Supply Management: An Unfair Advantage or a System that Works?

If you live in Canada, chances are you’ve heard or read multiple opinions about our supply managed dairy industry. I’d like to spend some time explaining what supply management is and how I feel it benefits all Canadians – consumers and farmers alike.

Around the world, farmers face wild fluctuations in the price they are paid for the milk produced on their farms. Perhaps you’ve heard of the challenges currently facing British dairy farmers who cannot continue operations at the price they are currently paid for milk. This is not the case in Canada. Why?

In the 1960s and early 1970s, the Canadian government and Canadian dairy farmers came to the conclusion that production discipline – balancing supply and demand for milk products – was necessary to avoid extreme market fluctuations. Both the federal and provincial governments worked together with farmers to implement a system that is adjusted to suit the needs of Canadian demand for dairy. The system is administered by the Canadian Dairy Commission, which measures the demand for milk and sets the production limits accordingly. Milk found in Canadian grocery stores is solely produced by Canadian dairy farmers for Canadian consumers. Milk is a local product, supporting local economies across our nation.

The share of the market that each farm owns is called quota. Quota grants the farm a right to produce milk. The provincial quota is adjusted according to demand, and is increased or decreased as needed. Overproduction and waste are avoided because production is directly synchronized with consumer demand.

Dairy farmers are paid a standard price for the milk they produce. This price is set by the Canadian Dairy Commission and is the result of a yearly national study of the cost of producing milk at the farm. Producers are paid the cost of producing the milk they ship to the processor. However, the retail price is influenced by more than the price paid to farmers. Processors and retailers can increase or decrease the price of milk in the stores to provide what they feel is a suitable margin of profit. It is also important to note that quota ensures the price of the raw milk produced on the farm, but not the income. If a farmer cannot produce the quota of milk, no payment is received. Just as in all farming, dairy farmers can be negatively impacted by crop failures, herd illness, natural disasters, etc. Milk quota does not protect farmers from these types of problems, but farmers in a supply managed system are just as subject to regular farming woes as any farmer from any country around the world. Additionally, Canadian farmers are not subsidized in any way, as is the case in most countries.

 

So what’s the problem? As I mentioned earlier, there are various opinions about supply management. Critics of the system claim it makes milk products more expensive, blocks imports and is a barrier to trade. Some become rather indignant and antagonistic in their disagreement, calling supply management a “cartel of milk-fare bums receiving more than their fair share of government handouts”. Other critics complain that it is too difficult for aspiring farmers to obtain or purchase quota, making the system an “old-boys club”. Some lobby to have the industry deregulated, allowing imports from other countries to pour in. Allow me to explain why this is a terrible idea.

Incidentally, many of the arguments I mentioned are myths, not realities.

Perhaps you’ve compared the price of milk in Canada to that of milk being sold in supermarkets just across the border. Wow! It looks like the Americans are getting a much better deal on their dairy products! But wait just a minute… The price on the store shelves doesn’t tell the whole story. On average, Canadians pay $1.48/L of milk. Americans pay $1.04/L. However, you may not be aware of the fact that US farmers are government subsidized – taxpayers contribute to government funded direct and indirect subsidies paid to dairy farmers to offset the cost of production. Sources claim that an average of 24 to 37cents/L is paid to American dairy farmers, accounting for approximately 53% of the cost of producing that milk. This subsidy comes directly from American taxpayers’ pockets, and when added to the price of milk in the stores, shrinks the price difference quite dramatically. Remember this: Americans pay for their milk in the stores and through their taxes. In this source, the author, a Canadian economist, claims that Americans actually pay more for their milk when tax-payer funded subsidies are taken into account: http://www.theholmteam.ca/WDF.Holm.Oct.2014.Senator.Kenny.pdf

Canada’s milk price is very comparable to that of the rest of the world. The price of 1 L of milk in China in Canadian currency is $2.30, Australia: $1.47, New Zealand: $1.50, France: $1.71, Denmark: $2.65, Germany: $1.07. (To view a complete info-graphic of world milk prices, go to http://www.dairyfarmers.ca/var/df_site/storage/images/media/images/20140120_myth_milkprice-milkconsumption_1024/31299-1-eng-CA/20140120_myth_milkprice-milkconsumption_1024.jpg)

But what if the industry was deregulated? Surely that would result in lower prices for consumers, especially if farmers would no longer need to pay for costly quota to produce milk? NO! History has shown both in the UK and Australia that after deregulation, amounts paid to farmers decreased, but retail prices INCREASED! In Australia, prices for milk rose 27 cents/L in the three years after deregulation, as opposed to 9 cents/L in the three years before deregulation.

 

Additionally, in New Zealand, known as the most competitive milk producing country in the world, the price of milk in the stores is very comparable to here in Canada. Abolishing supply management would be extremely detrimental to farmers’ incomes and would likely result in government subsidies paid to farmers, but probably would not benefit the consumer at all.


