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Why Is Milk So Darn Expensive? A Debate on Supply Management

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When it comes to food prices, Canadians often complain about paying too much. We're handing over more cash at the grocery store, we seem convinced, than our neighbours to the south or even our European counterparts. Are we right about that? And if so, what's to blame for the discrepancy?

Federal Liberal leadership contender Martha Hall Findlay points the finger at this country's supply management system, which she faults for adding to the financial burden of Canadian families, retailers and restaurant owners. But Dairy Farmers of Canada Executive Director Richard Doyle says contrary to the conventional wisdom, supply management actually has very little to do with the retail price of Canada's cheese and milk -- but it does benefit the Canadian economy.

What do you think? Have a look at what Hall Findlay and Doyle have to say in our online debate. Then decide whose case is more persuasive, and cast your vote...

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Pre-debate poll:

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Canada's supply management system is harmful to the country's consumers and retailers

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Who makes the better argument?

Martha Hall Findlay Former Member of Parliament, Executive Fellow, University of Calgary School of Public Policy, Chief Legal Officer, EnStream LP

Yes, Supply Management (SM) harms consumers -- the average Canadian family is forced to pay hundreds of dollars more each year for the basics of dairy, poultry and eggs. Worse, the people who suffer proportionately the most are those who can least afford it -- low-income families with small children and Aboriginal families living in remote communities.

It harms smaller retailers as well as hundreds of thousands of Canadian restaurants. (Here's a classic headline from a few months ago.)

And here is a link to my major research paper published by the School of Public Policy, U of Calgary, last spring.

SM is a system of protection for dairy, poultry and egg farmers. It started in the 1970s to help the then 145,000 Canadian dairy farmers deal with price volatility. It was well intentioned at the time, but we now have barely more than 10,000 dairy farmers across the whole country, a drop of well over 90%. The average dairy farmer now earns significantly more than the average Canadian family, and owns over million in assets. The underlying reasons for the system are long gone; instead, consumers, farmers, exporters all suffer. It is a government-sanctioned cartel that benefits a very few, to the detriment of many, that would never be allowed if proposed today.

The following counters some of the oft-heard arguments from the dairy lobby:

"Opposing supply management is 'anti-farmer'": On the contrary -- There are fewer than 15,000 supply-managed farmers; there are, however, over 200,000 other farmers in Canada, most of whom produce beef, pork, grains, oilseeds, pulses. Over 90% of Canadian farmers do not benefit from SM. On the contrary, they would benefit from greater access to the fast-growing markets, particularly in Asia, for their products -- access they are being denied because of SM for the few.

"We need SM to ensure food safety, for example to keep hormones out of our milk": I support greater food safety and am proud that Canada produces hormone-free milk. But the standards for Canadian-consumed food have nothing to do with the economic structure of supply management. We can control whether we allow growth-hormone enhanced milk by way of regulations, border restrictions, food labeling and inspection. The fact that we produce high quality, safe milk in Canada is exactly the comparative advantage that could benefit our dairy producers once we open trade. This is something the many dairy farmers who support dismantling this system reinforce -- they know they can compete and win because they are good at what they do.

"Supply management "supports" the family farm": This is completely false. The rate of consolidation in the supply-managed sector has, in fact, been higher over the last few decades than in virtually in all other Canadian agricultural sectors.

"U.S. prices are too low because the US subsidizes their milk": There are U.S. subsidies, but they are not nearly as high as the difference paid for by our consumers. None justify our exorbitant 250-300% tariffs. We can level the field using restrictions based on those U.S. subsidies, and we are in negotiations with Europe. But many other sources are now open markets, such as Australia and New Zealand, both of which completely freed their respective dairy markets over ten years ago.

"Supply management doesn't hurt our trade -- see the agreements we've been able to sign": This also a fallacy. Canada has been able to sign certain trade agreements, but in every case we had to give up concessions in other areas because of SM. This hurts all Canadians -- manufacturers, resource companies, service providers and, ironically, the majority of Canadian farmers who need access to other markets. Even though Europe has agricultural subsidies, we have less leverage than we would. However, the proposed Trans-Pacific Partnership Agreement is critical -- not only do the TPP countries offer huge potential markets for Canada, the agreement is also seen as an opening door to the major Asian Pacific markets such as China, India and Japan. Canada has been "invited to the table," but it is clear that Canada will not be accepted as a signatory unless we dismantle SM.

