Exploring a future without supply management

With the North American Free Trade Agreement (NAFTA) renegotiations on the table, there has been much concern that Canada’s supply management system will once again be on the chopping block. According to a recent survey conducted by the Angus Reid Institute, some Canadians think it should be.

The survey asked a representative, randomized sample of more than 3,000 Canadians how they thought Canada should handle the supply management issue during the NAFTA negotiations. While 29 per cent said they are committed to keeping the system in place for Canadian farmers, 26 per cent want to scrap it altogether. Another 45 per cent believe that supply management should be used as a bargaining chip during the trade agreement negotiations.

Interestingly, though, when asked how much they know about supply management, just four per cent said “a lot.” Fifty-eight per cent, however, admitted to knowing nothing about the system at all. Perhaps if they had a better understanding of how supply management works and its benefits to producers and consumers alike, they wouldn’t be so eager to scrap it.

Let’s be clear – supply management is likely here to stay. But with that said, it would be naïve to imagine a future where supply management was an absolute certainty. If anything, an imagination of that future provides a stronger defence for keeping supply management in place. We asked five industry experts to explore the idea. Each was clear that they think supply management is here to stay; each shared their view of a world without.

The price myth
Many consumers believe that eliminating supply management will lower costs at the store level. But Bruce Muirhead, associate vice president of external research at the University of Waterloo, says it won’t. “Consumers think they are going to have low-priced eggs and the cost of living is going to drop,” he says. “It sounds like it’s really great for consumers, but that also doesn’t happen necessarily.”

Yves Leduc, director of policy and international trade for Dairy Farmers of Canada, agrees. “If the prices go up, the processing sector and the retailers will have a tendency to pass on the price to the consumer,” Leduc explains. “But when the prices go down, you’re not likely going to see price reduction equivalent to the reduction of the prices on the world market.”

In fact, Leduc believes that price volatility will likely benefit those who have power in the marketplace, namely processors and retailers, long term. “Farmers themselves, if they are not organized, have little bargaining power in the marketplace,” he says.

Europe, and in particular, Belgium, provides a great example of this. When dairy quota ended in April 2015, milk prices plummeted across the continent. According to Price Observatory, milk prices (for farmers) dropped 33 per cent in Belgium (based on the average price between December 2013 and May 2015). At the supermarket level, though, prices declined by just 10 per cent.

Consumer impact
Losing supply management could also mean losing fresh, locally produced eggs, chicken and dairy products. Currently, family farms meet that demand in each and every province across the country. “The benefit of supply management right now – because we have production in all 10 provinces – is that there’s fresh chicken available right across Canada,” Mike Dungate, executive director of Chicken Farmers of Canada, says. “Without supply management, I think the first thing that would happen is those who are the least competitive in Canada would drop off quickly.”

“I’d say we’d probably lose production in six provinces completely,” he continues. “And then you would concentrate the rest of production.”

The repercussions for the egg sector would be similar, Muirhead says. “We’d be inundated with American eggs,” he explains. “American farmers would have to increase production by probably one per cent and they could flood the Canadian market with shell eggs.

“Most Canadians live within 100 km of the American border, so it would be nothing to them to ship eggs from Iowa or Idaho to western Canada, or from New York State to Ontario,” he continues. “They ship eggs farther than that now to other parts of the U.S. So, we would definitely lose.”

Goodbye, family farms
In recent years, consumers have expressed great concern over the loss of family farms in Canada. Without supply management, an increase in large, concentrated farms, like those found in the U.S., is inevitable, say experts.

Roger Pelissero, chairman of the Egg Farmers of Canada, compares the demographics of Canadian egg farms to those in the U.S. to further elucidate this point. “We have over 1,100 egg farms in Canada with an average flock size of about 25,000 birds,” he says. “In the U.S., they have 175 egg companies and their average flock size is 1.5 million birds. Altogether, in the U.S., they have about 330 million laying hens.

