopping reform? Politics, of course. It’s a classic dilemma where visible benefits are concentrated, while hidden costs are borne by millions. According to the latest Census of Agriculture, more than 80 per cent of Canada’s dairy farms are located in Ontario and Quebec and half are found in fewer than three dozen Census Divisions. The electoral calculus is clear.

Of course, there’s no need to reform overnight and hang farmers out to dry. A reasonable transition period and direct supports to farmers could surely be provided. For example, we could compensate farmers through a direct levy on milk consumption, but one that we would gradually phase-out. An explicit and temporary milk tax like this would be cheaper for consumers, and better for Canada’s economy, than the system we have now.

As the NAFTA talks unfold, let’s get serious. There are few defensible reasons for supply management to exist. So what might seem like a concession, isn’t. Putting dairy on the negotiating table is a big opportunity for us to finally tackle this issue. We should take it.

 

Trevor Tombe is an Assistant Professor of Economics at the University of Calgary, and a Research Fellow at the School of Public Policy.

 


 

Now is our chance to scrap the milk tax once and for all

  1. This is a well reasoned article. Thanks! Supply management for one sector is not fair and does not promote market pricing. And, yes, I can see where consumers lose out and are in fact taxed.

    • There is no other product like milk. It has to be produced at a constant rate and yet it can’t be stockpiled. What is the benefit of having fluctuating milk prices like they do in the US. The problem is that producers have to over leverage themselves expanding their production only to go bankrupt when the prices are too low. The only way to make money and stay afloat is to produce more leading to a constant state of over-production.
      The system in Canada transfers money from urban areas to keep rural areas going. Let’s not kid ourselves, that land is marginal land for agriculture and it will be left empty if it isn’t used for dairy farming. In Vermont and northern New York most of the dairy farms have gone under in the past 50 years. In south-eastern Quebec there are still hundreds of small dairies supporting small communities.

    • I cant agree about this article being well reasoned because it only provides reason for one side and provides facts that are exagerrated and untrue. supply management being to blame for middle and lower income households is ridiculous. if it costs a family $600 a year for milk which is breaks down to $11.50 a week, one should compare that to other costs of living such as car payment, mortgage, cell phone plan, electricity. Dairy products are comparable in price in Canada to the rest of the world and we all seem to forget that food is a necessity to human life, not gas or internet. the term “milk tax” is completely fabricated and there is no merit to its so called meaning. Milk is affordable here, and what you pay is actually what you pay, unlike in the States where dairy farmers are heavily subsidized which costs tax payers real money or “milk tax”.

    • I cant agree about this article being well reasoned because it only provides reason for one side and provides facts that are exagerrated and untrue. supply management being to blame for middle and lower income households is ridiculous. if it costs a family $600 a year for milk which is breaks down to $11.50 a week, one should compare that to other costs of living such as car payment, mortgage, cell phone plan, electricity. Dairy products are comparable in price in Canada to the rest of the world and we all seem to forget that food is a necessity to human life, not gas or internet. the term “milk tax” is completely fabricated and there is no merit to its so called meaning. Milk is affordable here, and what you pay is actually what you pay, unlike in the States where dairy farmers are heavily subsidized which costs tax payers real money or “milk tax”.

  2. American capitalist imperialism.  Trump says “we will not be taken
    advantage of”.  Yeah right.  Look how many American companies
    have taken over the Canadian retail landscape, forcing many
    Canadian companies into bankruptcy.  McDonald’s, Best Buy,
    Subway, Petsmart, Dennys, GM, Ford, Apple, Netflix, Amazon,
    Google….and the list goes on and on.  It is the Americans that have
    raped corporate profits from so many countries around the world. 

    • For every entity you listed – you have a choice of where your $$$ are spent.

      Don’t like it – don’t spend your $$$.

    • Supply Management in Canada isn’t really about America. Didn’t you read the article? By allowing it to continue we taxpayers are handcuffing competition in certain sectors so that only certain individuals in that sector can become rich at a big cost to the consumers, many of whom are impoverished. Who exactly is that benefitting? We know it isn’t a necessary thing because we don’t do it with all agricultural commodities. We don’t do with beef. Instead we demand that they be excellent and competitive in their own right as we do our other agricultural products that we export. If we are to be innovators, we need to stop feeling that we are inferior and therefore need protection. We don’t. What we need are superior safe food products, innovation, great logistics/supply management and excellent marketing. Why couldn’t Canada be known as a country that makes superior cheeses?

    • Those companies are all here because we let them. And, they thrive because we like them.

  3. If you are going to be so biased in your article here is the other side of the story for readers. Try being unbiased next time. https://www.dairyfarmers.ca/what-we-do/supply-management/why-supply-management-works-for-canadians.