 

EDIT (Dec. 10, 2014): Recently, news sources have been full of news about the milk crisis in New Zealand. Global milk prices have plunged due to  Russia blocking dairy imports from the EU and China importing less milk, both of which have led to a global surplus of milk, causing prices to halve since last February. Farmers in New Zealand are being paid less than the price of production now, BUT retail prices of milk have remained the same – higher than the prices Canadian consumers pay. At the moment, both consumers and farmers can be thankful for our supply managed system!

http://www.radionz.co.nz/news/national/256004/dairy-foods-unlikely-to-be-cheaper

http://tvnz.co.nz/national-news/concern-milk-moving-staple-luxury-6130538

http://www.radionz.co.nz/news/national/259332/fonterra-defends-rising-milk-prices

http://www.dairyherd.com/news/nz-farmers-tighten-tap-milk-production-prices-plunge


 

Does supply management hinder trade agreements and block imports of foreign produced milk products? NO! Since 1986, many trade agreements have been signed by Canada, including NAFTA , EFTA, and, recently, CETA. Canada is also participating in TPP (Trans-Pacific Partnership) talks. Supply management has been brought up at these agreements, but has not yet hindered an agreement’s successful completion. You may also be surprised to learn that Canada gives access to quite a slice of imported dairy products – more than 6%. Interestingly, countries that are known to be “free trade friendly”, such as the US, import less (2.75% in the US).

Of course, the cost of quota does make the process of beginning a dairy farm more difficult. In Canada, many farms are handed down though the generations, allowing the younger generation to continue on the family farm, gradually assuming the debt burden. However, most provinces have implemented an entrance program for aspiring farmers. The programs allot a certain amount of quota to farmers wishing to enter the industry, giving them a “leg up” into the industry, helping them to start out on their own. The value of the quota received is paid back over a number of years, or (in some provinces, including here in BC) belongs to the farmer free and clear after 10 years.

As you can see, many of the objections to supply management are unfounded and inaccurate. If you’d like to learn more about the system, check out these resources:

Dairy Farmers of Canada: http://www.dairyfarmers.ca

Canadian Dairy Commission: http://www.cdc-ccl.gc.ca/CDC/index-eng.php?id=3806

And, as always, if you have questions, please feel free to voice them in the comments section below.

To conclude, I’ll leave you with the voice of Canadian dairy farmers: “We support supply management… because it works!” I hope you agree.

8 thoughts on “Supply Management: An Unfair Advantage or a System that Works?

  1. Cj lock says:

    The dairy industry definitely has large concerns moving forwards with SM. Yes BC has a startup program- that is very flawed. Instead of large allotments being given to existing farmers more of that should help get new young dairy enthusiasts into the industry. Many dairyfarms are on their second generation. I foresee alot of these farms being sold by 3rd generation. First generation farmers were very enthusiastic and loved the lifestyle. Many second generation farmers have had it very easy thanks to the rise of land and quota prices. I’ve been in this industry as a herdsman for thirteen years and have seen alot of self-entitlement and arrogance among these. Dairyfarmers try to paint an image through advertisements that they’re small family run farms. This is becoming further and further from the truth. In BC dairyfarms are decreasing rapidly while kilograms of butterfat shipped daily have gone up significantly. Many second generation farmers have mostly hired help. Look around, their children are completely disinterested in the industry. They see their dads golfing, hunting, vacationing most of the time. Why would they involve themselves in the farm and actually work? Why not just cash out when their parents turn the farm over to them? And when they sell out who’s going to buy those farms? Large existing farms, not new dairy enthusiasts which would be so healthy for the dairy industry.
    I support supply management to but don’t sit back and think everything is all good and shouldn’t be looked at to improve. As population increases so will milk demand. Instead of milk boards comprised of dairyfarmers ‘lining their pockets’ and giving themselves significant increases with the increased demand maybe look out for the best of the industry and look for new young growth into the industry.

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    • Hi! Thanks for taking the time to leave your thoughts. You’ve raised some very valid points here. However, I think it is unfair to blame this situation on supply management OR the graduated entry program. Disinterest in the industry starts on the home farm, and should be addressed there. Also, the BCMMB is currently working with FIRB at the moment to stop family transfers with graduated entry program quota. I totally agree that the industry needs fresh new enthusiastic producers, and I hope our board takes steps to continue to allow new producers into the industry. I sincerely hope that we’ll see continued interest from new producers who are looking to start up on their own. And while the size of farms in BC are increasing, back east in Ontario and Quebec, the small family farms you mentioned are the norm: average farm size in QC is 58 cows, with 50% of the dairy farms there milking less than 50 cows: I was trying to present an overall picture of dairy farming in Canada.
      I wrote this article to give the average Canadian an overview of the supply management system, trying to explain it in an easy to understand manner. Unfortunately, the media often presents just one side of the SM debate, and I felt it was necessary to voice an opposing opinion.
      Just as an aside: my husband is a fourth generation dairy farmer – his father, grandfather and great-grandfather all milked cows in the Netherlands. We were able to start farming here with family help, first starting out with three brothers on one farm and gradually separating until we all now own individual dairy farms. I’d like to think that we are neither self-entitled nor arrogant, but thankful that we had the opportunity to become part of this great industry. We only have one employee, a relief milker every other Saturday afternoon. We sincerely hope that we are setting a good example for our children, showing them that the only way to get ahead in life is by working hard for what we want.

