The Udder Futility of Centrally Planned Milk Production

The Udder Futility of Centrally Planned Milk Production
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Dairy products in Canada cost roughly two to three times more than in the U.S. This has the Canadian Restaurant and Foodservices Association (CRFA) feeling cheesed.

In an open letter to the Canadian Dairy Commission (CDC), the CRFA decried the current state of affairs:

Canada’s restaurant industry purchases $2.5 billion a year in Canadian dairy products. As one of your largest customers, we want to do more to promote and grow the market for Canada’s high-quality dairy products. Unjustifiably high prices, however, are having the opposite effect. This should be of concern to all of us along the supply chain, from farm to fork.

When applied to the Canadian dairy industry, the term “market” is a substantial misnomer. In fact, the “unjustifiably high prices” for dairy products in Canada are a direct consequence of supply management, or the centrally planned production of milk.

Our national supply management apparat is the Canadian Dairy Commission, whose commissars purport to calculate a national milk production target, or quota. This national quota is then divvied up amongst the provinces who then allocate it to farmers. As per the CDC mandate, it is designed to “stabilize revenues and avoid costly surpluses.” In order to achieve predictable profits for dairy farmers, the quota is designed to achieve a target price for milk, which is calculated as a function of farmers’ costs.

Because of this, there is less economic incentive for dairy farmers (especially the least efficient among them) to reduce their costs. This helps keep marginal operators in business. It also contributes to ever-increasing dairy prices that continue to outpace CPI growth. With higher prices, less dairy is demanded. In fact, milk production is actually lower than it was four decades ago.

Further conflagrating matters is the fact that protective tariffs (for example, a 299% mark-up on imported butter) restrict competition from foreign exporters.

Of course, this socialist methodology is deeply flawed. It has resulted in the current mess.

The answer to prices as a function of costs is prices as a function of consumer preferences. By comparison, in an unhampered market economy, costs have no influence on prices. Indeed, the law of price, as stated by Murray Rothbard, reveals that:

Individuals, on their value scales, evaluate a given stock of goods according to their utilities, setting the prices of consumers’ goods; the stock is produced according to previous decisions by producers, who had weighed on their value scales the expected monetary revenue from consumers against the subjective costs (themselves simply utilities foregone) of engaging in the production. In the former case, the utility valuations are generally (though by no means always) the ones made by consumers; in the latter case, they are made by producers. But it is clear that the determinants of price are only the subjective utilities of individuals in valuing different conditions and alternatives. There are no “objective” or “real” costs that determine, or are co-ordinate in determining, price.

Alternatively, William Stanley Jevons explains:

Labour once spent has no influence on the future value of any article: it is gone and lost forever. In commerce bygones are forever bygones and we are always starting clear at each moment, judging the values of things with a view to future utility. Industry is essentially prospective, not retrospective.

The free market is resilient. Incredibly, supply management in Canada has led to a flourishing underground market in cross-border cheese. That’s right, cheese-smuggling.

“With U.S. cheese being as little as a third the price it is in Canada, drivers are making $1,000 to $2,000 a trip,” the story says.

Adding to the absurdity, the police department’s internal affairs division is also investigating, because officers were allegedly involved.

Mario Sebastiano, the owner of Super Mario’s pizza in Port Colborne, told the CBC he was approached by a Fort Erie man.

“He was gonna sell me a case for 150 bucks — normally its $240,” he said.

When it comes to socialism versus capitalism, it should be obvious on which side your bread is buttered.

  • baergy

    From an article today: "The price of milk will go to $7 a gallon in 2013 if Congress refuses to pass a revised Keynesian bill to subsidize milk producers. But Congress cannot decide what to pay them. Congress is toed up on the edge of the fiscal cliff.
    Why will milk's price rise? Because the lapse does not abolish price supports. The lapse forces the milk price support system to revert to the formula of 1949. The federal government will have to pay $7 a gallon. Milk will flow to Washington. To bid it away from Washington, consumers will have to pay $7 a gallon.

    There will be a hue and cry. Voters will not demand an end to price supports. They never do. They will demand that Congress force the price down. So, Congress will pass some makeshift subsidy that will replace the 1949 fall-back system. Ludicrous, no? Yes. But it is Congress in action. We have not had a free market in agriculture since 1933.
    We live in a world where tiny special-interest groups prosper at the expense of consumers because the government subsidizes them. In agriculture, we pays higher taxes in order to pay more for our food. It is pure theft, and no one cares. Few Americans are aware of the agriculture subsidies. This has gone on for two generations."

    We could surely use something to JERK the Canadian system as well ! !

