ANALYSIS | 5 reasons to defend farm marketing boards

Stephen Harper's government has resisted pressure to phase out supply management in trade talks so far. Here's why the government may stick with that stance in 2012.

Why does the Harper government continue to back supply management for Canada's dairy, egg, and poultry sectors?

Former agriculture minister Eugene Whelan is hit on the head with a milk jug during a demonstration by dairy farmers in this 1976 photo. Whelan said in his autobiography that the federal government's refusal to bail out Quebec dairy farmers helped elect the Parti Québécois later that year. (Russell Mant/Canadian Press )

A 40-year-old farm program could become a political issue to watch in 2012.

But not if the Harper government can help it.

Andrew Coyne declared the "supply management rip-off" the most under-reported political issue of 2011 during The National At Issue panel's year-end "best and worst" roundup.

"It's remarkable how little people know about how much they're paying for basic food," Coyne said, noting that supply management has become a major issue because "our trade partners are fed up with it."

Supply management and spilled milk

Canada's supply management system took shape in the 1970s, when dairy, egg, chicken and turkey farmers agreed to limit their production levels, according to quotas based on market demand, in return for stable, predictable prices. 

Eugene Whelan, Pierre Trudeau's agriculture minister, oversaw the creation of several marketing boards to administer those quotas.

He also ended up literally wearing the wrath of Quebec dairy farmers during a protest in Parliament Hill in 1976.

When Trudeau's cabinet refused Quebec's demands for more dairy subsidies in the face of a world market collapse, angry farmers literally dumped (milk) on Whelan's head.

Whelan suggested in his autobiography that the federal government's reluctance to bail farmers out helped elect the sovereigntist Parti Québécois across rural Quebec later that fall.

As Coyne spoke those words in mid-December, International Trade Minister Ed Fast was in Geneva at World Trade Organization talks where, in the words of the government's press release, Canada was "recognized as a free-trade leader."

Although Fast, and Harper before him at this fall's APEC Summit in Hawaii, supported the concept of open markets, the government has been equally adamant publicly about protecting supply management, even as reports hinted that compromising some aspects of Canada's agricultural marketing board system may be necessary to sign on to a future Trans-Pacific Partnership trade deal.

"We always say that all matters are on the table," Harper said in Hawaii. "But of course Canada will seek to defend and promote our specific interests in every single sector in the economy."

A senior government source confirmed that as an accurate summation of the government's approach to not only the TPP talks, but current negotiations with the European Union as well: say you're open to talk about anything to get to the table, but when it comes time to deal, keep your elbows up on supply management.

This frustrates Canada's restaurant and food industry, which is campaigning to slay the sacred cow of supply management for consumers and food suppliers who want lower prices.

But despite a majority Conservative government and renewed moves toward trade liberalization worldwide, there's no sign the Harper government plants to dismantle dairy or poultry marketing boards the way Conservatives ended the monopoly marketing system of the Canadian Wheat Board.

It's been six years since MPs had a recorded vote on the principle of supply management in the House of Commons. That vote — on a Bloc Québécois motion calling for a strong mandate against tariff changes during WTO negotiations — passed 288-0. Not a single MP rose to suggest there might be something to gain by giving even a little.

Even Maxime Bernier, a cabinet minister otherwise known for his free-thinking, free-trading, pro-business views, defends the status quo.

Why might the Harper government continue to defend supply management? Here are a five reasons:

1. Complex jurisdictions

Any government bent on dismantling supply management must unravel a complicated jurisdictional web. In addition to federal legislation, every province has its own marketing board legislation. On top of that, provinces have inter-provincial agreements, such as those establishing "pooling blocks" for milk.

Al Mussell, a senior research associate at the George Morris Centre in Guelph, an independent agriculture think-tank, says tackling supply management would be far more difficult for the Harper government than dismantling the Prairie-only wheat board monopoly that was based only on federal legislation.

"There's no procedural analogy," Mussell says of speculation that having dismantled one, the other could follow. "It's an interesting theoretical discussion but the reality is absent."

The federal government could change its own laws, but it couldn't force the provinces to pull back unilaterally; a potentially divisive round of federal-provincial negotiation would be required.

2. Quota buy-back expensive, 'unfeasible'

While it was a (buyer) monopoly, the wheat board was not a form of supply management — producers did not hold "quota" that itself has a dollar value. Ending quota-based systems typically requires some kind of buy-back or compensation program in the transition to an open market.

Quota values fluctuate with market conditions, but recent estimates put the total national value of Canadian dairy quota in the $25-billion range. Add in the egg, poultry and turkey sectors, and that figure may be as high as $35 billion.

That's an awful lot of quota to buy back for a government struggling to cut its deficit. It's also a lot of value to simply erase from the financial books of Canadian agriculture.

Some farmers inherited their quota along with other family farm assets, or were given their quota when the original system was set up. Other farmers who started up or expanded their businesses more recently may have financed their quota to the tune of hundreds of thousands or even millions of dollars. (Current dairy quota values are approximately $25,000 per cow, and an average-sized Canadian dairy farm may hold some $1.5 million worth of quota.)

"It's unfeasible to have a quota buy-back," suggests Maurice Doyon, a specialist in rural and agricultural economics at the Université Laval, who thinks the government could afford to compensate farmers at a rate of 50 per cent at most. (Recent tobacco quota buyouts were at a rate of 30 cents on the dollar.)

Doyon notes that a lot of banks use quota as collateral for loans. "It would be a huge shock," he says, speculating that the government would be very reluctant to expose the banking sector to that kind of sudden loss in value.