"Without SM the dairy industry will disappear": Nonsense. The same argument was used by those in the wine industry who feared a free market -- yet we went from a small industry producing less-than-stellar wine to a thriving, much larger industry. I have proposed a comprehensive compensation and transition plan. Not all will stay in the business (but as noted above, major consolidation is happening all the time anyway), but they will be properly compensated. Those who stay should be able to thrive, as will their suppliers, second level beneficiaries and their communities -- just as with the wine industry.

We can -- and should -- dismantle SM. It can be a win-win for all.

Richard Doyle Executive Director, Dairy Farmers of Canada

The price of a glass of milk in a restaurant can run about .50. It must be supply management driving up the cost, right? In fact, Canadian dairy farmers get much less than the tip on that glass of milk, about 20 cents.

OK, so then you stop off at the market to buy some Italian Parmiagiano Reggiano cheese (the most highly imported European cheese by volume) and marvel at the per kilo price tag. It must be those huge supply management tariffs you heard about! Wrong again. The actual import tariff on that cheese was only three cents a kilo and the price at customs was only about a third of what you're paying at the cash register.

What do these two scenarios have in common? They show that supply management has very little to do with the retail price of Canada's dairy products. The truth is, the only price that supply management sets is what is paid at the farm gate, based on actual cost of producing milk in Canada.

Few people think of the benefits the system creates not only for Canadian dairy farmers, but also for the Canadian economy. A few facts:

Stability/Predictability: Farmers must be efficient to cover their costs under the current pricing system. But because of the stability, farmers are better able to plan and to reinvest in their farms, their employees and their communities. They are key drivers for the rural economy.

Northern climate: The costs of producing milk in a northern country like Canada are significantly higher than in a country like New Zealand, which benefits from 10 months of pasture for cattle. Some New Zealand farmers must produce year round to supply their liquid milk market. Their costs are much closer to Canadian costs. However, because of Canada's additional housing expenditures, costs are still higher here.

No volatility: Globally, dairy products are among the most volatile agricultural products. In recent years, we have seen the price double in three months or cut by half in less than six months. Not in Canada.

Some suggest supply management is to blame for consumer prices. The Hall Findlay report incorrectly claimed Canadian consumers are paying up to .60 for four litres of milk, a figure that was later retracted.

The truth is the current retail price of milk in Canada is higher than it is in the United States. But it's lower in Canada (about .45 per litre, according to AC Nielsen Consumer data) than it is in New Zealand (.65 a litre) or Australia (.55 a litre).

So, will the price of milk always be higher in Canada than in the United States? Not if history is any guide. In the mid-1990's, milk at retail came close to being 40% cheaper in Canada than in the U.S.

We often compare the prices of goods between Canada and the U.S. As a recent Senate report found, there are many elements that explain the price difference with the US (e.g. currency strength, economic conditions, wages, domestic policies such as healthcare, larger social safety nets, etc.). When Target opens in Canada its prices will likely be higher on most goods compared to the U.S. store. That isn't because of supply management.

Moreover, on February 14, Canadians had earned enough money to pay for food for the year, making Canada and the U.S. the countries with the most affordable food in the world.

What would happen if we were to abandon supply management? Australia is a country that some cite as a model for Canadian dairy. Australia deregulated its milk market in 2000, and almost immediately farm prices began to fluctuate wildly. An initial retail price drop was followed by steady increases, which were accentuated by a tax levied to help farmers with the transition. The end result of deregulation: prices are no better for consumers, and they pay an additional tax.

There is one final and most important difference between Canada and other countries. Where the dairy industry is subsidized, like in the United States and the European Union, consumers are essentially paying twice for their dairy products -- once at the store and again through their taxes that fund farm subsidies -- but it's still not enough for farmers to cover their costs. A 2010 study indicated that Americans pay the equivalent of 31 cents per litre in government dairy programs. Canadian dairy farmers are not subsidized, and do not rely on government handouts.

Canada has a lot of farmland. We also have a system in place that helps dairy farmers create jobs and contribute as active members of their local communities. Research tells us Canadians want their farmers to cover their costs, keep farming and providing jobs.

Supply management is not perfect, but it is the best agricultural system. When you strip away the hype and myths, it's clear that it's right for farmers and right for Canada.

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Canada's supply management system is harmful to the country's consumers and retailers

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Martha Hall FindlayRichard DoyleNeither argumenthas changed the most minds