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Is Supply Management in Agriculture a Hindrance in Trade Discussions?

Is Supply Management in Agriculture a Hindrance in Trade Discussions?
Profile photo of Danny LeRoy

ContainerShip_teaser-300x129Good afternoon.  Thank you for the kind introduction and for the invitation to speak to you today.

I have enjoyed corresponding with Knud Peterson.  He has done a good job up to this point.  But inviting an economist to speak – about anything – is always risky.  Often it’s a distressing indicator of a lack of good alternatives.  I mean, there are so many people who are much more interesting than economists.

With some justification, economics has been described as a painful elaboration of the obvious.  Making matters worse is that, professionally, we have a poor public reputation.  This stems from our ability to predict the future; an ability which lies below that of weather forecasters and just above tarot card readers at the circus.

Economists have been characterized as people who don’t know what they’re talking about — and making you feel that it’s your fault.  I saw a t-shirt the other day that read…

“I am an agricultural economist.  I solve problems that you didn’t know that you have, in ways that you can’t understand.”

These unflattering remarks about economics and economists are funny because they contain an embarrassing element of truth.  And they also serve to remind me and others of the importance of being clear, modest, useful, practical and, most importantly, remembering the people involved.  Economics is really not about prices, money, banking or corporations.  It is not about objects or things; Economics is about people.  It is about me.  It is about you, you and you.  It concerns each of us and the consequences of the decisions we each make at every moment of every day under conditions of scarcity and uncertainty.  Economics is the philosophy of human life.  It is the pith of our earthly existence.

Because economics is about people, when I composed my presentation beside my keyboard I kept photos of family and friends who produce supply managed commodities as well as those who do not.  Of course there are countless more people than ones I know personally who are impacted by supply management.  But remembering the people involved helps to focus, identify and delineate the effects of supply management.  It provides an answer to the question Knud asked, “Is supply management in agriculture a hindrance at trade discussions?”

I have three photos of men at my desk, whom I have met in person, who have the definitive answer:  Mike Gifford, Steve Verheul and Frédéric Seppey.  Beginning in the 1970s, Gifford was directly involved in all aspects of Canada’s bilateral, regional and multilateral agricultural trade policy.  From 1985-2000 he served as Canada’s chief agricultural trade negotiator and principal agricultural trade policy advisor to the ministers of agriculture and trade.  Verheul was the chief agricultural negotiator and trade policy advisor to the ministers of agriculture and trade during the first decade of this century.  Seppey is currently in this position.

Over the past 25 years I have heard each of these men speak at academic and trade conferences in North America.  Journalists often interview them and quote their responses extensively.  Their names and reputations may be familiar to you.

While I have chatted and shared a meal with each them, I have never had their enormous responsibility as the national agricultural trade negotiator.  I cannot provide any first hand insight with regard to supply management being a hindrance in trade discussions.  But listening to them and reading words attributed to them, my sense is that defending supply management does not make their job any easier.  But I could be wrong.  Deconstructing the psychological and political aspects of trade negotiations on the negotiators themselves is best left to other social scientists.

The fact is the really interesting question this afternoon is not: “Is supply management in agriculture a hindrance at trade discussions? The really interesting questions are the ones which it begs: “A hindrance for whom? In the context of which decisions?” Answering these questions is the wheelhouse of the economist and demonstrates our particular comparative advantage.

Time does not permit a detailed genealogy of supply management in Canada.  In a nutshell, supply managed marketing boards were created after WWII to centrally choreograph marketing activities to achieve higher and more stable selling prices and incomes for farmers.  They were initially established on a provincial basis, with the Ontario tobacco marketing boards in 1957.  Provincial milk and chicken marketing boards followed in the early 1960s.  Because competition across provincial boundaries made the control of provincial supplies difficult, national supply management systems were adopted beginning with raw milk in 1971, eggs in 1972, turkey in 1973, chicken in 1978 and broiler hatching eggs in 1986.

At present, supply management systems for raw milk, eggs, turkey, chicken and broiler hatching eggs are based on three core elements:  producer price fixing, producer production controls, and import restrictions.

Producer prices are fixed according to quality and end-use using collected information on production costs, demand factors, other variables and the subjective assessment of marketing board authorities.  The aim is to provide a reasonable return, which enables producers to cover production costs.  Produce prices does not rely on taxpayer transfers.

To realize predetermined producer prices, the amount produced domestically is restricted by production quotas which are set provincially.  Production quota is the legal property of each provincial marketing board.  It is allotted to individual producers as each marketing board sees fit and is subject to the terms and conditions of the quota policies in each province.

