Tag Archives: supply management

Supply management : nobody is getting the facts right. Here are some examples.

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Apparently, neither proponents nor opponents of supply management are able to present their figures in an unbiased rigorous fashion.

Consolidation of dairy farms has been faster in Australia than in Canada. Well, it depends on the period you want to consider. For instance, between 1970 and 2014, consolidation has been faster in Canada. Over this period, the number of Canadian dairy farms decreased by 78%, 71% in Australia. For the period 2008-2014, the rate slowed significantly in Australia to 16% (8% in Canada). Production wise, between 1970 and 2013, Australia experienced a 23% increase while production in Canada barely grew (+1%). Between 2008 and 2013, production grew by 3% in both countries. However, there is one common dynamic: the five to ten-year period following a significant policy change (introduction of supply management in 1970 in Canada, deregulation in 2000 in Australia) saw a rapid consolidation and a drop in production in both countries, which is to be expected as farms have to adapt to a new environment and delayed changes are accelerated. Besides, it is interesting to see that nobody talks about the extreme drought experienced by many Australia regions between 1995 and 2009 (especially between 1995 and 2003) and how it has affected dairy farms, most likely magnifying the effects of deregulation. Similarly, since the introduction of a price cap on quota in 2007, quota markets in Canada are feeble and the recent consolidation rate in Canada has been slowed somehow artificially.

I also find a bit misleading the comparison of milk retail price used by Dairy Farmers of Canada, especially in the case of France, a country I know very well. Unlike Canada, most of the consumption of fluid milk in France is made of UHT ½-skimmed milk (about 70% of fluid milk retail market). The average price per liter of UHT ½ skimmed milk in France was 1.15 CAD according to official statistics, not 1.81 (the price of fresh whole milk). I have not checked yet any such discrepancies for the other countries used in the comparison. Any relevant comparison of milk price must account for the differences between milk consumption patterns.

Talking about price, I took a look at egg prices in Canada, at the farm gate and on the retail shelf. It was very instructive. First, farm gate prices in Canada are in line with wholesale price in the US. This means that Canadian egg producers could be competitive on the North-American market, especially considering the strength of biosafety protocols in Canada. However, the most interesting thing is the differential between farm gate and retail prices which has been growing for a decade or so (see figure below).

egg data

Regarding economic contribution of the dairy industry, the proponents of supply management tend to forget to outline that about a third of contributed jobs and GDP, half of fiscal revenues come from the induced effect, which is the most tenuous one and is widely debated in economists’ circles as to its relevance. Besides, they do not highlight how Saputo and Agropur are the cornerstones of the industry nor do they show what would be lost in phasing out supply management (perhaps they want us to believe that all would be lost).

We could fight over these figures forever and forget what the real issues are.

The real issues for the dairy industry are that strengthening forces are weakening the three pillars of supply management: import control, production discipline and price fixing. I have discussed them in a previous post. Like any public policy, supply management has an expiry date, and my guess is that it is before 2030. By then, supply management could well be about 6,000 dairy farms, a handful of dairy processors, and a few retailers fighting over a dormant market, triggering at some point a major crisis originating in a spat between Ontario and Quebec. The dairy industry itself will ask for dismantling supply management, but it may well have lost any political goodwill – the fourth pillar of supply management – to fund the transition by that time.

Some people should really think honestly about the two following questions: how long can we expect to make supply management work in the interest of most of its stakeholders? Are we sure we can get enough political support for massive assistance funding when time comes?  Right now, there is an apparent consensus on the fact that phasing out supply management requires financial assistance for dairy farmers and processors. The industry should take advantage of that to develop a vision and a strategy, and start investing in its future.

Phasing out supply management in Canada is not that simple

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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.

The phasing-out of supply management in Canada will be initiated before 2030, regardless of TPP.

