Cows graze outdoors in Saint-Pie, Que., on July 11. Canada’s supply-managed dairy sector receives the largest share of government support compared with the size of the sector.Christinne Muschi/The Canadian Press
A new report by the Organization for Economic Co-operation and Development says Canada’s supply-management system distorts trade, inflates prices and discourages innovation.
Although Canada’s federal supports are below the OECD average across most industries, that’s not the case for the supply-managed sectors of dairy, eggs and poultry, the annual development report on government subsidies for agriculture found.
Canada’s dairy sector in particular receives the largest share of government support compared with the size of the sector. This support surpasses the industry-wide and government-backed farmer insurance program, which acts as a general safety net for all Canadian farmers.
“Supply management distorts trade, and in Canada’s case, it distorts the domestic market,” said Marion Jansen, director of the trade and agriculture directorate for the OECD. “I expect the intention is to ensure there is national production, but it actually makes your market not very responsive.”
Andrew Coyne: What makes supply management so uniquely vile? Let me count the ways
Supply management has been in place for dairy, poultry and eggs since the 1970s. The federally mandated policy sets production limits and import controls to restrict supply and stabilize pricing for farmers. It is touted as a way to protect farmers and food sovereignty.
When supply management came into effect, protectionist policies were typical in Canadian agriculture, said the OECD report. In addition to supply management, farmers also used collective marketing in grains and oilseeds (notably the Canadian Wheat Board).
Agricultural policy changes started in the mid-1980s, switching from sector-specific supports to more general income insurance and safety-net programs. Trade liberalized – especially with the free-trade agreements of the 1990s (such as NAFTA) – and government support for farmers declined to around 8 to 11 per cent of farm revenues in recent years from more than 35 per cent in the mid-1980s.
On the whole, Canada now offers significantly less support and subsidies to its agricultural sector than the OECD national average. Canada averages 8.2 per cent of total gross farm receipts (total revenue from all farms), compared with an OECD average of 13.2 per cent across 38 countries. Canada’s supports have also fallen from 17 per cent at the beginning of the century, largely because of growth in the agricultural industry.
“Generally, we consider it good to have as low percentage as possible,” said Ms. Jansen. “It means the sector does not distort international markets.”
Opinion: We must protect supply management from the trade war
The countries with the highest support compared with the size of their agricultural sectors were Switzerland, Norway and Japan. However, in terms of straight cash transfers to the sector, China is the global giant, accounting for more than one-third of the value of all government subsidies to agriculture.
Supply management is the exception for Canada. It is also unique, said Ms. Jansen. While dairy commonly receives government subsidies globally, few other countries offer dairies the trifecta of production, price and import controls.
By controlling prices and production, Canada’s supply-management system distorts domestic markets, said Ms. Jansen. It means consumers pay more for their products. (Canadians paid on average 20 to 30 per cent more for milk over the past seven years than Americans, according to Globe and Mail reporting.)
It also is distorting trade, according to the report.
Canada is a net exporter of food, with agri-exports accounting for 12.9 per cent of Canada’s total. Globally, Canada has a US$20-billion agricultural trade surplus.
However, the average tariff rate applied to agricultural imports was 14.4 per cent, well above the non-agricultural tariff rate of 2.2 per cent. This is largely because of the 223-per-cent tariffs applied to dairy imports that fall outside a small amount permitted to enter tariff-free.
The system is also not resilient, said Ms. Jansen. For example, should one province face a crisis and no longer be able to produce milk, other provinces would be less able to quickly accommodate.
Changes should be undertaken, argues the report. However, a sudden disintegration of supply management would be very distortive, said Ms. Jansen. But gradually increasing production quotas and reducing price supports would incentivize the industry to become more efficient and resilient.
“It would allow for more efficiency, it would set higher incentives for innovation and diversification, and Canada would move closer to a market that functions freely.”
In June, Ottawa passed a bill that would restrict giving trading partners greater market access for supply managed goods. The move came ahead of the review of the United States-Mexico-Canada Agreement. U.S. President Donald Trump has repeatedly taken issue with Canada’s supply-management system for dairy.
On Friday, the Canadian Dairy Commission announced next year’s dairy price. The 2.3-per-cent hike – starting Feb. 1 – is calculated based on the increased costs of production for farmers and the Consumer Price Index.