The only legal buyer of raw milk is the provincial milk marketing board.  The provincial milk marketing boards are the only legal sellers of raw milk processors.  The provincial poultry and egg marketing boards are the obligatory intermediary between commercial farm output and graders, processors and retailers.

Because it enables individuals to sell into a controlled market where producer prices are fixed and farm level supply is made scarce, production quota has become a valuable asset, worth millions of dollars.  Quota has become the financial nest-egg of farmers approaching retirement and the single largest impediment to enter any supply managed industry.  It’s a real catch-22:  The greater the perceived benefit on the margin from selling into the controlled market, the more that producers will pay on the margin for this privilege.  Anything that profitably increases productivity gets capitalized and is reflected in the prices of fixed assets like quota. The most a producer would pay for quota is their expected discounted present value of an unearned revenue stream less their opportunity costs of production.

Finally to insulate producers from foreign competition, tariffs are used keep imports from the United States and elsewhere out of Canada.  Tariffs range from 168% for eggs, up to 285% for chicken, 246% for cheese and 298% for butter.

The possibility of these import taxes being reduced and greater access provided to potential foreign suppliers from international trade agreements like NAFTA, is a big concern to producers of supply managed commodities and their marketing boards.  It reduces the scope of the privileged market into which producers of supply managed commodities in Canada sell.  It also reduces the perceived value among producers of their quota holdings.  The potential financial loss in quota value is not limited to producers of supply managed commodities, but also extends to others including their lenders among them commercial banks and Farm Credit Canada.  There will be immerse political pressure for bailout if the supply management system is terminally compromised.  Across the 13,500 producers of supply managed commodities in Canada the combined value of their quota holdings is more than $35 Billion.

There is a lot at stake here.  Much more for some individuals than others.  And it is much more than money:  its family business, friendships, security, property, freedom and things so personal and deeply subjective that they defy words.  It is imperative to remember the people involved, and that includes each one of us.

Fortunately, economic science is especially helpful to make sense of this problematic situation.  Economics is about people.  It is also a value-free science.  Propositions of economics, such as the law of demand, neither state nor imply any judgments about what is good or bad, right or wrong.  It just is.  As the price of something increases, all other things the same, the quantity demanded of it falls.  Whether the price increase is a good or bad thing is beyond the proper purview of an economist.  So too is whether supply management is a good or a bad thing.  It is up to you to contemplate and make up your own mind.

Devastating problems arise when individuals are compelled to rely on economists – or anyone else – in place of our own individual decision making. C.S. Lewis famously remarked that of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive.  He was correct.  The reason central planning always fails is because it requires a utilization of knowledge which is not given to any single person or small group in its totality.  As Nobel Prize winning economist Frederich Hayek explained, “The economic problem of society is not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.”  Rather, it is a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.”

This elaboration by an economist of the reality that humans are not omniscient is very painful indeed.  I’m sorry.  Please accept my apology for bringing it up.  But it is precisely because that we can forget or choose to minimize or to ignore the people involved, that some are drawn to government interventionism and forms of socialism.

A less painful, but no less obvious insightful contribution made by economic science that I wish to share is:  only individuals act.  Geopolitical regions, non-living objects and concepts are non-sentient.   They do not act.  They do not and cannot experience gains or losses or have opportunity costs.  They are incapable of producing, consuming or trading.  Only individuals can, and do, experience these things.  Turns out, this blatant reality is very important in terms of understanding if supply management is a hindrance, and in the context of which decisions.

It also leads to the unavoidable conclusion that supply management doesn’t protect domestic producers of raw milk and poultry against foreign competition.  Rather, supply management protects domestic producers against their fellow Canadians, consumers and would be producers and innovators.

Consider an import tax.  I mentioned a moment ago the import tax on butter is 298%.  Butter does not and cannot pay tax.  It is a non-sentient object.  No matter how hard you try, for example, you cannot get the packet of butter on your table to hand over some cash.  Only individuals can be compelled to pay.

Which individuals are compelled? Canadians purchasing butter from suppliers located in some other geopolitical jurisdiction, bringing it to their homes to consume directly or using it as an ingredient in some productive process to satisfy consumer wants.  The butter arrives in Canada legally if the individual importer pays the tax.

