Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK. A Sacred Cow: The Past, Present & Future of Canada s Supply Management

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1 Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK A Sacred Cow: The Past, Present & Future of Canada s Supply Management H. Ali, N. Blaff, E. Urbankiewicz, E. Xherro

2 Agenda What we will be discussing today 1 History & Economics Review 2 BCG Model Analysis 3 Supply Management Debate 4 New Developments 2

3 Counting Head Breaking down the world cattle inventory (BN) 1% 9% 30% 23% 3% Source: USDA 3

4 History & Economics Review 4

5 What Is Supply Management? Endorsing domestic cartels Bringing Everybody Up To Speed Supply Management is a national agricultural framework used in Canada It coordinates the supply and demand of dairy, poultry, and eggs through production and import control and pricing mechanisms Supply Management mechanisms such as import control were viewed as valid practice under GATT After the article was removed, Canada introduced tariffs to protect Canada s domestic dairy and agriculture Surprisingly, Supply Management was not involved in 1994 when NAFTA came into effect With the creation of the WTO in 1995, Canada was forced to remove export subsidies. As a result, the government and Canadian Dairy Commission CDC updated the pricing system to become more stringent in managing supply The policy has been described as regressive and protectionist and costly with money transferred from consumers to producers through higher prices on milk, poultry and eggs, which some label as a subsidy Legislative Genesis and Regulatory Bodies The Supply Management system was authorized by the 1972 Farm Products Agencies Act This act established two national agencies to oversee the system the SM-5 Organizations (Egg Farmers of Canada, Turkey Farmers of Canada, Chicken Farmers of Canada, Canadian Hatching Egg Producers) and the Ottawa-based Canadian Dairy Commission Of the 193,492 farms in Canada in 2017, 16,351 were under supply management The controls provided by supply management have allowed the federal and provincial governments to avoid subsidizing the sectors directly, in contrast to general practice in the European Union and the United States Supply management's supporters say that the system offers stability for producers, processors, service providers and retailers Detractors have criticized tariff-rate import quotas, price-control and supply-control mechanisms used by provincial and national governing agencies, organizations and committees Source: Dairy Farmers of Canada, CBC, Huffington Post, Reuters, The Star 5

6 Pillars of the Earth Structural integrity & stability Pillar I Import Control Under supply management, a national marketing agency determines production amounts for each commodity and then sets production quotas for each province In order to sell their products, a farmer must hold a quota basically a license to produce up to a set amount As of 2015, there were just over 16,000 quota holders in Canada most of them dairy farmers in Ontario and Quebec While U.S. President Donald Trump has pushed Canada to dismantle the system to help U.S. farmers, many dairy farmers south of the border look at Canada's system of supply management with envy. Economics Lesson: Import Quotas An import quota is a limit on the amount of imports that can be brought into a particular country For example, the US may limit the number of Japanese car imports to 2 million per year Quotas will reduce imports, and help domestic suppliers. They will lead to a decline in economic welfare and could lead to retaliation with other countries placing tariffs on our exports Types of quotas: Absolute quota a simple physical limit on number Tariff rate quota These allow a certain number of imports to gain a discount on the usual tariff rate Voluntary export restraints (VER) This is when a government limits the amounts of exports from one country to another for a particular type of good. In the early 1980s, there was a VER on exports of Japanese cars to the US. The cap on export of Japanese cars lasted from 1981 to 1994 because the US government wished to protect the US car industry Source: Dairy Farmers of Canada, CBC, Huffington Post, Reuters, The Star 6

7 Appendix A: Supply/Demand Effect of Quotas Lower price, increase Quantity loss of overall welfare 7

8 Pillars of the Earth Structural integrity & stability Pillar 2 Minimum Prices Supply-managed producers are guaranteed a minimum price for their products Farmers negotiate minimum "farm gate prices" with processors through provincial marketing boards Critics maintain that Canadians pay too much for supply-managed products But not everyone agrees and the research is by no means unanimous in its conclusions In 2014, a Nielsen Company study commissioned by the Dairy Farmers of Canada showed that the price of Canadian dairy products compared favourably with prices in other countries The Montreal Economic Institute maintains that millions of Canadians are paying artificially high prices to benefit a few thousand farmers Tell Us How You Really Feel Maxine Bernier, former Conservative leadership candidate, has become one of the most vocal opponents of supply management "The worst aspect of supply management, however, isn't that all Canadians who buy these products must pay more. It's that the poor, and households with children, are affected the most," Bernier wrote in a chapter from his forthcoming book Bernier wrote, Average after-tax income of all households in Canada is $69,100. By comparison, the average dairy farming household income is $147,800, and the number is $180,400 for poultry-farming households." But dairy farmers point to retail prices for milk in jurisdictions that have deregulated their dairy industries, like the United Kingdom and Australia, as proof that supply management strikes the right balance In New Zealand, the largest dairy exporting country in the world, milk prices are higher than they are here in Canada Source: Dairy Farmers of Canada, CBC, Huffington Post, Reuters, The Star 8

