Monday, November 23, 2015

Farming in Canada-The much hated Supply Management System distorting the market landscape

Why do Canadians pay two to three times more for their milk purchase compared to their counterparts in other countries? It might appear shocking that a developed country like Canada has in place a tightly controlled dairy sector held in a vice like grip by the bureaucrats endowed with the responsibility of sustaining the diary economy of the country. The archaic system does not permit the farmers to expand their cow population beyond a quota allowed by the government to prevent a milk glut and consequent price crash. While imports could be much cheaper a deliberate custom duty imposition make them as costly as the domestically produced milk. How this country can break this system to synchronize with that in other countries is a million dollar question. According to critics a cow in Canada can be costlier than an automobile because of the restrictions on the entry of new dairy entrepreneurs into the existing cozy club! Read further below to understand this ridiculous situation to decide whether to laugh or cry! 

"The reference price for milk is going up again today by 7.8%, forcing milk-using industries to pay more coast-to-coast for an important input. Soon, consumers will feel the price hike when they buy fluid milk or other dairy products at the grocery store. Given that productivity has been rising for centuries in agriculture, one might wonder why we keep paying more for milk instead of less. The reason: Theseproductivity gains are being wasted away in our inefficient supply management system. The creation of the Canadian Dairy Commission in 1966 produced Canada's first national agricultural supply management system. This system relies essentially on two major forms of government involvement in agricultural markets. Largely through a quota system that controls the quantity of milk offered, it sets up planning and administrative control over pricing and marketing. And it relies on customs tariffs that are set high enough to keep foreign products out. Through these measures, the government ensures a captive market for Canadian farmers. The establishment of quotas is equivalent to issuing rights to sell a certain quantity at administratively set prices. Milk quotas were initially distributed free of charge but later changed hands on centralized exchanges, becoming increasingly expensive.An average of more than $22000 was required to make use of a cow and sell its milk in Canada in 2002. In 2003, according to Statistics Canada, quotas amounted to an average of nearly $1.1-million per dairy farm and a total of almost $17.6-billion for all dairy farming operations in Canada. This represents close to half the entire permanent long-term asset base of milk producers. To set up a dairy farm, almost as much would have to be spent on quotas as on the assets truly required for milk production, such as animals, land, buildings, farm machinery and equipment. Thus quotas have become a barrier to entry for anyone wishing to start a new dairy operation. The paradox is that farmers already in the market have no interest in ending the quota system. Quotas constitute an "asset" that farmers can sell and that is often used to guarantee loans from financial institutions. Abolishing supply management would result in quotas losing their entire value, posing serious problems for farmers and their creditors. Supply management also deters adapting production to economic conditions. Efficient farmers who might wish, for instance, to raise their production cannot do so because they are not authorized to exceed their quotas. Instead of trying to win market share to the benefit of consumers through various strategies in areas such as pricing, quality, product differentiation, advertising, service or forms of marketing, Canadian farms under supply management must devote an increasing share of their resources to covering the cost of quotas. From a geographic standpoint, evolution of the system is blocked. It is very difficult to modify the proportion of quotas that each province receives. This rigidity is a source of conflict between provinces and of added uncertainty for farmers. Because of quotas, it is impossible to take advantage of more favourable production conditions in different parts of Canada if and when they arise. The costs of the supply management system are, of course, reflected in retail prices. These artificially high prices correspond in reality to an implicit tax that governments have authorized farmers to impose on consumers. The OECD estimates the assistance provided to Canadian dairy producers through supply management at $2.7-billion in 2003, equal to more than 60% of the value of total dairy production that year. It also found that Canadian milk prices have been two to three times higher than world prices since 1986. This has no doubt contributed to a drop of nearly 15% in per capita milk consumption in Canada between 1986 and 2003."

Whether it is the World Bank or the International Monetary Fund, the so called financial wizards in these august bodies never cease to chant the mantra of "economic liberalization" and WTO pressurize every country on this earth to ensure exports without restrictions levying practically no import duties! Yet here is a country which likes to preach to the poor countries about the virtues of free trade and open economy. Subsidy is supposed to be a dirty word to these wealthy countries but look what are they doing!.Canadian government is reported to be subsidizing its dairy industry to the tune of almost 1.5 billion dollars every year. While the dairy farmers are fattened by this subsidy, the per capita consumption of milk in Canada seems to be falling to the extent of 15% during the last two decades, which is not an encouraging sign! 


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