03/21/2013 02:39 EDT | Updated 05/21/2013 05:12 EDT

Another Look at Supply Management

Canada's aggressive trade agenda has spawned much political, public and media discussion about the supply management system in place for certain agricultural sectors, including dairy.

The C.D. Howe Institute recently added its voice to the chorus with a commentary on reforming supply management, as did the George Morris Centre. I find the latter better informed, so will address the misinformation of the CD Howe commentary here.

The CD Howe claimed the industry restricts consumer access to things like milk and cheese. This alone should be enough to discredit the entire commentary. Every day there is plenty of milk on our store shelves and Canadians can choose from a wide variety of dairy products available.

But let's consider the price and market realities raised by the C.D. Howe Institute.

The price of Canadian dairy is compared with that of our closest neighbour, the United States, which instead of supply management, offers significant government subsidies to the agri-food industry.

According to the recent Retail Price Study conducted by the Canadian Senate, there are many reasons for the difference in prices between Canada and the U.S., ranging from the costs of distribution and market size to product safety standards. This discrepancy in prices is therefore not unique to dairy. Almost everything is cheaper in the U.S. than it is in Canada, which points to the idea that there are many factors other than supply management that cause price differences on both sides of the border. I've said it before: I don't expect Target to have the same prices that it has in the US as they open in Canada!

It must also be noted that on the shelves of Canadian grocery stores, milk is the least expensive beverage at retail that offers any nutritional value. Only water and soft drinks are cheaper, per serving size, and their nutrition value is nil.

Could it be that if we could drop the retail price of milk it would drive more consumption, and thus more demand for the product? Not necessarily. A Neilsen international comparison of milk prices and consumption found that in Canada, at (a weighted average of) $1.45 per litre for fluid milk, consumption is at 77.8 litres per capita. Meanwhile the price in the U.S. is 99 cents a litre, and their consumption is at 77.2 litres per capita.

This tells us consumption is driven more by culture than by price.

The C.D. Howe report wrongly describes "efficiency" as an issue of farm size. We have cost of production surveys that clearly demonstrate that while economies of scale exist over time (and the average farm size is growing over time), size is not "the" indicator of lower costs. There are large and small farms all through the cost range in the survey. The Canadian Dairy Commission's current target price only covers the costs of 37% of producers on the sample. This is far more indicative of the level of efficiency most dairy producers in this country must strive for.

Based on Canadian Dairy Information Centre numbers, DFC has calculated, the average dairy herd size has increased from 20 in 1971 to 78 in 2012, and milk shipments per farm have increased by roughly 600 per cent in 35 years. Dairy farms today are more productive. Since 1969, milk production per cow has increased 154 per cent. In 2011 that means the average milk production per cow is about 9,800 litres a year, putting Canada in line with, or better than, other dairy-exporting countries. Farmers are continually investing to improve animal comfort, and no growth hormone is allowed for dairy in this country! Because to be a dairy farmer, one must be committed to animals and treat them well. In turn the cow will work for the farmer.

Our system has also created stability for farmers in Canada while the international market remains among the most volatile. A number of retailers have told me they have a different approach to marketing and margins they take for a product which is volatile vs one that is stable. Over the years, I have become convinced that more certainty is beneficial to processors, retailers and consumers, and, yes, for Canadian dairy farmers.