Putting the Market Back in Dairy Marketing

Abstract

Canada’s system of dairy supply-management restricts the availability of milk to Canadian households, food processors and restaurants to maintain a higher price for milk and dairy products than Canadians would otherwise pay. The immediate beneficiaries of the system are Canadian dairy farmers who own production "quotas," without which any significant milk production is virtually forbidden.

The system is enabled at the federal level in several important ways. These include an often-discussed import tariff which effectively closes the door – beyond certain minimum access commitments made to our trade partners – to imported dairy products. Less well-known to Canadians are the Agricultural Products Marketing Act, which effectively delegates federal power over interprovincial trade and exports to the provinces, and the Canadian Dairy Commission (CDC), a federal Crown corporation. The CDC is the lynchpin of the system – helping the provinces coordinate and allocate production limits and set minimum support prices.

This paper asks whether the restrictions on milk production that are necessary to enforce prices correspond to the objectives of the CDC as set out in the legislation that created it, the Dairy Commission Act. These objectives are to provide efficient producers of milk and cream with the opportunity of obtaining a fair return for their labor and investment and to provide consumers of dairy products with a continuous and adequate supply of dairy products of high quality.

We argue that the current degree of restriction on Canadian milk supply is not necessary to meet these objectives. It is possible to provide consumers a more "adequate" supply of milk and dairy products without sacrificing the goal of providing efficient farmers with the opportunity to earn a fair return. A sharper focus on efficiency would also benefit the industry, where many are beset by debts and high quota values reduce industry dynamism by making entry difficult.

The paper recommends changes to the governance of the CDC that would bring consumer and industrial users’ interests into decision-making, consistent with the regulatory set-up in many other industries. The paper further recommends a cap on support prices set by the CDC, until a reasonable benchmark is reached for an "efficient farm," using national and international comparisons. Finally, to help Canadian farms achieve such a level of efficiency the paper recommends that the federal government reclaim for itself the powers over export and interprovincial trade that it delegated to the provinces so that it can enable efficient farmers – who wish to operate outside of the quota system – to export outside of Canada and expand interprovincial trade.

Keywords: International Policy, Dairy, Milk, Market, Farmers

JEL Classification: F14, F15