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The current debate about the TPP negotiations and their consequences for the future of supply management in Canada is not about the merits and benefits of supply management themselves. It is about Canada’s bargaining power in negotiations it has been invited to and to which it may not be an essential party. As of now, it seems that Canada has a rather weak hand and will have to commit to open its dairy market somehow or risk being sidelined. I’m not privy to the negotiations and my opinion has been forged on what has been publicly disclosed.

Supply management has undeniably served the Canadian dairy industry very well, allowing among other thing dairy farmers to increase their income and wealth over the years and two dairy processors (Saputo and Agropur) to develop into major global players. Over the period 1998-2014, the number of dairy farms has been almost halved. Production has increased only by 4%, following a sleepy growth in consumption of dairy products driven by demographics and changes in food consumption pattern. Today, the three largest dairy processors control about 80% of the market. The Canadian dairy industry could be said to be relatively mature. However, even if supply management survives the current TPP negotiations, its future is uncertain as adverse forces are gathering strength, threatening the three pillars of supply management (import control, producer pricing and production discipline) from within.

The strongest force is the weakness of growth potential in the domestic market which, because of supply management, will translate into a marginal production increase. On the processing side, maintaining or increasing margin will then require to lower supply cost, which will result in a downward pressure on milk price and concomitantly in an increased use of imported ingredients which in turn will reinforce the former. In the meantime, and considering productivity gains and labour shortage in dairy production, there will be tremendous pressure to realize some economies of scale at the farm level to limit the ongoing deterioration of profitability in many dairy farms. Even so, more voices getting louder may call for increasing market potential by making it possible to export Canadian dairy products, which would antagonize import control.

Now the second significant force, quota mobility. Pressure to further consolidation at the farm level will certainly build up as previously shown. This will require that quota is made available for purchase. However, the quota exchange market has become rather illiquid over the last seven years or so. This change has been most remarkable in Ontario and Quebec after new regulations of quota exchange were introduced in 2007. A trigger is needed to incentivize the sale of quota. Will it be sufficient to decrease milk price? Shall we lower the existing price cap? Shall we let the price be set freely? Shall quota move unhindered between province? All this in a context where there are expectations to maintain as many dairy farms as possible in as many regions as possible. Quite a catch 22, isn’t it. Some unruly producers may end up challenging production discipline.

The third force is indebtedness arising from the cost of capital which in turn stems from the price of quota. Indeed, one must not forget that acquiring quota is just the first step but a costly one. Additional investments (buildings, equipment, farmland, herd genetics, etc.) are needed to maintain consistent dairy production systems. This will be especially critical in Quebec where almost all dairy barns are of the tied-stall type, which is ill-fitted for the automation of milk production processes. Besides, these barns are ageing, which combined with work overload could make it more difficult to maintain good herd health status and consistent milk quality, both being key to the farms’ competitiveness. Consequently, heavy investments will have to be made over the next ten to fifteen years in order to achieve a full-scale modernization of Quebec dairy production. Meanwhile, the sources of capital available to the Canadian agriculture are essentially restricted to debt. Already indebted farms will thus have to carry on more debt, pressuring their profitability further. Quebec dairy farms will be particularly exposed to that risk. Here, it is worth remembering that, for instance, if the current dairy crisis in New Zealand has indeed been triggered by a sudden drop in price, one of the main structural fault lines has been excessive indebtedness. So, the very economic sustainability of many dairy farms will hinge on higher milk price while the most efficient ones may still prosper in this lower-price environment. Consequently, producer pricing will become even more conflictual as increasingly diverging interests are expressed along the value chain and within different groups of stakeholders.

These conflicting dynamics may give enough strength to centrifugal forces,  make one of the, or all three pillars of supply management crumble. Quebec may well be at the epicenter of this quake.

This is why I think the phasing out of supply management will be initiated before 2030, regardless of any trade negotiations.

Supply management as such is a sound policy. However, it cannot pretend to remain unquestionably relevant forever. This is why I think it is time to engage in a comprehensive review of supply management, followed by an open debate over its future, over the why and how of supply management.