Phasing out supply management in Canada is not that simple

In a previous post, I have highlighted that supply management will likely be phased out within the next 15 years, either because of trade agreements or because of internal tensions which could morph into fault lines. I have been quite critical of some of the arguments used by the proponents of supply management because they don’t pass the test of facts. I will be equally critical of some of the arguments of the adversaries of supply management.

Martha Hall Findlay and Jack Mintz recently published an opinion piece in the Globe and Mail in which they outline a possible scheme to phase out supply management in Canada. Their proposal is to transpose to Canada what was implemented in Australia following the deregulation of the dairy market in 2000, namely a temporary levy on fluid milk sale to finance a quota buyout to help dairy farmers transitioning to an open market. However, one key element seems to be missing there : geography matters to trade patterns.

The Australian domestic market for fluid milk is, well, quite insulated from any competition. Therefore, substitution by cheaper imports was not a threat to Australian dairy farmers on that specific market.

In the case of Canada, the situation will be very different. If a levy was imposed on any fluid milk sale in Canada while the market is totally open, the retailers would have many incentives to substitute Canadian milk by cheaper US milk. One fact to remember here: the US states neighbouring our border produced in 2014 about 5 times more milk than Canada in its entirety (Wisconsin alone produced more than Canada). The threat of substitution will be very real in the aftermath of a brutal end of supply management. Moreover, such substitution by retailers would happen very quickly, much faster than any adaptation at the farm level.

While operating costs are fairly similar on average between dairy farms in these US states and Canada, capital and labour costs are quite higher in Canada, partly due to unrealized economies of scale. Consequently, to have a chance to compete against US dairy farms, Canadian dairy farms must be given time to transition and realize their economies of scale.

In these conditions, I think that an Australian-style levy on fluid milk would have dire consequences on the Canadian dairy industry.

The current debate has been painting supply management as the last Canadian obstacle standing in the way of the TPP agreement. Obviously, this is not true as many other issues are contentious but too often perceptions are stronger than reality. In the meantime, the dairy industry contributes significantly to the Canadian economy. So, we could say that the stakes are high.

Unfortunately, the public debate is rather poorly informed and too many arguments – for or against supply management – are weak, resorting to wishful thinking, twisting facts. What is particularly missing is foresight. Fortunately, the federal government has a group dedicated to such exercise, Policy Horizons Canada. Perhaps, it could be mandated to lead a foresight study of Canadian supply-managed industries, allowing scenarios with and without supply management in different forms.

Questions about lower oil prices and farmland prices in Alberta. Should we be concerned ?

One of the recent issues of The Economist contains a very interesting special report on energy and technology that shows how advances in the fields of renewable energy production, of storage, distribution and marketing of such energy may challenge the place of oil in the global energy mix. Henceforth, it is not unlikely that oil prices may never come back to the level they were over the last decade while they will probably rebound a bit from their current level. Consequently, the changes in Alberta’s economy and socio-economic environment may not be benign and may last. This may lead to a drop in farmland prices, especially in Alberta and this for several reasons. The first reason is lower crop prices. The new energy environment will, in all likelihood, challenge the relevance of the production of bio-ethanol from corn in the US, or biodiesel in Europe. This could shift a bit the supply-and-demand equation of the corn and oilseed markets in favor of demand, resulting in a downward pressure on prices of crops. Even though lower oil prices would reduce the cost of some farming inputs, this may be insufficient to maintain operating margins at the level they were a few years back as they were driving the boom in farmland prices along with rock-bottom interest rates. The second set of reasons lies in the socio-demographic structure of farms in Alberta that I will summarize with a few key figures obtained from Statistics Canada :

  • About 60% of farms in Alberta have farming gross revenues of less than $100,000. In these farms, the average annual net farm operating income per operator is around $1,700 while their average annual off-farm income is above $55,000.
  • The average net farm income of the farms with less than $100,000 of gross revenues has decreased in nominal terms between 2001 and 2011.
  • 30% of all farms in Alberta are either qualifying as lifestyle farms or as pension farms.
  • 50% of farmers are 55 or older. The farms with only one operator who is older than 55 represent 32% of all farms. These latter farms are very exposed to dismantlement.

Hence I have some concern in the light of recent work I have done in Quebec. Indeed, in Quebec like in Alberta, the family income of farms with less than $100,000 of gross revenues come entirely from off-farm sources and a significant share of these farms are either lifestyle farms, or pension farms. These farms do not contribute much to the economy. Yet, in Quebec, they own almost 25% of farmland and this is why I have some concern about a drop in farmland prices in Alberta even though interest rates are still set to stay low for a little while. Questions remain for which I do not have answers as of now – and I would gladly look into them for any organization interested in finding out – as they are key to assess the risk of a drop in farmland prices because of lower oil prices :

  • To what extent the economy of the different categories of farms in Alberta is sensitive to the health of the oil industry ?
  • What is the relative importance of the categories of farms sensitive to lower oil prices ?
  • What is the share of farmland owned by these farms ?
  • What is the likelihood that exiting farming is the best course of action for them ?