Why your milk costs so much and what to do about it

It’s time to put Canada’s most sacred cow, supply management, out to pasture

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In a three-part series Martha Hall Findlay, executive fellow at the University of Calgary’s School of Public Policy and a former Liberal MP, has argued that Canada’s system of supply management for dairy farmers should be dismantled. This is part 1.

Part 2: Why the dairy industry’s defence of supply management is so flawed

Part 3: How to scrap supply management—a lesson from down under

A rebuttal: Critics of supply management are milking the argument

There is a lot more to Canada’s dairy farms than the idyllic settings portrayed in the TV ads with the dancing cows. Dairy, poultry and egg farming, alone among all of Canada’s food production, is governed by supply management, an archaic, decades-old—and very costly—controlled-market system. We continue to artificially support this small group, barely six per cent of all Canadian farmers, by fixing prices, imposing extremely high tariffs to keep those prices high, and controlling production. This system, Canada’s very own regulated cartel, costs virtually every Canadian, sometimes in multiple ways—yet very few know anything about it, what it costs them, or why they’re paying so dearly for it. [For a full report, see “Supply Management: Problems, Politics – and Possibilities”.]

  • It hurts consumers. The average family pays over $300 a year more than they should for basic nutrition. Worse, it’s regressive, hurting the most vulnerable the hardest—low-income single parent families with small children, those who need access to affordable nutrition the most.
  • It hurts Canadian manufacturers and other exporters because Canada’s insistence on protecting supply management puts Canada at a disadvantage in every trade negotiation, hindering access to international markets. Even in those trade deals that Canada has been able to sign, we have had to give up far too much at the negotiating table.
  • We lose Canadian food processing jobs, because the food processors (the butter, cheese and yogourt makers) who sell internationally, locate their plants (and their jobs) outside of Canada because our milk is too expensive.
  • And for those who like the idea of helping Canadian farmers, supply management actually hurts the majority of them–the 94 per cent who are not supply managed—because by far the majority of Canada’s farmers produce beef, pork, grains, oilseeds and pulses—all products that Canada could sell more of to the rapidly-growing Asian markets, if only we stopped harming our trade options by insisting on protecting supply management for a tiny minority.

Ironically, and perhaps most frustratingly, it hurts many of the dairy farmers themselves—certainly the most efficient ones, as highlighted in “Reforming Dairy Supply Management: The Case for Growth”, a new report by the Conference Board of Canada. Roughly 25 per cent of Canada’s dairy farmers produce half of Canada’s milk. These more efficient, growth-oriented farmers could be reaping significant profit from exporting to international markets, particularly the rapidly-growing Asian markets. Unfortunately it is they who are denying themselves these extraordinary growth and profit opportunities. The report also analyzes how the better farmers are subsidizing the less-productive ones, and how the whole system costs several hundred million dollars a year in debt servicing costs, capital that could be better used to fund tangible and productive assets. In another ironic twist, dairy farmers are also losing sales to less-expensive (and less-nutritious) dairy substitutes such as butteroil/sugar blends (49 per cent milk fat, 51 per cent sugar). These products circumvent import tariffs and are brought into Canada by processors of ice cream and other products. The loss to farmers is estimated at more than $70 million per year.

How does supply management work?

The system is determined by supply, not demand. It is based on three pillars: fixed prices, tariffs, and quotas. The price for milk paid to the producers is based not on the market but on the costs of production (as determined by the producers themselves). High protective tariffs prevent competition from outside, and production is controlled through a regulated quota system.

Price Setting: Milk prices (for consumers as well as processors of butter, cheese, yogurt, and ice cream) are set by the dairy farmers themselves—based on cost of production plus what they determine is the appropriate profit.

Tariffs: To maintain these high domestic price levels, the federal government limits competition from other countries. For all imports (other than a small exempt amount) the tariffs range from 168 percent for eggs, 238 percent for chicken, 246 percent for cheese, to almost 300 percent for butter.

Quotas: This guaranteed price makes for a no-lose, very profitable, and thus attractive enterprise. To prevent overproduction, the government established a quota system that, in 1971, was based on each farmer’s existing production and is now transferable. Quota is currently worth about $30,000 per cow—over $2 million per average farm.

