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The MEI proposes compensation to end supply management


June 16, 2017
By Montreal Economic Institute

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June 16, 2017, Montreal, QC – Compensating farmers who paid for production quotas with the revenue from a temporary tax would allow the government to abolish supply management in the dairy, poultry, and egg sectors, shows a Viewpoint published by the Montreal Economic Institute (MEI).

Such a measure would be positive both for farmers and for Canadian consumers. “If the government decided to compensate farmers for the value of their quotas over a period of ten years, it would have to offer them annual payments of $1.6 billion. Yet the net benefit for consumers would be from $3.9 billion to $5.1 billion each year, and up to $6.7 billion once the reimbursement period is over,” explains Alexandre Moreau, Public Policy Analyst at the MEI and co-author of the publication.

For example, Canadians could pay $2.31 for a two-litre carton of milk following liberalization, instead of the current price of $4.93, he adds.

The accounting value of the quotas, estimated at $13 billion by the MEI, is on average equal to 38% of their current market value, which comes to a little over $34 billion.

Compensation would vary from one farmer to another in order to avoid providing excessive compensation to farmers who bought their quotas at a fraction of the current price, or received them free of charge, while being fair to those who acquired quotas recently at a higher cost.

If Ottawa decided to liberalize supply-managed sectors, a temporary tax should serve to finance the compensation paid to farmers. This tax would disappear once the compensation was paid in full.

“Such a policy was used successfully in Australia when that country eliminated its own supply management system,” explains Vincent Geloso, Associate Researcher at the MEI and co-author of the publication. “The compensation offered to producers was financed by a transitory tax equal to half of the expected consumer price decline. Consumers were therefore immediately able to enjoy price reductions while farmers received payments to compensate them for their losses of revenue. The same principle could be applied here,” he adds.

Rules regarding the environment, health, and food quality would continue to apply to products imported from abroad once the market is liberalized.

“This exit plan would be positive and fair both for farmers and for consumers. Now, it’s up to public decision-makers to take action and dismantle this regime that is unfair and costly for consumers, all while adequately compensating farmers,” concludes Alexandre Moreau.

The Viewpoint entitled “Ending Supply Management with a Quota Buyback” was prepared by Alexandre Moreau, Public Policy Analyst at the MEI, and Vincent Geloso, Associate Researcher at the MEI.