“A lot of those farms in the U.S. started as family companies way back in the day,” he continues. “And they’ve grown, and they’ve had to grow due to the economics of it. At times, they’re making very little, if they’re making anything, so they need that scale to try and offset some of their cost. Here in Canada, we have a system that allows farmers to get paid properly for the cost of producing.”

Felt by communities
Not only would family farms be lost. So too would many rural communities, as family farms support them with local jobs. In Quebec, Dr. Maurice Doyon of Laval University conducted surveys in three villages to find out how supply management affected those living in the communities.

One of the villages was completely surrounded by supply managed farms, cash croppers and hog farmers surrounded another and a mix of both surrounded the third. Doyon interviewed people from all walks of life – from gas station attendees to restaurant workers to mechanics and mayors.

“It was amazing,” he says. “There were machinery guys telling us that if the chicken or egg guy in my area closes, I’m gone. I’m gone because those guys are really important for buying my machinery and keeping me in business.

“The pork or beef guys sometimes do business, but when they’re in a down cycle, those guys just don’t buy anymore,” the economist continues. “They need to sell all the time in order to have a positive cash flow. They cannot just wait for cycles.”

Doyon says it’s not just the farmers who spend money; it’s the people who visit farms, too. In the village with no supply managed farms, those he interviewed said the farmers – big cash croppers and hog farmers – are so big that they no longer buy local. “They just go directly to the source and that has no impact on the village,” Doyon explains.

He believes that without supply management, many of those villages wouldn’t exist. “We will have a lot fewer farms,” he says. “And there’s a lot of local communities that might just shut down – or they will just be places where people go to sleep.”

What happened elsewhere
Countries without supply management provide a good example of how a future without it would look for farmers. In the European Union, where milk quota ended in April 2015, dairy farmers are still in recovery. The post-quota years were so bad, in fact, that the European Commission offered farmers subsidies to try to slow milk production. It worked, and prices have since bounced back, but it came with a hefty price tag.

Muirhead believes that if supply management were to go, our system, particularly in eggs, would look very similar to that of Australia, minus the Americans as competitors. Australia, Muirhead says, has three major producers that control about half of the market. Hundreds of smaller producers control another third. The downside to Australia’s system is that they have just two big supermarket chains, Coles and Woolworths.

In Australia, retailers hold an annual auction to determine the price of a dozen eggs for the coming year, Muirhead explains. On the day of the auction, egg farmers sit poised over their keyboards, waiting for the opening bid. “When the retailers finally decide on a number, anyone who is above that bid has one minute to respond,” Muirhead says. “If you don’t respond, good luck finding somewhere else to place your eggs.

“It’s a really cutthroat system they have in Australia, and the producer is the one who absolutely has to suffer all of the pain of declining prices,” he adds.

Not all non-supply managed systems suffer, though. New Zealand’s dairy sector, for instance, has been hugely successful without it.

Although it was deregulated, it was done so through the creation of Fonterra, a co-operative that deals with some 90 per cent of the country’s milk supply, Leduc explains.

“The Fonterra model will never work in Canada,” he says. “I would be very, very surprised if the Canadian government was able to force Agropur, Parmalat and Saputo, the three big dairy companies, to merge into one.

“To those who are saying that we should adopt the New Zealand model, there would be major obstacles in being able to do that.”

In the U.S., farmers are supported through the U.S. Farm Bill. In 2008, Pelissero says, the Farm Bill offered support to the tune of $288 billion. In 2014, that number rose to $478 billion.

Something to CHERISH
Sometimes, younger farmers think they could do better without supply management, Pelissero says. “But they don’t know the history,” he says. “They don’t recognize the big picture – the world picture – and look at farmers in other parts of the world who are struggling to make returns. And we have farmers here who make a fair return for what they’re doing. It’s a privilege, and not a right,” he continues. “It’s a privilege that we have that other areas of the world don’t have. And I could tell you that when I attend international egg conferences in different parts of the world, Canada is the envy of the world. They think it’s great that we can get a fair return for producing eggs and farmers can make a fair living and not have to worry about any type of government subsidies at all.” 

This story was published as part of Ag150, a celebration of Canadian agriculture. Visit www.ag150.ca for more.