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All things considered: June 2010

An Economic Sin?


May 18, 2010
By Jim Knisley


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The C.D. Howe Institute has your best interest at heart – just ask its
researchers. Or you could just read its latest epistle on why supply
management should be wound down and why it would be good for you.

The C.D. Howe Institute has your best interest at heart – just ask its researchers. Or you could just read its latest epistle on why supply management should be wound down and why it would be good for you.

The institute’s latest report proclaims supply management to be a sin against economics – nothing new there. It then lays out 20 years of penance as the route to free and open markets, increased opportunity, more profitability, more diversity and lower consumer prices. This is the economists’ vision of heaven. It is their version of perfection against which all other systems are compared. It is a cake tomorrow but never cake today future. It is a perfection that has never been achieved but to which all things are compared.

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Compared to this mythical future the present system pales by comparison – at least in their minds.

The CD Howe report suggests “Ottawa and the provinces begin a regular auction of new quotas, gradually expanding the supply of agricultural production quotas over a time horizon of 20 years. This should be coupled with the immediate elimination of direct producer price administration.”

“Eventually, increased supply from new domestic production would bring domestic producer prices in line with competitive world prices.”

The cost to producers from this would be the erosion, collapse and eventual elimination of quota value. Under the plan, quota values would fall by about half in year one and then dwindle to zero over 20 years. The authors of the report foresee few, if any, problems from the elimination of more than $10 billion in quota value in the first year and $18 billion more over the next 19 years. It is doubtful farm lenders would be so complacent. Quota value has been used as an asset by lenders and reductions in quota value could make loans more difficult or expensive for some (perhaps many) farmers. Recent entrants into dairy or poultry could discover that they are under water owing more than their farms are worth. As we’ve seen with the U.S. housing crisis, being under water is not good.

The report also makes the point that the high price of quota makes it difficult, if not impossible, for many (especially young) people to get into poultry or dairy farming. It says: “When they (the public) discover that just getting the opportunity to succeed or fail in poultry farming will cost millions just to obtain the right to produce they are dumbfounded.”

That is the one element of the report that might resonate with politicians – who have been staunch supporters of supply management. Some provincial marketing boards have instituted programs to reduce the cost and other barriers for new entrants into the industries. But more will likely have to be done on this front. This won’t be easy and there will be resistance within the industries, but it is a very sensitive political issue that needs to be addressed.

As for the economic side of the argument and proposition that free markets cure all ills, it is instructive to look at what is happening in the U.S. dairy industry

It is a mess, as illustrated by recent reports from Pennsylvania and Vermont.

Lancaster Farming said in a report on the U.S. House of Representatives Agriculture Committee hearing in Pennsylvania: “The take-home message to the committee was that current dairy policy is broken and does not fit today’s industry.”

Lauren Mosemann, a dairy producer, stressed that the current policies are “inadequate protections against not just periodic low milk prices, but also destructively low profit margins.”

Meanwhile at a meeting in Vermont dairy farmer Jeremy Michaud said: “If you’re looking for the milk problem, I’m it.”

A year ago Michaud said he didn’t want to hear about supply management. He’s changed his mind. “You’re going to have to bend a little bit. I’m going to,” Michaud said.

Economist Bob Wellington told the Vermont meeting the price swings are the result of an imbalance between the supply of milk and the demand for milk. He said an excess supply of one or two percent can drive down prices 20 or 30 percent. A five percent excess supply can cause the kind of price collapse farmers experienced last year.

These concerns aren’t restricted to American dairy farmers. Fruit producers and some beef producers in B.C., having seen prices collapse, are calling for supply management for their industries.

The bottom line is that C.D. Howe’s prescription for supply management would quickly destabilize Canada’s dairy and poultry industries. It would likely result in increased government spending to offset periodic market collapse, increased political involvement and increased industry lobbying. It would also likely result in corporate domination of the industries, as seen in the U.S. poultry industry.

It is a prescription that fails the Hippocratic edict “Do no harm.”


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