Op-ed: Supply management: red flags and red herrings
The following is an op-ed written by Ryan Cardwell, an economist in the Faculty of Agricultural and Food Sciences. It was originally published on August 15, 2016.
As UM Today reported earlier this year, Professors Ryan Cardwell and Chad Lawley were awarded the John Vanderkamp Prize by the Canadian Economics Association. This prize recognizes the best paper in the journal Canadian Public Policy. Their paper: “Milked and Feathered: The Regressive Welfare Effects of Canada’s Supply Management Regime”.
Supply management is regressive policy
An op-ed by Bruce Muirhead in the Free Press touted: Canada as a trendsetter in supply management. (Aug. 8). It is not clear how maintaining a 40-year-old system of market regulation can be considered trendsetting, but that is beside the point. The op-ed uses misdirection and red herrings (often used by lobby groups) to confuse the issue.
The basics of supply management in Canada are these:
- Supply of dairy and poultry products is controlled through a system of production quotas in which national output is limited by the lobbying and promotional organizations for dairy and poultry farmers.
- Imports are restricted through prohibitively high border taxes.
- Producer prices are set by industry marketing authorities, instead of by the market forces of supply and demand.
There are many effects of these policies, both intended and unintended. The most important effects are higher prices for supply-managed products. Muirhead makes some casual cross-country price comparisons, but cross-country price comparisons are difficult and are only useful in policy analysis if they shed light on what would happen in Canada if supply management were deregulated.
Milk and egg prices in New Zealand and Australia are not relevant. The Canadian market is fundamentally different in many ways; the most important of which is geography. New Zealand and Australia are remote island nations facing high trade costs, while Canada borders one of the world’s largest producers and consumers of dairy and poultry.
The removal of border taxes on supply-managed products would require Canadian farmers to compete with U.S. farmers, as do Canadian farmers of most other agricultural and food products. Consumer prices for dairy and poultry products in Canada would fall. To suggest otherwise is disingenuous. Why would lobby groups so staunchly defend high border taxes if they were not convinced that such protection is needed to prop up prices?
The issue of competing with subsidized farmers in other countries is also complicated. U.S. dairy farmers benefit from a system of subsidized margin insurance, which draws funding from the U.S. government’s progressive income tax system. Canadian dairy and poultry farmers receive indirect subsidies from a regulatory system that reduces supply and increases prices, instead of from direct government subsidies.
But Muirhead’s belief Canadian farmers could not compete with subsidized farmers in other countries may not be justified.
It is likely Canadian dairy and poultry farmers would be compensated in two ways if trade barriers were removed. They would be compensated for the lost value of production quota and would subsequently be eligible for the subsidies currently paid to other (grain, livestock, etc.) farmers. Perhaps more importantly, recent peer-reviewed analysis suggests Canadian dairy and poultry farmers could compete in the world market, and production and exports would actually increase if production and trade regulations were removed.
In analyzing any public policy, one must ask two key questions: 1) what is the policy objective; and 2) what policy tools can be used to achieve that objective? The primary policy objective of supply management is to increase and stabilize farmer income. If that objective is viewed as worth pursuing, then we should analyze the options to achieve that goal. However, it should be noted average income for supply-managed farm households is currently more than 60 per cent higher than average Canadian household income.
The policy tool that currently transfers income to supply-managed farmers is unique in Canada in that income is transferred directly from consumers to producers through regulated production and administered prices. This has regressive distributional effects on poor households that spend larger shares of their incomes on food.
Other Canadian farmers receive transfers from government through subsidized revenue and crop insurance, financial bailouts and other programs. These programs are funded from government revenues that are raised using progressive income taxes. Understanding the difference between these options is important in determining support for public policies.
Other outcomes of supply management that are often viewed as benefits of the system are red herrings. Limiting the use of growth-promoting hormones in dairy cattle is not a feature of supply management, but rather a set of regulations imposed by Health Canada to achieve veterinary-health objectives. Such objectives do not require production constraints and border taxes.
There are many other such red herrings that come up in the debate over supply management, but perhaps the most frustrating is the claim that a policy can enhance “food security” with a system that increases food prices. This kind of thinking is several decades out of date on the understanding of poverty and food insecurity.
At the end of the day, supply management is a regulatory system that transfers income from consumers to producers using a regressive policy tool. It is important to understand, to the best of our ability, the true costs and benefits of the system in determining support or opposition. It might “feel good to be a trendsetter,” but let’s make sure that we’re not imposing our preferences on those who might not understand the consequences of the current fashion.