  • baergy

    I milked 40 cows in the 1960's and got $1.67 per 100lb for raw whole milk delivered to the plant 14 miles away. The dairy down the road that got a government QUOTA for bottled milk received $14.00 per 100lb for the exact same milk as mine and that was FOB his barn. The Dairy Company picked his milk up. Needless to say I made no money for doing the work or for initial investment. It did pay all it's own related expenses and ended up being a break even venture. Canadian Government had 1000's of tons of butter in storage that they couldn't sell. (I bought wholesale at the plant for .65 cents) Today Canada imports 100's of thousands of tons of butterfat. But I could no way start a Dairy for less that 1 million dollars for a quota and 250,000 for cows and equipment. New Zealand took the price supports off of lamb as well. They sell more lamb than anyone in the world ALL OVER THE WORLD ! ! !

    • predrag rajsic

      baergy, supply management is one of my research areas…. Please fell free to drop me an e-mail.

      • baergy

        Reading your article sheds a lot of light on my personal experiences with the dairy industry. It starts in 1949 when my father quit milking his own cow and bought milk in 2 qt. sealers (canning jars) from the neighbor less than 1/4 mile away. I have no idea of the price back then ! It then continues through to a career in farming, failure, hired man at a dairy farm, move to BC, a milkman, retail, wholesale, buying my consumed raw milk from a dutchman in the valley, an uncle in Chilliwack in the dairy farming business, his sons in the corporate world of NOCA Dairies and onward, to a son keeping the farm and expanding the herd to 100, selling that farm to a milker about 10 years ago, his own sons not interested. I have been encouraged to write more about my experiences so I will and will be sure and post them here. I will be needing some meat for the bones of my memories and so I will be asking some help from you, Rajsic :-)

        • predrag rajsic

          Sure, I'll be happy to help. I am looking forward to reading your articles.

  • christian

    and where does it say that someone anti regulation and a fellow follower poster on Miss Institute is a conservative small c or big.

    • Redmond

      Very good point christian – I had thought of that as well, but didn't bring it up.

      Of course, DeepGreen is attempting to make his case based on the false paradigm of "liberals vs. conservatives" when he should know from his own "research" that much like in the US, our politicians have few if any principles and will flip from protectionism to "free" trade positions based more on what they think they can get away with, or which lobby group pushes the hardest.

      The Progressive Conservatives were fully complicit in the increase of the size of the state over the 20th century – and in fact the Liberals in Canada were originally "classical Liberals" with Laurier attempting to pass free trade legislation in the early 20th century, but being defeated by protectionist conservatives.

      But unfortunately Deepgreen simply hasn't read his history or done the requisite research to understand the nuances – applying political labels is simple way to attack a point of view that you don't agree with without having to think.

  • deepgreendesign

    When it comes to whining conservatives in Canada, this is a typical "good story".

    The US subsidizes its milk, something you forget to mention. I think you need to learn more about journalism.

    Of course our small market also impacts the comparative cost, as well.

    Learn to do research first, thanks!

    Comparing Canadian & US milk would be better served by people not looking to destroy what we have created in Canada.

    • Redmond

      Sorry deepgreendesign – it would seem that you need to do some research yourself.

      The facts are simply not on your side – yes the American government subsidizes milk production in certain areas(which I do not support), but when you take a look at New Zealand, you will find that they eliminated all of their subsidies and state quota systems, the country has since become a world leader in exporting dairy products.

      "Through Fonterra, their dairy processing and marketing cooperative, they have captured 40% of the world dairy export market with branded New Zealand dairy products. As a result, New Zealand Dairy farmers have good incomes and have accumulated significant net worth, compared with the average net worth of all families in New Zealand. Their success can be attributed to good farm management and a willingness to take risks."

      As well, consumers pay much lower prices than they do in Canada – and that is without subsidies from the state for their dairy industry.

      "Lippert (2001) also states that “Canadian farm gate milk prices are 135 percent higher than the world reference price set by New Zealand”. New Zealand prices are used because they are considered the least distorted by government interventions, or the prices you would expect in a free market for dairy products."

      "we" haven't created anything in Canada, the government has forced upon us a monopoly control of the dairy sector – given that you are "green" I would imagine that you would support raw milk suppliers and other "environmental" initiatives – those of course are heavily regulated and outlawed by the system you support.

  • christian

    Supply control and other regulation or very bad for clients but before comparing to US and as a mater of fact most of Europe the difference in price mite be the really high government subsidies that make production cost very low. So there regulation is not better then ours we just end up paying on singular pruchase and they just make the entire population pay the price for lower food cost client or not

Profile photo of Gregory Cummings

Gregory Cummings (@gregorycummings) is a Pharmacist and Certified Diabetes Educator. He has owned and operated his own retail pharmacy business since 2009. An alumnus of Dalhousie University in Halifax, Nova Scotia, Cummings received his bachelor's degree in pharmacy with distinction in 2008. He lives in Sault Ste. Marie, Ontario with his fiancee and daughter.

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