9 Pillars of the Earth Structural integrity & stability Pillar 3 High Tariffs Third pillar of supply management is the imposition of high tariffs on foreign imports, a policy that makes these goods prohibitively expensive for Canadians, leaving domestic supply as virtually the only option for consumers It's this policy in particular that annoys Trump, who has said the policy is unfair to American farmers. However, the main source of the financial problems plaguing some U.S. dairy operations is overproduction Canada sets tariff-rate quotas, meaning some foreign goods enter tariff-free, but all other imports face high tariffs to prevent foreign foods from flooding into the country Tariffs by Good % % % % % % 50.00% % % % % % 0.00% Fluid Milk Cheese Ice Cream Cream Butter Source: Dairy Farmers of Canada, CBC, Huffington Post, Reuters, The Star 9

10 Supply Management s Reputation and Effects Why should you care? Overwhelming Support From Canadians Consumer Benefits Fresh, high-quality products Canadian farmers work together to match our domestic demand with Canadian products, resulting in better quality No government subsidies needed Supply Management provides stability to such a large part of our economy. The US and EU spend millions of dollars subsidizing their farmers which cost consumers again Canada s Agricultural Dependency Make This A Hot Button Topic Agricultural Contribution to GDP Source: Dairy Farmers of Canada, CBC, Huffington Post, Reuters, The Star 10

11 BCG Model Analysis 11

12 BCG Model Analysis Risk, costs, and reduced GDP Economic Impact A deregulation and opening of the Canadian dairy industry presents an estimated $ bn reduction for Canadian GDP, additionally threatening 24,000 jobs directly related to milk processing and production Dairy producers in debt $16 to $18bn - these loans are at risk Substantial costs to finance the transition period or to help producers at risk Producers Processors Retailers & Catering Other players State Source: BCG 12

13 Case Study Australia They deregulated and Background Context Supply management started in the 1920 s Wanted to increase global dairy trade participation Complete deregulation of the industry in 2000 (eliminated quotas and minimum prices) Following New Zealand as they deregulated in the 1980 s Dairy Product Exports Results? The country lost 2,000 farms in 2 years Since 2000 exports have decreased 3% each year (returned to 1996 levels in 2013) 6% share today, once represented 16% Foreigners taking a larger share Dairy products (cheese and butter) increased price faster than inflation over past 10 years AU$ 2bn Financial Programs # of Dairy Farms Dairy Product Exports (Thousands of Tons) Casein Whole Milk Powder Skim Milk Powder Cheese Butter Source: BCG, Globe and Mail 13

14 BCG Model Analysis Price impact BCG Price Analysis While talking about economic impacts, that same BCG report also does a price analysis on an open market scenario It started by taking average US raw milk prices in pounds (Unit of Production) Accounts for the mark up in prices from the farmer to retailers It then converts the pounds which is a unit of production to liters which is what milk is sold in Then converts the exchange rate from USD to CAD based on a 5 year average of US-Canada exchange rate Adds in the fact most imports would come from Northern Eastern region, which is 1.03x more expensive than US average Finally It adds the the transportation costs of shipping from milk from the North Eastern US to Canada The result is an 80 to 61 cent per liter drop in prices saving consumers 24% per liter on milk Using the same model, the BCG report analyzed Canadians could save up to 45 cents/kg on cheese Sources: BCG Source: BCG 14

15 BCG Model Analysis Price impact Perspective The average Canadian consumed liters of milk and 10 liters of cream (per year) This would save them around $18.40 a year and a family of four $63.80 a year only on milk, a 24% price decrease in price The average Canadian consumes kg of cheese (per year), meaning they would save $5.61 a year on cheese, a family of four would save $22.46 a year, a 40% decrease in price L KG Bigger Picture Pizza shop buys thousands of kgs. of cheese every year, potentially adding thousands of costs to it s business which are then transferred through higher prices to the consumer The prices of dairy are not being subject to the laws of supply and demand, as we speak, globally the demand for cheese is slumping and many of the markets in the world are experiencing a surplus of dairy products, economics tells us the price of cheese should fall in these circumstances Which they have, but sadly not in Canada due to suppliers ability to control production, imports and negotiate prices with processors This is increasing input prices on firms, ensuring aggregate supply is stagnant, stunting GDP growth from the sectors affected by the prices of dairy and poultry products Source: BCG 15

