Dairy supply management is an old solution to an old problem. The approach of setting dairy prices, controlling production, and controlling imports has been costly to Canadians as a whole and to dairy farmers for a long time. Today, Canada has an opportunity to break with supply management for the benefit of everyone — and it’s time to seize it.
When supply management policy was implemented in the 1960s and 1970s, Canada had a growing domestic market for dairy products. China was in the throes of the Cultural Revolution. Today, China is hungry for quality, safe dairy products. Canada could quickly become a major exporter to China and other developing countries.
The New Zealand dairy industry illustrates the potential gains. Since opening its once-closed market in the 1970s, New Zealand has become the world’s greatest dairy exporter, accounting for nearly 30 per cent of dairy products traded globally. New Zealand exported US$9.4 billion in dairy in 2012 while Canada, in contrast, exported $27 million in dairy products that year.
Yet, Canada has a unique opportunity to supply the world with dairy products. New Zealand is already struggling to keep up with demand. And shipping milk to Asia can be done efficiently.
Taking advantage of this opportunity requires embracing a new vision, instead of settling for a share of a stagnant domestic market.
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Think of supply management as a three-legged stool consisting of price setting, a production quota, and trade barriers. Successful reform will require co-ordinated action on all three to eliminate price setting, wind down milk production quota, and remove international trade barriers.
Quotas could be bought out on the basis of their book value (the cost of the quota at time of purchase). This cost is estimated at between $3.6 billion and $4.7 billion. This approach would compensate farmers fairly and equitably for their quota purchases.
The buyout could be funded by a temporary levy on dairy products. In the medium term, prices would not decline much, if at all. In the longer term, however, Canadian prices would settle around the world price, saving consumers an estimated $2.4 billion annually.
While reform to the price and quota factors are being pursued, Canada would need to aggressively negotiate access to international markets for Canadian products.
These steps would result in somewhat larger farms, but they will remain largely family owned. Under supply management, the number of farms has been declining for half a century. The most efficient and successful dairy operators are expanding already.
With moderate growth in the industry over the next decade, the number of farm operations would decline at a rate similar to what is currently occurring.
Under a rapid-growth scenario, in which Canada’s production grows 150 per cent to meet export demand, the number of dairy farms would actually increase by 2.1 per cent over 10 years, adding thousands of jobs.
And there should be no doubt that Canadian dairy producers can take advantage of the opportunity that surging global demand offers them. The top dairy Canadian farms are managerially and technically among the most sophisticated in the world. There are few, if any, technical barriers to Canada’s farmers scaling up their operations to be globally competitive in markets that are eager for Canadian dairy products. The real barrier is our outdated policy.