An Often Overlooked Reason for High Grocery Prices: Canada's Supply Management System
In the end, it benefits almost no one, including most dairy farmers
Understandably, a lot of people are quite upset about “sky-rocketing” grocery prices over the last little while, and a lot of these frustrations have been directed at large grocery retailers, especially Loblaw Companies Ltd. and its President Galen Weston Jr. However, much too little of the blame is being directed at federal and provincial governments in Canada who legally require higher prices in dairy, eggs, and poultry (DEP), via the enforcement of “supply management”: a system that was designed to create and enforce a legal cartel to the detriment of not only consumers, but also non-DEP farmers, restaurants, and even many participants in the DEP industries.
Even worse, there is no real political opposition to the system since all major parties endorse it — the only one to come out officially against supply management is the People’s Party of Canada under Maxime Bernier, but it is hardly worth mentioning.
In fact, on November 23, 2005, a motion supporting the supply management system was unanimously passed in the House of Commons. This unanimity is remarkable considering how political parties tend to disagree with each other just for the sake of disagreement. It even reminds me of the following classic Adam Smith quote from The Wealth of Nations, which applies to both the members of the cartel and to the politicians who support it:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.
It is therefore the purpose of this issue of the Walls and Bridges newsletter to explain the system of supply management and why it is so bad for so many people, as well as why it appears to be so politically risky to oppose it. I will also cite similar historical examples of protectionism — specifically the dairy industries in Australia and New Zealand, and Canadian wines — to show how deregulation can actually benefit everyone (producers and consumers) if only our political leaders have the courage to stand for all of their voters rather than just the special interests.
Before moving on, I invite you to please consider a paid subscription to my newsletter so that I can more easily afford the time and other resources to conduct this kind of research. Regardless, I thank you all for being here to read what I write.
The History of Supply Management
In her excellent research paper for the University of Calgary’s School of Public Policy, Martha Hall Findlay (2012) explains that pressures on Canadian governments by dairy farmers started as far back as 1890 with the appointment of the first Dominion Dairy Commissioner. However, it was not until 1970 when the first fully national system of supply management was created, starting with dairy and then expanding to eggs in 1972, turkey in 1974, chicken in 1978, and chicken hatching eggs in 1986.
The motivations behind the supply management system were not unique to Canada, as governments around the world wanted to ensure a “fair” return for farmers, as well as stability in prices and supply for both processors and consumers. In their minds, the system was necessary to reach these goals because world markets were volatile and world prices were unstable; dairy producers could do nothing about it on their own because they lacked market power. These governments also agreed dairy farmers should be compensated for having to adhere to high health and safety standards.
So how does supply management work? Unlike free markets where prices are jointly determined by demand and supply — where demand represents what consumers are willing and able to pay for the product — the supply management system determines prices based primarily on costs of production. Furthermore, the federal government levies substantial protective tariffs to keep out foreign competition, and production is controlled through a regulated system where farmers are not allowed to produce more than their individually-alloted quota.
Under this system, the Dairy Commission (comprised mostly of dairy farmers) sets milk prices, while the national Milk Supply Management Committee determines the national production level — the provinces have the authority to manage the supply of raw milk for table milk and cream. Furthermore, prices differ according to the use of the product — for example, the highest prices are for milk that go to the tables of consumers (“table milk”) and cream, followed by milk sold to processors for ice cream, yogurt, and sour cream; cheese is next, then skim milk powder, and finally butter.
Initially, the federal government simply blocked foreign competition outright, but that approach became difficult given international pressures for Canada (and other countries) to lower trade barriers, first under GATT and then the WTO. So Canada allowed tiny quotas of DEP imports to adhere to international “minimum access commitments” at low tariffs, and then levied prohibitive tariffs above those quotas.
To be clear, the quotas are so small to be essentially meaningless; one example given by Findlay (2012) is the quota for yogurt, which amounted to the equivalent of one rounded-teaspoon per Canadian per year. As of 2012, the tariff rates above quota were 168% for eggs, 238% for chicken, 246% for cheese, almost 300% for butter.
With respect to how much each farmer is allowed to produce, they are each provided a maximum quota because overproduction would obviously be counterproductive for the purposes of the cartel. The quota is transferrable, so the average price of a cow in 2012 was $28,000 over-and-above the amount the cow would be worth apart from the quota — double the value from ten years earlier.
Since Findlay’s paper was published, there was more pressure from the international community for Canada to back away from supply management. Most prominently, the Canadian government had to make concessions on this front to become a member of the Trans-Pacific Partnership (TPP), as well as when renegotiating NAFTA. These moves upset the dairy producers who benefit from supply management, and for that reason the federal government did all it could to keep the system as strong as possible, while all opposition parties did the same.
Supply Management Hurts Almost Everyone
Consumers
Obviously, consumers are negatively affected by supply management since they must pay more for less. Furthermore, while proponents of the system argue it still leads to higher quality food, the evidence is not there, particularly when considering the post-deregulated dairy industries in Australia and New Zealand, as well as Canadian wine producers after 1988 — but more on them later. Even so, health and safety regulations can exist without supply management, as they do in many other Canadian industries.
There are also negative equity implications of supply management because consumers who are harmed the most from it also often have lower incomes, e.g., single mothers who especially need milk for their children.