October 29, 2001
Let Them Drink Soda Pop
Canadians have fought a spirited campaign against poverty, but we've failed to brandish one obvious weapon: shedding a marketing board system that raises the price of food and makes basic nutrition more expensive for the poor. With the support of provincial and federal governments and the courts, milk and poultry producers have virtually abolished competition and set prices and profits in a closed market.
It's difficult to calculate how much food this policy takes from hungry mouths. Most estimates of the increased consumer cost that flows from it are couched in "macro" terms numbering in the billions of dollars. One attempt to express the difference in "micro" form, in 1992, concluded that a single welfare mother with two children who each drink a litre of milk a day pays an extra $219 a year. That's a lot of money for a poor family, and it's a safe bet that the extra burden is higher now.
Lawrence Solomon at the Urban Renaissance Institute in Toronto recently pointed out the nutritional consequences of this misguided policy. A jug of milk costs more than one filled with soda pop; consequently, we down more of the latter. StatsCan reported that per capita milk consumption declined by 10% over the last decade, and we drank 17% more soft drinks.
Proponents of marketing boards will argue this was not their intention when the system was put in place about 30 years ago. "Supply management" was all the rage, because the boards were supposed to stabilize and strengthen the lot of family farmers by guaranteeing a fair return and reducing their exposure to wild market swings. Even if those goals had been accomplished, we've had plenty of time to evaluate other, unintended consequences. When all factors are considered, supply management does more harm than good, to farmers as well as the rest of us mere eaters of food.
Here's how the Byzantine system works. Provincial and federal marketing boards calculate the cost of production. Items as diverse as animal feed, gasoline prices and the expense of building a new barn can go into the mix. They then set a "fair price" for selling milk, cheese, eggs, and poultry that reflects this overhead. Fair or not, dictated prices are not immune from the real market, the dynamic of supply and demand. The system could fail because, if allowed, producers who are more efficient would have an incentive to undercut the "fair price." To prevent this, production quotas were set based on the proportion of the market held by different regions at the outset.
Quotas are occasionally fine-tuned, but they reflect the market share that existed when each commodity was controlled. Powerful dairy farmers in Québec - the only place in the world that still forbids coloured margarine - held a larger proportion of quota rights then, and they still do. Nationally, about 100,000 dairy and poultry farmers get regulated, higher than market, prices from 30,000,000 consumers.
This bonanza is reflected in the high cost of quota rights, essentially a fee producers pay for the right to participate in this cozy arrangement. For example, it costs roughly $15,000 per cow for the quota in Manitoba. New entrants pay twice as much for quota rights as they do for all other costs of production, including land, buildings, equipment and livestock. Producers have little incentive to improve operations, because they can't sell more than their quota. The gap between formula-driven prices and an open system keeps Canadian farms smaller and less efficient, with underutilized capacity and lower yields.
The ripples extend to the food processing industry. Surpluses are dumped offshore at real prices. Solomon details the incredible process by which manufacturers of frozen pizza snap up our cheese at world prices, while pizza parlours here lose market share because they have to pay 30% more for the same mozzarella. These effects add up to what's sometimes called a "hidden tax" on Canadian food, estimated in 1995 by the OECD at about $3-billion a year.
Why can't we compete on a level playing field? Canadian producers are as well informed and technologically proficient as foreign ones. Other commodities, such as beef, hogs and vegetables, are competitive and Canadian production of these goods has expanded. All we have accomplished is to protect ourselves into inefficiency.
Sentimentality about the "family farm" also confuses the debate. In some respects, this position is a red herring - U.S. dairy operations are concentrated in family-sized operations. The poultry industry would likely become more concentrated in an open market, but why is that bad? More integrated U.S. poultry growers offer products of equal quality, nutritional value and safety at lower cost and prices.
Poultry and egg producers represent a small part of Canadian farming, so it's silly to suggest deregulation might destroy family farmers, who might even mount larger operations on their own, as they have with hogs. Thousands of family farmers have moved out of the dairy and poultry industries under supply management. Without marketing boards, Canada will not become dependent on imports: Canadian producers retained the bulk of the domestic market before supply management.
There is a good news angle to all this. Recent decisions by the World Trade Organization point to an eventual end to supply management in Canada, because the system cloaks what amounts to an illegal subsidy for producers. With their demise, Manitoba would likely see thousands of new jobs, as formerly supply-managed production shifts to places with low-cost feed.
Not a bad ending to a bad policy.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."