But times have changed

Over the last 40 years the number of dairy producers has dropped a staggering 91 percent, from about 145,000 in 1971 to barely more than 12,000. There are fewer than 3,000 poultry farmers and fewer than 1,000 egg farmers. And the idea of consumers supporting hard-pressed farmers may have been a laudable goal decades ago, but it no longer applies: In 2010, the average dairy farm’s net worth was well more than $2.5 million; the average poultry/egg farm’s net worth was almost $4 million—far more than all other Canadian farmers, and far, far more than the average Canadian family. Yet governments in Canada continue to protect this small segment—less than one-half of one per cent of Canada’s economy—even though the system significantly, and adversely, affects much larger parts of the economy.

So why do we still have it?

Many politicians acknowledge, privately, that supply management should go, but they are loth to do anything because they feel that “they just don’t have the votes.” The well-funded dairy lobby spends a great deal of money (an estimated $80 to $100 million each year—ironically paid for by the higher prices consumers pay), persuading federal and provincial politicians that supply management “protects the family farm,” “ensures food security” and that, because these farmers are so numerous, doing anything to upset them would be political suicide.

These are complete fallacies. There has been more consolidation in dairy, poultry and eggs than in almost every other agricultural sector—even with supply management. So much for “protecting the family farm.” And food security is protected by regulation of what we allow as ingredients in both what we produce and what we import, which we do for all of our other food—not through cartel economics. Arguably we should be doing even more in terms of food security, but for all—it has nothing to do with supply management. And for the politicians: as shown, the number of farms (and therefore voting influence) has dropped dramatically. Something clearly should be done. The big question now is how.

 

For more on why the industry’s defence of supply management doesn’t stand up to scrutiny, and how to dismantle the system in a way that is beneficial to all involved, visit www.macleans.ca/tag/supply-management/ over the following week for more from Martha Hall Findlay.

UPDATE: See part 2 here and part 3 here

 




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Why your milk costs so much and what to do about it

  1. Canadians have been led to believe that the system regulates the quality of the product, not the supply.

    So if we dump the system, we will have American and/or contaminated milk, eggs etc here. They see the extra money as ‘worth it’

    • Corret. Consumer have been misled. Food safety regulations are quite apart from the supply management systems. However, said marketing boards spend large amounts of money each year convincing us that maintaining the status quo is vital to our safety and well-being. Getting rid of dairy boards, for example, does not mean the approval of hormones to improve dairy production, which is legal in the US, not legal here. But supply management defenders are quick to shout “HORMONES!” when it serves their purpose.

      • Each member of the controlled supply management monopoly has personal direct financial interest in maintaining the quality of the product produced by the group. You can’t hide. Great way to produce high quality food at good prices.
        Of course you can choose to sacrifice a culture and way of life to shave a few cents off the price of a litre of milk.
        Pass me some more of that great Tyler chicken from Arkansas.

        • A nice romanticized version of supply management if there ever was one. It’s not a culture, it’s a cartel, and it results in obscene economic rents for those who own the quotas.

  2. Prosperous Ontario families. We’ll regulated and inspected production, collection, processing, and distribution.
    Cleanliness.
    Animals respected.
    A former Lib, now apparently some kind of right wing American Republican.
    Findlay you should like Tim Hudak’s plans for labour and wages.

    • Hall-Findley is still a LPC member, just no longer an MP. I don’t think her position on supply management is too out of step with the LPC in general. The only reason this system persist is the fact that the dairy farmers are a powerful lobby. The CPC are natural enemies of this policy, but they are beholden to rural farmers more than they oppose centrally planned markets.

    • “Animals respected.” Was that a joke? I toured a Quebec dairy farm two years ago. The cows each had their tails amputated. I naively asked how they kept the flies off them when they were out in the pasture in summer. I was told, “they’re kept indoors year round.” They remain in their stalls 24/7 throughout their useful lives.

      I grew up next door to my my great uncle’s egg farm in Manitoba, and used to work for him. We would cram chickens 3 to a cage, and keep the lights on 24 hours a day to fool them into laying more. Supply management did little for those chickens. (See the movie Napoleon Dynomite to see what a standard egg operation looks like. That one was in Idaho, but Canadian barns are no different.)

      That’s 3 posts of yours on this topic that I’ve seen, and all 3 of them either blissfully naive or outright untruthful. You should really stop.

      I am not proposing that an end to supply management will increase animal welfare. What I am proposing is that it is entirely inconsequential to animal welfare. That will depend on regulations and costumer demand, not supply management.

      • We all know pork producers have a terrible record. I’m talking about Ontario Milk Producers, and rural Ontario. I’m not hearing much on the benefits to rural society and stability as a whole of paying a bit more for milk. I don’t need any lectures from you on the value of supply management to society as a whole.