But this is not always the case.  After fuel, alcohol and tobacco, goods like fluid milk, butter, cheese and chicken are the objects of wide-spread smuggling activities.  In 2015, a Niagara police officer went to jail for smuggling thousands of dollars of cheese and chicken wings. In 2013, a Burnaby importer was caught hiding thousands of dollars of contraband cheese in cross-border shipments of grape juice. In Vancouver, the police lingo for illicit dairy is “offshore cheese,” and it’s been slipping into the city by sea for decades.

170 years ago the great French economist, Frédéric Bastiat, wrote his classic essay, “What Is Seen and What Is Not Seen in Political Economy” He pointed out, in brilliant fashion, the universal truth that you can’t get something for nothing.  To most people this seems perfectly obvious.  Yet many of these same people forget all about this “obvious fact” when the conversation involves economics.  The same forgetfulness clouds thinking about agricultural supply management.

Agriculture is an activity of man involving the deliberate and controlled use of plants and animals for the production of food, feed, fibre and more recently, fuel.  Because agriculture is an activity of man, agricultural supply control inexorably means people control.  Think about that and let it sink in.

For decades, supply management has stabilized and raised prices and incomes in Canada for producers of raw milk, eggs, turkey, chicken and broiler hatching eggs.  But this has come at a cost for real people that has compounded with time.  The legislation and regulations enabling supply control has impaired the capacity of individual Canadians to realize their separate self-interests both as consumers and producers.  It has created a financial dependency for many agribusinesses on the continuation of supply management.  Further, it is created nasty interpersonal conflicts that transcend the country, among farmers, among consumers, among neighbours and even among family members around a dinner table.

Supply management is a hindrance to trade – in the widest sense of the word “trade”.

Tariffs are a hindrance for Canadians importing or wanting to import dairy, poultry and egg products from abroad.  It reduces the volume of trade, increases the cost to the importer and reduces the return to the exporter.  This does not make people richer; it makes them poorer – here in Canada and everywhere else.  And it gives rise to extralegal markets where smugglers thrive.

High domestic prices are a hindrance for Canadians, particularly the poor, who trade a larger portion of their disposable income than they would otherwise to satisfy their demand for dairy, poultry and eggs.  They consequently have less to spend on everything else.  Purveyors of all other goods and services can only sell less than they would otherwise or at lower prices or both, and must be satisfied generating smaller revenues.

Supply restrictions are a hindrance to existing Canadian producers who must purchase additional quota to expand their enterprise.  There is no larger financial barrier than the cost of quota – a non-productive asset — to expand their agri-business.  Compelled to trade for more quota, these individuals must therefore forgo the benefit of trading for and subsequently using every other additional productive asset they otherwise would have acquired.

Supply restrictions are a hindrance to Canadian producers wanting to enter the industry or existing producers wishing to differentiate their output to satisfy the wants of specific consumers.  Hobby farmers with small flocks are exempt from supply management.  For example, legislation in Ontario exempts producers with under 300 broilers, 50 turkeys and 99 laying hens. But there are no exemptions for raw milk producers, they are the most constrained.

The sale and distribution of raw milk to any buyer other than a provincial milk marketing board, which up until recently was a provincial level regulatory offense punishable by fines, is now a federal crime punishable by up to two years in prison.  While it is legal to drink raw milk, Canada is the only G7 country that completely prohibits private distribution and sale through both federal and provincial legislation.  In contrast, in Europe, raw milk can be had through a vending machine.

This litany of hindrances is what is being defended by the chief agricultural trade negotiator in multinational trade negotiations.  Losses stemming from trade liberation have been, are, and are going to be met with demands for assistance and compensation.  Taxpayers and consumers are in the cross-hairs.

Last fall the free trade agreement with the European Union was signed.  It enables European cheese producers tariff free access of up to four percent of the Canadian cheese market. To the extent that Canadians choose to switch away from domestic cheese producers to these European suppliers, the quantity demand for raw milk in Canada will fall.   In view of an estimated two percent decrease in the quantity demanded of raw milk in Canada, the federal government provided $350 million to raw milk producers and processors to help them compete.  As is the case with any taxpayer transfer, the government must first take financial resources away from somebody else.

Looking to the future, it seems easy to be discouraged by challenges inherent in supply management.  But don’t be.  There is tremendous scope for leadership, honesty and clear thinking.  Good and compassionate people will rise to the occasion.  Some of you will be among them.  There is a need to keep in the forefront of our minds the people involved – all of them.  And understanding economics is essential.  It is about real people and real problems and it’s why I keep portraits close by on my desk.

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