Dairy farmers are being thwarted from competing and innovating globally because of a supply-management system that relies on import tariffs of up to 300 per cent, says a report Monday by the Conference Board of Canada.

"Supply management largely meets its stated goal of improving producer incomes," said Conference Board chief economist Glen Hodgson in a news release.

"But it also prevents milk producers from capitalizing on opportunities in global markets, while thwarting Canada's international trade objectives and reducing competitiveness and innovation," he said.

However, the Dairy Farmers of Canada organization, responding to the report, said it prefers the 40-year-old protected supply system to a free-market approach.

"It has been clear in the last two years that the free-market principles have failed agriculture and food around the world," said the Dairy Farmers in a release.

The Dairy Farmers called the Conference Board's report "regretful." It said the stability of supply management in Canada has actually helped the industry weather the recent international storm of wild price fluctuations.

The supply management system was set up in the 1970s and gave agencies under federal authority the power to set the prices that farmers receive for their milk. It also limited production through quotas to match anticipated Canadian demand for milk, cheese, butter and other dairy products at those prices.

To maintain high farmer milk prices and not undercut Canadian production, most foreign dairy imports are restricted by tariffs of between 200 per cent and 300 per cent, said the Conference Board report.

The Dairy Farmers said the conference board rehashes propaganda made by "anti-supply management ideologues" and ignores the fact that "perfect competition" exists only in theory. The farmers pointed out that the European Court of Auditors, in an October 2009 report, found that between 2000 and 2007, when the EU began relaxing quota regulations, the producer price fell six per cent, while consumer prices increased by 17 per cent.

In October, dairy farmers in the Czech Republic dumped milk on fields to protest the lower prices they were getting for their product.