Supply Management

​Last week I posted the following tweet as a response to comments made by Justin Trudeau regarding the factual nature of the benefits of supply management.

Below is a link to the short video of Justin Trudeau’s comments featured in the tweet above.

My tweet garnished a lot of interest from people on both sides of the debate and generated a discussion between myself and Bruce Sargent who goes by the Twitter handle of @FarmBoyProd.
You can see the thread of tweets on my twitter page @JohnstonsGrain. In this discussion, I was prompted to listen to an interview featuring Bruce Sargent on the Taz Show on FM96 – London’s Best Rock. The article I’ve written below is a response to this interview. Listen to the interview here:

I’d like to open by saying that as a partner in a grain brokerage firm it’s safe to say that taking exception to Supply Management is probably not a great business decision. I understand that this is a contentious issue with dairy farmers, many of whom we provide grain brokerage services. I’ve already had one client confront me questioning my loyalties and why I wouldn’t be pro-farmer on this issue.

The truth is that my business is built on serving farmers. We strive to do that everyday by providing premium grain prices and discount input prices. However, I firmly believe that supply management is an unfair burden on Canadian consumers and an affront to free trade and free markets, pillars of the Canadian economy. This will inevitably put me at odds with Canadian dairy and poultry producers whose businesses are protected by supply management in the same way that our efforts to dismantle the Canadian Wheat Board monopoly did with CWB advocates.

The interview with Bruce Sargent began by refuting comments made by Donald Trump regarding NAFTA and Canadian supply management and how it effects dairy producers from the Northern United States. From my understanding of these issues, Bruce’s response to these comments are accurate. Either Donald Trump doesn’t understand the issue or he’s willfully conflating the issues to politicize them and attack NAFTA. I have no quarrel with Bruce’s comments here. It’s when he moves on to his defense of Canadian supply management that I take exception.

In his first defense of supply management he says this, “We actually already import millions of dollars of dairy products from the US and they take a fraction from us. We import 700 million dollars more annually than they allow us to send to them. So, we’re already buying America. So, it’s really, it’s ironic when Trump says, ‘Buy America, hire America – but Canada you should really take our milk even though we’re not going to take yours.’”

I will rely on Bruce to come up with the documentation that backs up the claim that the US does not allow us to export or tariffs exports of Canadian dairy products into the United States. I have looked through the NAFTA documents and I see no evidence that this is true. I’ll be willing to accept that this is true if documentation of tariffs or quantity limits can be provided. Canada may import 700 million dollars more of US dairy products than the US imports Canadian dairy products but this seems to be due to price differential not US tariffs or quantity limits.

Bruce then goes on to say about Trump, “So, what he wants to do is to get rid of supply management. And that’s the system that we have in Canada. We have to buy the rights to produce X amount of milk and that means that we don’t have the oversupply issue that the states is having right now. In the states a farmer can produce as much as they want, so Trump wants access to our supply managed commodities which, frankly, he can piss up a rope because our system works and…”

Trump has no interest in getting rid of supply management. Trump has an interest in getting rid of Canadian dairy tariffs to open up new markets for US producers. Trump would be happy to keep the inflated supply managed prices for Canadian Dairy in place if US producers have access to Canadian markets. Canadian consumers would benefit from this as well as it would put competitively priced US inventory in Canadian grocery store refrigerators bringing down retail prices.

Bruce goes on to say this about supply management in the United States. “They have it in California but the majority of the states don’t. So, they have a huge overproduction issue because the farmgate price is so low in the US that farmers are losing money on every litre they ship and they have to make more milk, more milk, to make more money because if they choose to make less then they’re probably going to go out of business. But the problem just gets worse and worse.”

This is where logical economics get thrown to the wind. If there is a huge overproduction issue and lower farmgate prices then the obvious winner is the consumer who buys overproduced dairy products at a cheaper price. In the Canadian system, the consumer is always at a disadvantage because the supply is capped by a quota system and imports are extremely limited due to massive tariffs, sometimes as high as 277%. Due to these huge tariffs on imports, Canadian producers are not forced to compete and retail prices increase for the consumer.

When asked about Trudeau’s recent defense of supply management Sargent said the following, “I think it could have been a little bit stronger but I do appreciate him defending our industry for sure. Um… Supply management works. Without supply management milk would trade like a commodity like oil on the open market and when was the last time that you felt fair or good about the oil price that you’ve been paying at the pumps. Never, right? Now expect a dairy farmer that works 12 hours a day generally to be paid based off of that system. On daily basis speculators could say that you know, the value of milk has gone down and you’re going to get paid 20 cents less tomorrow than you were today but your costs have stayed the same. That’s not fair.”

There are two points that need to be made about this segment. First, what is milk if not a commodity? Why should milk be traded any differently than any other commodity or product. Should we have supply management for wheat, urea, steel, garage doors or any other random product? No, producers of those products are susceptible to the ebbs and flows of markets – supply increases, demand decreases, recessions and all other factors. Dairy should be no different.

Secondly, this last argument about fairness, although wrong, is a compelling one because it plays on the emotions of the listener. In my experience, it is true that dairy farmers are extremely hardworking people but does this warrant government favour over other hardworking Canadians who deserve the opportunity to buy their dairy products at fair market prices? The answer here is no as well. Markets should be fair to all participants, it isn’t the job of the government to pick winners and losers. Fairness means equality of opportunity not equality of outcome.

Mr. Sargent can’t have it both ways. He must acknowledge that supply management favours dairy producers and is at odds with consumers. His argument here is equivalent to saying “We need to join OPEC so that gasoline prices don’t get too high.” If supply management wasn’t a sweetheart deal for dairy producers then we wouldn’t see tweets like the one below from Bruce himself.

The hashtag #VoteNotMax is included in this tweet because dairy producers don’t want to see a true Conservative Free Market proponent like Maxime Bernier in the CPC party leadership as he has vowed to end supply management for dairy and poultry.

As a final note on the subject, it should be recognised that supply management and import tariffs are different things. The reason the US has such inexpensive product available is that they heavily subsidise their dairy industry. It is reasonable that Canadian dairy producers don’t want to compete against the US Treasury department. If the US is not willing to put these subsidies on the chopping block when renegotiating NAFTA then an argument can be made for maintaining tariffs on US products at a level equivalent to the subsidies. This would maintain a level playing field for our producers; however, this is not a compelling argument for maintaining supply management. Dismantling supply management and opening trade with all other nations with a free dairy industry would allow the market to set prices and equilibrate the supply and demand curves. This is done by allowing the lowest cost producers to succeed and driving higher cost producers to compete or leave the market. Anybody should be allowed to be one of these low cost producers not a handful of quota owners.

I’m very interested in hearing a response to this blog from Bruce and other dairy farmers as well as from the average Canadian consumer who knows about this issue or is just learning about supply management for the first time.

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