cows in field

Real Supply Management

The history and politics of a successful program in Canada

By Mike Larsson

Added August 3, 2012

Northeast organic dairy farmers were gathered together for their annual field days on a cold day in October 2010 in central Maine. A pioneer of organic dairy farming was giving a summary of how his small organic milk company shipped milk under a buy-back arrangement to the State sanctioned milk monopoly, paying himself and his fellow dairymen $40/cwt plus a 20% premium for organic.

At the time in New York and New England, the going price for organic milk at the farm gate was in the mid $20's. Needless to say the famers in the audience were somewhere between disbelief and envy. Was the speaker from some northern European country that heavily subsidized it's farm sector?

No, the producer was from Ontario, Canada. The State protected dairy sector he was describing is called supply management. There are no taxpayer subsidies to support the milk pricing & quota system coming from the public pockets in Toronto, Montreal, or Ottawa.
Supply management controls oversupply, protects from cheap imports, gives processors stable pricing and supply, costs nothing to the taxpayer, guarantees cost-of-production to the farmer, and allows rural areas to have prosperity not depending on tourism or call centers. What's not to like?

Beginnings of Supply Management

Dairy supply management started in the early 1970's in Ontario and Quebec partly because the Liberal government of Pierre Trudeau wanted the support of those two provinces. Quebec had been advocating for home rule for their province and the Quebecois value their farming as a key part of their heritage and culture, with agri-food as their largest industry. Ontario has a large dairy industry and Trudeau wanted the rural vote. In the national capital of Ottawa, governments in power have usually had to win 2 of 3 regions: the West, Ontario or Quebec.

Supply management in dairy and later in poultry, was a way to confer prosperity to rural areas through the control of milk volumes and prices. Prices and volumes were set through negotiation between the dairy producers' federation and the milk processors federation, with arbitration by the State representatives if required. All existing producers were granted a quota and their children had the opportunity for a one time quota transfer to aid generational transfer. Prices were set yearly based on current costs-of-production that factored farm input costs, plus a return for the farm labor. A new entrant to dairy farming would have to buy quota from a farmer and for the retiring farmer this was an asset to cash out at retirement. Initially there was no control of the value of quotas, which were traded freely, and the certainty of profits in the system made quota a hot commodity. Banks and financial institutions saw the dairy business as a safe investment because of the consistency of incoming cash flows, which raised the value of the quota and consequently the cost of entering dairy. The cost of the quota also saw an increase in larger herds that could manage a high level of debt. This problem for new entrants is now being addressed through quota price caps and even mandatory quota value rollbacks.

Opposition to Supply management

Criticism of supply management came from the West which grew hard wheat, canola, beef and hogs. None of these commodities were covered by supply management, and westerners saw it as another example of Ottawa prioritizing Ontario & Quebec concerns at their expense. Manufacturers, the food service and processors also opposed it a as their feared that their competitiveness was hindered by the protection given to the dairy and poultry business. Supply management did not initially impact treaties as free trade agreements were signed and global deals were held up by bigger issues between USA, Asia, and Europe. The 1988 USA-Canada FTA (Free Trade Agreement) was signed allowing an exemption for supply management in dairy and poultry. Supply management also was exempt from the NAFTA agreement in 1994. At a large protest rally against NAFTA in 1993 (organized in part by the national farmers union), a crowd of 10,000 Quebec farmers marched across the bridge to Ottawa from Quebec to join the protest. You didn't mess with Quebec's dairy farmers!

The food processors and the foodservice & restaurant associations oppose supply management essentially because it stopped big American processors like Kraft Foods and Unilever from having free access to sell imported dairy products and ingredients into Canada. It also stopped the buyers at the big dairy processors from being price-makers. Processors complain that consumers paid more for cheese and poultry than their American counterparts. While the argument had truth, the defenders of supply management pointed out that pricing was stable and predictable under the system. Also, farmers didn't have to compete with artificially cheap farm products from Europe, America, and New Zealand. While consumers might pay marginally more for their dairy and poultry food, they at least were not subsidizing the farm sector with taxes.

Effect on other commodities of limited supply management and Free Trade treaties
The free trade era has not been helpful to farmers in most of the non- supply managed commodities within Canada and there is not enough political support or critical mass to introduce the program to other commodities. Pork and beef have both been subject to low profitability and crippling trade challenges by the US livestock industry. The livestock business in Canada has become concentrated over the decades, and the bigger players and the big packers don't want government controls. Smaller beef and pork producers in Ontario have asked the government to underwrite "risk management" programs to guarantee cost-of-production base prices but without some control of supply, overproduction follows, and taxpayers are on the hook for the subsidies to make up the difference.

Renewed Media Attacks on Dairy Prices

The media debate in Canada has started anew in the last year. The current government of Canada is conservative, and Prime Minister Stephen Harper is an Albertan who would prefer to end supply management. The government is participating in the Asia-Pacific trade deal talks which include New Zealand - a big dairy exporter. The fear in Canada is that the system will be sacrificed so that western Canadian commodities can gain more export markets and the ageing demographics of the farm sector doesn't bode well for the future. Despite the price and production controls in Canada, the farm population is shrinking and the farms are getting bigger and fewer.

However the termination of the system wouldn't be easy and the system is deemed worth fighting for, due to its benefits to farmers and rural economies. Ending the program could cause a major split between Ottawa and Quebec, which could contribute to another electoral referendum for Quebec independence from Canada, and the cost of a buy-out of production quota would cost billions of dollars to the federal treasury.

Therefore, the question that Canadian voters need to ask themselves is: why "fix" something that isn't broken? Supply management works well for everybody - except the parts of the economy the processors and end users - that are used to being price-makers.

Next in series: Canadian Organic milk under supply management

Originally from Ontario, Canada, Mike Larsson has worked in the Quebec and Ontario agriculture & farm products sector for 20 years. He is a recent immigrant to New York State on a spousal visa, married to Dr Pam Corey DVM who is a large animal veterinarian. Mike has worked as a dairy farm inspector (IOIA trained) for NOFA-NY in northern New York during 2011, is a member of NODPA, and a strong supporter of fair pricing for northeast organic dairy producers.