Tobacco precedent?

The Auditor General's fall 2011 report found the administration of a small-scale tobacco quota buyout in southwestern Ontario in 2009 was a rushed job that lacked sufficient safeguards.

Farmers that should not have been eligible received payments, among other criticisms.

The Harper government announced the exit strategy for tobacco farmers in the lead up to the 2008 federal election. 

Two other countries that recently ended their supply management systems, Australia and Switzerland, never compensated farmers for lost quota. But Doyon suggests they may not have needed to, since the comparative value of the quota in those countries was lower.

"The only way to do it is to phase out quota slowly," says Doyon.

recent study by the C.D. Howe Institute suggests a gradual increase in production levels over 20 years could lower prices slowly, phasing out the current quota system. 

3. Trade benefits uncertain 

Supply management opponents argue that Canada is missing out on trade opportunities for its stubborn insistence on maintaining supply management. But what are those opportunities lost?

"The idea of assurances in trade negotiations is folly," says Mussell, who believes Canada was invited to the table for future TPP talks not because of any openness on supply management but because those already at the table wanted to bring in the large market represented by Japan (which defends its rice industry with similar stubbornness.) Mussell thinks it would have been helpful for a potential partner like the U.S. to bring in another player like Canada at the same time.

Still, Mussell thinks it's worth at least trying Canada's luck at the negotiating table.

"Is there a fantastic opportunity in red meat or grains access [to Asia] in return for a very small change in dairy tariffs? Or would a very major change for supply management yield only a minor gain for other commodities? We just don't know," he says.

Mussell remains concerned that Canada may find itself on the outside looking in at future trade deals with Asia if it's too stubborn on supply management. He says supply management doesn't adapt well to changes, including opportunities for growth, citing recent innovations using milk protein concentrates for cheese production as a case where Canada missed out.

"You don't create a transparent and vibrant market by making rules," he suggests.

But Doyon is skeptical there's really that much for other countries to gain from opening up Canadian markets.

"Canadians tend to inflate our importance," says Doyon, who argues that because of the perishable nature of Canada's supply-managed commodities, the market other countries could realistically have access to is neither large nor valuable. "The impact is overblown."

4. Consumers pay, taxpayers don't

Price comparisons across supply-managed and open market jurisdictions are fraught. It's extremely difficult to make "apples to apples" comparisons when different retailers price a commodity like milk or eggs all over the map: sometimes as a loss-leader, or sometimes vastly more expensive, in stores where convenience counts more than a bargain.

While opponents argue lower prices would result, the evidence for that varies in different comparisons. Arguments often assume other players in the supply chain, including retailers or food services, wouldn't simply absorb the difference between the supply-managed farm price and a new, lower, open market price. 

In New Zealand, one of the countries thought to be pushing hardest for Canada to give up supply management, the price farmers receive for their milk is among the lowest in the world, leading to larger-scale "factory" farms trying realize economies of scale. Meanwhile, New Zealand consumers pay prices equal to or higher than average prices in Canada. The extra money is somewhere, but it's not in the pockets of farmers or consumers.

Would other players in the supply chain simply absorb the price difference if farmers gave up supply management? The severe drop in the prices Canadian beef producers received during the BSE scare and resulting U.S. border closure never resulted in significant, across-the-board price cuts for beef consumers in supermarkets or restaurants, for example. 

What Canadians don't pay are government subsidies for supply-managed products. For last decade, the dairy and poultry industries haven't drained the Canadian taxpayer to the tune of billions the way their counterparts have in the United States, Europe or elsewhere.

"If I was the federal government, I would like supply management because it costs me nothing," Doyon says.

In Canada, the price of milk pays the full cost of producing it. Supply-managed commodities do not need the millions of dollars in bailouts and other risk-management programs the federal government regularly provides to pork, beef or grain farmers.

"Americans pay for their milk twice: once at the store, and once through billions in subsidies," says Bruce Muirhead, a trade policy researcher at the University of Waterloo. "Our system is one the rest of the world should come to."

The U.S. Congress is wrestling with supply management proposals of its own: knowing that year after year of billion-dollar bailouts are not affordable, current farm bill proposals suggest a national supply management system for American dairy producers. What is sometimes portrayed as a trade barrier for Canada could become a system Americans emulate.

5. Rural economic benefits

Muirhead believes supply management is more resilient over the long term than the boom and bust cycle of bailing out industries based on fluctuating prices.

In Australia, an end to supply management gutted the dairy sector: a decade later, milk production is down sharply and farmers have left the business.

Muirhead, who's compared Canada's system with New Zealand's in great detail, is also a fan of the smaller-scale agriculture that survives because of the stable and predictable prices of the Canadian system, which he thinks builds strong rural communities in a way the larger, industrial-scale farms in countries like New Zealand do not.

He acknowledges Canada's quota system presents a barrier to new entrants, but he still finds the system "eminently sensible" in a world where dairy products rarely are produced without some form of government intervention.

"I don't understand what the debate's about," he says.

Current trends suggest that fewer and fewer Canadians live in the rural ridings that would be directly impacted by a hypothetical end to supply management. But rural ridings lie at the heart of the Conservatives' majority, particularly in Ontario.

Ontario Conservative MP Michael Chong's riding in southwestern Ontario has plenty of farms and small communities that service local agriculture. Ending supply management is a non-starter for him. 

The cost of adding dairy and poultry producers to existing farm income support programs would be huge. Plus, he doesn't see it as a priority for his constituents.

"No one in my riding is complaining about the price of milk," Chong says. "They are concerned about their taxes."