    1. In the US consumers pay about the same as in Canada and they pay for it through their taxes as farm subsidies.
    2. Farms in the US are corporations and farms in Canada are small family farms. The average chicken farm size in the US is 1 million birds, the average in Canada is 20,000 birds.
    3. Animal rights abuses are rampant in US farming as corporations only focus on profits. Talk to any Canadian farmer and their first priority is the health and welfare of their animals.
    4. Pricing is stable in Canada where as in the US and the rest fo the world pricing fluctuates like gas at the pump.
    5. Supply management allows farmers in Canada to be given a fair farm price for their work and that allows them to innovate, invest in their animals without fear of bankruptcy.

  4. This article fails to mention the billions in subsidies that American dairy farmers receive.

    The author also seems to think a cow is simply a machine designed to produce milk, and farmers should just pump as much out per animal as possible, without any ethical considerations. These are living things,
    and should be treated as such.
    (I’ll admit I don’t know the specifics, but in this article the only thought put into why American cows produce more milk per animal than Canadian is rbST. Other things the author might care to research could be the animals diet, treatment, health, and quality of life. It would be easy to pump a cow full of non-rbST steroids, grain feed, leave the animal in a cage pumping out calves every 9 months for it’s 3 or 4 peak milk producing years, then kill it. But is it ethical?)

  5. Some dairy farmers are breeding cows to produce more milk without having to use hormones. The cows have udders so large they can’t walk. I don’t know if the practice is done in Canada.

    Dairy farmers have a large income? Interesting argument because we rarely hear from the ‘economists’ about large CEO salaries and bonuses being paid out after receiving handouts from the government.

    There used to be milk coupons given to low income households to help offset the costs. Not sure if the program still exists or not. Don’t even know if it was a regional program.

    Take a look at the history of the Mexican corn farmer pre and post NAFTA.

    Yes, we should take this opportunity Trump is offering us. NAFTA has been a “disaster” for all involved. The majority of people of my generation remember times pre NAFTA. There were bumps in the economy but people could still afford their children, food and a roof over their heads. Formal higher education was cheap and Canada had an overall excellent academic reputation.

    Shrinkage inflation, poor quality foods (dog food has better labelling) and the list goes on and on. This Canadian is tired of economists or so called experts telling us what’s good for us.

    You want Rand talk to the King. He used to be quite the expert unless he was buzzing.

  6. Getting rid of our supply management system is long overdue and would be a major cost reducer for Canadian consumers.

  7. Some Wisconsin farmers in a tv report really didn’t blame Canada for their troubles. The blamed their free for all boom and bust commodity market. Right now farmers there have been encouraged to produce a glut on the market. Prices are dropping and farms will go under.
    This is the result supply management tries to control. A stable market may result in slightly higher prices.
    Of course a totally free market operates on boom and bust cycles according to these Wisconsin farmers.
    On the bust cycle conglomerates can buy small farms at bargain prices and move toward monopoly.
    Then prices for those middle class consumers go back up, likely above supply management levels.
    Gasoline resembles milk in the market. A near monopoly controls prices, but with an undifferentiated commodity their are big swings and simultaneous jumps and drops which drives consumers crazy.
    Supply management is best for consumers and maintains a stable rural lifestyle and safety controls on the product.

  8. Just wanted to add…

    Has no one noticed the cost of beef? Cows have to eat something. You should try practising a middle class tactic….Talk to meat managers in food stores.

    Economists have to try to readjust their thinking to this brave new world. Free market utopia doesn’t and cannot exist. Too many unpredictable long and short term variables especially when it comes to commodities. Bay and Wall street, example, practice a form of ‘supply’ management. What do you think all those warehouse rentals/ownership are about?

    Choices are being eroded and we can’t complain about it. What can consumers do? Hang on to their pennies. That goes for consumption goods, social and regular media etc….

  9. Having read briefly Mr. Tombe’s macroeconomic theories that defy monopoly, multinational corporation control and lack of accountability to the greater good or nation based statistical modelling. At one point his correlation co-efficient was in the low 80% which was not good enough when I was in undergraduate studies. How does this now pass for an acceptable or plausible in light of obvious imbalance between trade within the market economies as they now exist. His theory also ignores the basic process of understanding who sets price for the consumer. His calculation of where price would fall to lacks some serious consideration for the power exacted by large food conglomerates. Labour efficiency is a rich person’s statistic; that does not include the full stomach of the labourer. Stop class warfare.

  10. Many Canadians have wanted Trump to succeed. Although we feel almost American,
    Canada is not the USA, so be careful what you wish for. Canada is collateral damage,
    with regard to Trump being tough on illegal immigration, as some of these immigrants
    are now walking across the northern border into Canada.

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