Sunday, March 31, 2013

The Supply Management Trap

The same kind reader who asked about coping with language differences in Turkey sent me a link to this Supply Management article in the Grope and Mall. I can't comment at all on the feather industry side of it but will try to explain the dairy industry side of it and show why it is so difficult to get rid of something that may have outlived its usefulness.

I milked cows as a kid.  We shipped cream until Dad got a job driving school bus in 1960.  One of the reasons I like beef cattle is that the calves do the milking of the cow.  So I am no dairy expert.  I called on my good friend DAC who as dairy cattle nutritionist (among other hats) at U of S has been in the dairy industry, production, politics, policy and all since his youth on a dairy farm near Saskatoon.  He sent me a package of stuff on the Canadian Dairy Industry Supply Management for which I am thankful.

Every country with the possible exception of New Zealand protects and supports its dairy industry directly or indirectly to some extent.  This very truncated version (with great liberties taken in abridging, partially due to my limited understanding of a complex issues), is Canada's approach.  (Dave, I know you will read this, so please fix any glaring errors).

In the 1930s, producers responded to processor problems by establishing producer-owned processing plants throughout Canada.  After WWII there was a shortage of milk and the government began subsidizing milk production.  In the 1950s a great many technological changes allowed the industry to reinvent itself and milk production increased to the point there was a surplus by the late 60s early 70s.  The government wanted to limit its subsidy liability and producers wanted to maintain prices.  The answer was to manage the supply of milk to meet Canadian demand with as close to no imports or exports as possible.

There are five classes of milk in the Canadian system, with classes 2-4 known as Industrial Milk.  Each class has its own price with Class 1 highest and 5 lowest.

  1. Fluid milk 
  2. Cream, ice cream, yogurt, infant formula
  3. Cheese
  4. Butter and Milk Powder
  5. Ingredients in food production.

Quotas were established for Industrial Milk under the Canadian Dairy Commission (CDC), set up in 1966 to regulate supply.  These quotas were distributed to the provinces according to historical production.  This quota came with direct payment subsidies and support prices set in the form of butter and powder purchases by the federal government.  It could not be sold but could be transferred with the herd, if the herd was sold.  Needless to say, herds with quota brought more money.

Provincial Milk Control Boards established quotas for Fluid Milk which could be bought and sold.  CDC, in cooperation with the provinces, set prices at producer and processor levels based on cost of production (COP).  Producers were paid monthly a pooled price based on the percent of milk used in each class.

This worked fine for a while but soon the ability to cheaply move milk longer distances including across provincial boundaries led to a Western Milk Pool (WMP) and an Eastern milk pool, the P5.  Small processors amalgamated into larger ones and soon all processing was done by large interprovincial and international companies.  Industrial quotas and fluid quotas were rolled into one, described as 1 kg butter fat (BF), and were bought and sold across their respective pool areas.

COP which is NOT supposed to take into account the cost of quota was calculated at $74.40 per hectolitre in 2011.  Average pool price for milk in 2012 was $75.50 per hectolitre.

Quota, as a right to produce, has a value determined in the market place. The price of the right to produce 1 kg BF for 365 days was 36,000 dollars or about $98.60 per kg per day.  Depending on how this is amortized at what interest rate it works out to $40 to $50 per hectolitre of milk that the buyer now has the right to produce.  Producers with low incremental production costs (the cost of adding one or more cows to the milking line) are the only ones who can afford to buy quota.

Supply management has provided a good living for two generations of dairy farmers but is has wreaked havoc with Canada's ability to negotiate trade deals.  How to get rid of it and what to replace it with?  Quota is used as security for bank loans; it figures highly into the retirement plans  of older dairy producers.  It has resulted in small high cost dairy farms.  If there is 310 million kg of quota at $100 per kg, it would cost the government $31 billion to buy it out and then what would they replace it with?  How do we keep our dairy industry from being flooded with low cost, highly subsidized product from other countries?

Eugene Whelan and company meant well and Supply Management served the industry well in the short term but in the long term the failure (inability) to adjust will cost the country dearly.

1 hundredweight of milk at 3.5% butterfat (bf) = .441 hectolitre at 3.6 kg bf per hectolitre. 
2.26761 hundredweight at 3.5% bf = 1 hectolitre of milk at 3.6 kg bf per hectoliter. 
1 hectolitre at 3.6 kg of bf = 103.2 kilograms. 
9.7 hectolitres at 3.6 kg of bf = 1 metric ton


2 comments:

  1. It appears the subject is a blog comment killer. Thanks for taking on the topic. It seems like supply management might have been the answer at one point in time but it has outlived its usefulness. But as you say, since there's dependency on it now, what moves in, if anything, to replace it.

    ReplyDelete
    Replies
    1. It is primarily a Canadian issue of interest to dairy and poultry farmers and a few consumer activists as well as those conducting trade negotiations. I did get a few comments via other media. One to the effect that high poultry prices in Canada help support higher beef and pork prices in Canada too.
      Truly it is a Gordian knot of some proportions. We could compete if we could get rid of it and restructure without being flooded out with cheap imports in the mean time.

      Delete