        • I was talking about Quebec dairy farmers, not hog farmers, and they operate on the same principals, and under an identical supply management marketing system, as the Ontario dairy farmers. And you’re right, I don’t need to lecture you, I consider it a public service to correct misinformation when I see it. I don’t expect to convince you of anything, but I’ll do what I can to make sure others aren’t taken by supply-management propaganda.

          Compared to dairy operations, hog farming is another level of abysmal animal cruelty altogether, but no worse than a modern supply-managed egg or poultry production operation. (By the way, if you try to raise a flock of chickens humanely and sell the eggs or the meat, the marketing board thugs will actually come and count your chickens and shut you down if you dare to have more than 100 birds. And they have the power to do so under provincial supply management legislation. That is the system you’re defending. So much for the “way of life” or “rural culture” defense.

          • As I have said I’m talking about Ontario dairy.
            This issue has nothing to do with economics or the price of milk. It’s about what kind of society do you want live in.
            We can Walmart our food production system if you want. You can Bangladesh it. You can Kevin O’Leary it.
            You and Findlay and your pal Hudak will not leave us with Canada we once knew. But you knew that.

  3. Supply management has also created a Gordian knot of another sort. Under the quota system, a dairy operation can have land, buildings, and equipment worth around $500K, but centered on a herd that’s worth $2 or $3 million in quota. A $1500 cow can be worth ten times that in quota value. Thus, a 3/4 million dollar operation can be, on paper via quota, worth $3 million.
    A sudden deregulation of such a market, while desirable, would be financially ruinous to many or most such dairy farmers. Millions of dollars in equity would simply disappear, and the ripple effect would be tremendous.
    We have the same situation in the taxi business. A guy with a fleet of 15 or 20 ratty old Caprices or Crown Vics, can be sitting on a business worth hundreds of thousands of dollars, based on the actual market value of a taxi license. Open up the licensing of taxis, which desperately needs to be done in most Canadian cities, and you face the possibility of wiping those guys out.
    This is why governments need to think a lot more than twice about regulating markets and creating artificial barriers to entry. With each passing day, the cost of deregulating a market that is financially ruinous to those whom the market is intended to serve, becomes more financially ruinous to those who serve said market.

    • Martha, What you fail to point out that the Milk Price in Canada is not the most expensive in the world, It is actually quite a bargain. And yes you cannot compare the loss leaders at the border states. Bill, a Dairy farm worth 500K will not have 3 million in Quota, get your facts straight.
      The dairy farmers and in fact all farmers work extremely hard for what they do. Provide you food to eat, If it is so easy do to, then why are we all doing it instead of 2 % of the population?

      • It only TAKES 2% of the population to farm….in fact it takes less, but we’re very slow to upgrade so we have far more people than we need.

      • It’s an accurate generalization. In my sales territory there are dairy farms that only own 1/4 section of land ($200K), and a $3-400,000 milking parlor for 150 cows. Dairy quota is worth about $15K/head, which puts us at the $2-3 million range. I am aware that a milking parlor that cost $300K back in 1997, but is still a perfectly serviceable operation would likely cost $750K today.
        The point is that getting out of these supply management situations is potentially ruinous to many operators, and that is one thing that needs to be dealt with. I don’t support supply management, but this is something we can’t leave out of the discussion.
        let’s take that hypothetical farmer like above. He has a viable operation, but his $1.2 million operating line is backstopped by the $2 million market value of his cattle. (150 head of beef cows are only worth $150-200K, by comparison) Many dairy farms are operated on the basis that they will be sold outright at a certain point in the operators life, with the quota being the bulk of the value. For example, if a 62 year old dairy farmer is looking at replacing a 30 year old barn to the tune of $750K, he will often cash out the land and cattle, to a new operator, or keep the land and just sell the cattle and quota. Other than modest savings, the quota is the farmer’s RRSP. Without some form of scaled change to our quota system, many of these people will simply be wiped out.
        Again, this is what happens when government gets involved. Nobody wins, everybody loses.

  4. Whoa! Milk is not basic nutrition. Its unhealthy for humans, it is designed for baby cows. Get milk out of your diets and avoid poor life quality in old age, if you are lucky to live long enough. Animal products increase chances of diabetes, heart disease and cancer. Milk is just marketing. Dump dairy, dump dairy investments and ask your government to stop subisidizing disease and cruelty. Milk is just more corporate profits.

    • sure, and see how long a newborn (human)baby survives, unwilingly forced to go pure “Vegan”.?
      I’m sorry, …what? -U just realized that now ?
      oh, ok.
      … mmm, talk about cruelty?.

    • Apply that folktale illogic to every food item on your table.

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