16 Supply Management Debate 16

17 Pro Supply Management Price of milk speaks directly The Common Myth Debunked Generally speaking, labour is cheaper in the U.S. than in Canada for the dairy industry Direct and indirect dairy subsidies totaled up to $22.2bn in 2015 Trump s 2018 budget added US $1bn for dairy farmers through subsidies In the US, over 50% of input costs that go into producing a gallon of milk are covered by citizen s taxes Canadian average farm size is 85 acres, while the average in the US is 225 acres - economies of scale benefits the US Milk Prices / Litre Across the World Global Retail Fluid Milk Price, 12 months ending October 2017 (per litre) Source: Export Action Global, CTV News 17

18 Pro Supply Management There are other factors to consider Supply and Demand In 2017, the U.S. dumped 100 million gallons of milk it wasn t able to sell This occurred due to supply exceeding demand The US has overproduced since 2007 The Rest of the World Europe, Japan, Australia, New Zealand, and Canada have all banned or blocked US milk containing growth hormones Antibiotics & Hormones rbst is not allowed in Canada but is still frequently used in the US Canada tests for antibiotics and if there is any present it cannot be sold (can still be administered) The US does not test for antibiotics and the FDA allows for safe levels to be present Somatic Cell Count (SCC) Somatic cell count number of somatic cells in milk - an indicator of the quality of milk The number of somatic cells increases in response to pathogenic bacteria Canada allows a maximum of 400,000 cells/ml US allows a maximum of 750,000 cells/ml 21.3% of US are over the Canadian limit Source: Government of Canada, Council on Dairy Cattle 18

19 Against Supply Management Actions of a cartel Cartel Action Expenditure on Dairy Products Cartel: an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition When comparing demand levels to prices, we can clearly see Canada s consumers are the victims of a legal cartel If any industry were to act the way our dairy industry acts, they would be charged under the Cartel and Competition Act Unaffected Prices Milk & Cheese Consumption As can be seen in the graphs, consumption of milk has declined steeply, consumption of cheese has been steady Yet even with these fall in demand, Canadian prices have still been unaffected By controlling supply, our dairy industry can protect their margins even with collapsing demand This fall in demand is likely due to the rise in alternative milk products such as almond and soy milk Source: Government of Canada, Council on Dairy Cattle 19

20 Against Supply Management Actions of a cartel There's more to the story Although Canada seems to be in the middle of the pack when it comes to prices, this does not tell the full story Australians and New Zealanders consume 1.49 times more milk than us yet only pay 1.04 and 1.22 times as much as respectively Source: Export Action Global 20

21 Against Supply Management The even greater risk: losing on trade deals NAFTA Visualizing the Risk What Monday s NAFTA developments proved to us is that supply management and trade deals are mutually exclusive Proponents of Supply Management have always argued our system has never prevented us from joining trade deals We now see, to be a part of NAFTA and other trade deals moving forward, Supply Management is something we need to concede CETA In CETA, a trade deal between Canada and the EU, we again we had to make significant concessions within the dairy industry The result was thousands of pounds of cheese entering tariff free, and an influx which causes 2% of Canada s dairy production to no longer be needed Countries in Europe simply refused to move forward on a deal without concessions on supply management Source: Government of Canada, CBC 21

22 Audience Debate 22

23 New Developments 23

24 Nafta 2.0: U.S.-Mexico-Canada Agreement What does the new agreement mean for Canada? Greater U.S. Access Canada currently allows a small amount of dairy and poultry imports from the U.S into the country duty-free or at very low tariff rates Exceeding import quota allows Canada to levy dairy tariffs of 249% New agreement marginally increases market access quota (3.25% à 3.59%) Class 7 Pricing Canada has agreed to end class 7 pricing - a milk class that slashed prices on Canadianproduced milk ingredients used to make cheese and yogurt The price cut made the American equivalents uncompetitive Liberal Government Dairy farmers demanded subsidies from Trudeau government Trudeau vows to keep Canada s supply management untouched 1970s 2018 Cabinet refused additional support leading to Parti Québécois victory later that fall U.S. producers given access to Canadian dairy market Figure 1: Quebec farmers dump milk on Eugene Whelan, former agricultural minister during protests of 1976 Source: CBC 24