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      • Cj lock says:

        Thanks for your reply. Without creeping you out I’m familiar with your family’s situation. We live in the same part of the province and the dairy community is quite close. I am by no means saying all are arrogant or self-entitled but without admitting it on this blog I’m sure you can agree with me many are. I’ve been on dairy tours abd seminars where farmers my age or younger don’t have the time of day for me once they find out I don’t own a farm.
        I’m also very familiar with the entry program(my name might even be on the waiting list:) ). This program has been abused since the beginning. Only now that FIRB (not the milk board) has started implementing changes is it a true ‘entry’ program. My issue with it other than the family transfers is that this year only five new entrants were given quota. Five new entrants in a year that existing quota stakeholders received huge increases! Setting up more people wouldn’t negatively affect any existing farmers due to the increase in denand for butterfat. If more entrants were started maybe they wouldn’t be 45-50 years old by the time the quota was actually given over to them. Entrants wouldn’t have to wait 15 years for their name to come up. Most farmers in BC were given more quota in the last year than a new entrant gets after waiting 15yrs fot his or her name to come up plus the 10 years before it becomes that persons. I have many friends and even family members that would love to dairyfarm but their parents aren’t so have all but given up on the dream.
        I agree that disinterest is somewhat a family problem but SM does have some blame in this. It’s not a hard business to take over when a large part of it(marketing) is taken care of for you. Like I said in the first comment I’m very much in support of SM but the dairy industry definitely has some concerns coming up. Lack of energetic, enthusiastic young blood is one of them.

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      • Great points again 🙂 I agree, the entry program should be reformed. Interestingly, when speaking to other farmers, it seems most approve of the idea of allowing more entries per year, and more quota to the new entrants. I’m with you all the way, new blood is a very good thing! I hope we’ll see changes in the future that encourage this.

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  2. Peter says:

    Great points from both of you! Ive made my living in the dairy industry for 46 years with another 8 to go hopefully! I came from the UK in 1982. They implemented quota after I left but never had supply management, a huge difference. They’ve got rid of quota now along with most of the dairy industry! However I think as long as we keep appealing to consumers to support SM to support farmers then we’re missing an opportunity to promote how good supply management is to the consumer.
    It allows for control of food safety, animal welfare and environmental protection plus it keeps the need for government support to the minimum (there’s still labor laws that benefit farmers even though improvements have been made). When it comes to the price issue it becomes a he said, she said thing and as long as people like Maxine Bernier keep telling the public they’re getting ripped off regardless of the actual facts, then we need to say it and move on. It seems to me that unless we can demonstrate the advantage to the consumer (who really could care less about farmers when they are just trying to pay their bills) and be quiet on how it serves us all in the industry (and let’s face it we probably care more about our cows than our customers) then we’re going to miss a marketing opportunity and allow the bleeding away of the best system in the world for both sides. As for the graduated entry program it’s on its death bed in BC. I hope that whatever vehicle is implemented to encourage new entrants, it gives equal opportunity (not just farmers sons and daughters) to anyone who’s willing to invest a lifetime, especially people like Cj who are already invested but need that initial help. All the best!

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  3. Larry Laughlin says:

    This is an interesting discussion for sure as to the obvious benefits of SM to the dairy farmers and dubious explanation of the benefits to consumers and taxpayers. My approach to this as a beef and grain farmer in Alberta is quite a bit different. I get tired of media and politicians who are likely being mislead a bit by the dairy industry telling the general public how SM supports farmers. This could not be farther from the truth. As a free market supporter I have never been as happy as the days after the demise of the oppressive Canadian Wheat Board. This has allowed entrepreneurial grain producers to flourish. The flip side is it has forced inefficient and or unprogressive farmers to adapt or exit the business. This is how a market should work. Most Beef producers shudder and cringe at the mere mention of SM in regards to our industry. Most beef producers are proud free market participants and have done quite well. That’s where this concept of SM angers me. It is sold to a misinformed public and willfully ignorant politicians as supporting farmers. It supports dairy farmers. Full Stop. As a beef and grain farmer I have to compete for land, inputs, labour and capital with government/consumer subsidized dairy farmers. This is very unfair in a free market. When we get into a drought condition and feed prices rise significantly I’m competing with a subsidized farmer who’s commodity price is unfairly adjusted to compensate for his production costs. This is very market distorting. Similar distortions are felt in competition for land, labour and inputs. An open market would weed out those who cannot be efficient or control their production costs. As a farmer I really dislike Supply Management being promoted as supporting all farmers. That couldn’t be farther from the truth.

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