Supply management increases prices, reduces range of milk and other dairy products

Supply management has become a contentious issue in Canada given ongoing NAFTA negotiations. In our article, Phasing Out Supply Management: Lessons from Australia's Dairy Industry, we described the transition and outcomes from deregulating the dairy industry in Australia. This blog post responds to concerns expressed by Tom Kootstra, Chair of Alberta Milk, which represents the interests of Alberta's dairy producers, about our explanation of the Australian experience with prices, production and the level of government support. 

First, Mr. Kootstra raises concerns about the price information included in our essay, specifically, two prices—those that farmers receive for raw milk, and retail prices paid by final consumers. When the Australian market was deregulated in 2000, the average price farmers received almost doubled from A$26.20 per hectolitre (a metric unit equal to one hundred litres) to A$51.20/hL in 2015.

It’s true that major raw milk processers Murray Goulburn and Fonterra recently reduced prices paid to farmers (average price is A$40.90/hL) but that’s not a product of market liberalization, which occurred much earlier. Rather, much of the decline can be explained by increased supply from Europeans. In response to European Union sanctions for its military intervention in the Ukraine in 2014, the Russian government banned agricultural imports from EU suppliers. European dairy producers consequently sought other markets particularly in China, Malaysia and Indonesia. With increased supply from Europeans, the important South Pacific export markets for Australians now generated smaller revenues, and hence lower prices paid to Australian raw milk producers. 

Mr. Kootstra is correct that since deregulation in 2000 the volume of dairy exports has decreased and the Australian share of the global market has fallen to six per cent. But what’s really important is the earnings from those exports, not the quantity. And despite the severe, prolonged Millennial Drought and circumstances noted above in Europe, Australian dairy export earnings have varied between A$2 and A$3 billion since deregulation. In contrast, dairy export earnings in Canada have fallen steadily from $311 million in 2000 to $235 million in 2016.

Moreover, Mr. Kootstra asserts that consumers pay C$0.06/litre more in Australia for fluid milk than in Canada. While it’s difficult to substantiate his claim and it is unclear what retail products he is comparing, it’s incorrect to blame deregulation for higher consumer prices—in fact, in Australia, since deregulation, milk prices have remained low, either falling or increasing at less than underlying inflation rates since 2000. Over the same period, the opposite is true in Canada. Prices of supply managed goods have risen faster than the Canadian consumer price index.

Consumption is the sole end and purpose of all production, including raw milk. Supply management is about administrative structuring of farm level prices, and restrictions on both the quantity of raw milk produced and on Canadians wishing to buy from foreign suppliers. The object of these restrictions on Canadians is to create scarcity in the place of abundance. At retail, prices are higher and the range of products is lower than they otherwise would be. If production quotas limiting output did not coincide with higher raw milk prices, Mr. Kootstra and others likely would not try to defend supply management.

Thus, the relevant comparison is not between retail prices in Canada and Australia; rather, it’s what the retail prices in Canada are compared to what they would be without supply management. The lesson for Canadians about deregulation in the dairy industry from Australia is this: consumers gain, but so too do raw milk producers. Buyers of the goods for which raw milk is an ingredient extends from the millions of domestic consumers to the billions of consumers in other countries.

Mr. Kootstra also draws attention to the number of farmers that have exited the industry since deregulation in Australia. There has been ongoing consolidation. The number of dairy farms has fallen while the average size of farms has continued to increase. The same is true in Canada in spite of supply management.

According to the 2017 Edition-Statistics of the Canadian Dairy Industry, between 2000 and 2017 the number of dairy farms in Canada fell from 19,363 to less than 11,000. Over the same period, the number of dairy farms in Australia fell from 12,896 to 5,789. The reality is that falling farm numbers reflect a trend in agriculture around the world, as changing business practices have encouraged a shift to larger, more intensive operating systems with greater economies of scale. In Australia, the trend in farm numbers follow changes in raw milk prices from season to season, with strong prices either slowing the rate of attrition or even reversing the long-term trend. At times of low raw milk prices, producers in Australia choose to leave the industry or cease dairying operations in favour of other farming activities such as beef cattle, until market conditions improve.

In contrast, supply management handicaps the ability of raw milk producers in Canada to adjust to changing circumstances. There’s no greater impediment to expanding the production of a supply-managed commodity than buying production quota, which for raw milk in Alberta approaches $40,000 per cow. The cost of quota is so daunting that special new entrant assistance programs are required to entice Canadians to take-up dairy or commercial poultry farming. The choices for most are limited to exiting the industry, expanding slowly at high cost, or a within-family transfer of dairy farm ownership.

Removing the emotion from Kootstra’s comments and appealing to facts, the lessons from Australia remain clear. Supply management does not prevent farm consolidation and it limits entrepreneurial opportunities and stifles consumer satisfaction. The net negative effects are well-known.

Tariffs are an impediment for Canadians importing or wanting to import dairy, poultry and egg products from abroad. They reduce the volume of trade, increase the cost to the importer, and reduce the return to the exporter. This does not make people richer; it makes them poorer—here in Canada and everywhere else. And gives rise to extralegal markets where smugglers thrive.

High domestic prices are an impediment for Canadians, particularly the poor, who spend a larger portion of disposable income than they would otherwise to satisfy their demand for dairy, poultry and eggs.

Supply restrictions are an impediment to existing Canadian producers who must purchase additional quota to expand their enterprise. There’s no larger financial barrier than the cost of quota—a non-productive asset—to expand an agri-business. Compelled to trade for more quota, these individuals must therefore forgo the benefit of every other additional productive asset they otherwise would acquire.

In Canada, the sale and distribution of raw milk to any buyer other than a provincial milk marketing board is now a federal crime punishable by up to two years in prison. While it’s legal to drink raw milk, Canada is the only G7 country that completely prohibits private distribution and sale through both federal and provincial legislation. In contrast, in Europe, you can buy raw milk in vending machines.

In closing, the one point where we agree with Mr. Kootstra is the injurious effects of taxes. In Australia, consumers were compelled to finance two programs to help dairy farmers adjust to market deregulation. However, Mr. Koostra misses the point that the 11 cent levy paid for each litre of milk sold following deregulation in 2000 was temporary (it was abolished in 2009), and in any case coincided with lower retail milk prices. This demonstrates that the distortionary effects of the previous system of regulation were more costly than a straight 11c/litre tax on milk. There’s no question about the harm to Australian consumers. To transfer wealth to dairy producers, government had to first take it from some other group of individuals.

Thus, the take-home message from Australia is that financial government assistance to dairy producers ought to be a last resort, and in that instance, the taxpayer transfer should be small, limited and of short duration.

References include the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). 2017. Australian Milk prices and Gross Value of Production. Table 6.8. Department of Agriculture and Water Resources.