Dairy supply management: Orphans versus yuppies

Yesterday Federal Agricultural Minister Gerry Ritz uttered insane lies about dairy supply management:

I would make the argument that I don’t see those inflated prices, certainly, depending on where you buy,” Ritz told a joint news conference with Alberta Agriculture Minister Evan Berger and Saskatchewan Agriculture Minister Bob Bjornerud.

I received a flyer in my mailbox last night when I got back to my apartment and I opened it up and it’s from Canadian Tire. They’ve got four litres of milk for $4.19. That’s completely comparable to the American price that we’re always being beat up over.

Canadian Tire Econometrics aside, consumers are of course harmed by high prices driven by quantity restrictions. Click here to see a graph showing how much higher our prices are than the EU, US, or New Zealand (all of which all of which except New Zealand [*] also have some sort of supply management, Canada’s is just more severe).

Simplifying, the economics of dairy supply management in Canada are as follows: a quota system places a cap on production. The cap on production keeps prices and profits up. However, firms must purchase quotas to legally produce, and the quota price reflects expected long-run excess profits stemming from higher product prices. The right to produce the equivalent of one kilogram of butterfat per day currently costs upwards of $40,000 in some regions.

The winners from this policy are the firms which were initially allocated quotas decades ago. Current farmers do not gain or lose from the quota system, although they would lose if the system were disbanded, destroying the value of their quotas. Consumers unambiguously lose. There is a deadweight loss resulting from low milk production.

Noting the average consumer loses masks distributional effects. I was unable to find any research on distributional effects using Canadian data, but evidence from the U.S. estimating the effects of reducing milk market orders (price supports which have similar effects to Canadian supply management) suggests Canadian policy is probably extremely regressive. Chouinard et al (2010), for example, find (emphasis added):

There are substantial differences across demographic groups in welfare effects from eliminating market orders. Virtually all consumers benefit from eliminating milk marketing orders, except for the wealthiest members of the population. Poorer families with young children gain more from eliminating this policy–induced price discrimination than richer families with no children or older children. That is, as predicted, orphans and young families with small children suffer from milk marketing orders while childless yuppies benefit. Finally, marketing orders are a highly regressive policy tool. Households with lower income levels pay a larger percentage of their incomes as a result of the milk marketing order regulations than do those with higher income levels.

It’s orphans versus yuppies! Here’s a graph displaying some of the results:

The graph shows how removing dairy price supports in the U.S. would affect households at various income levels, statistically holding other household characteristics constant. A household with income of $10,000 views the policy change as equivalent to about $4 extra income per week, whereas a household with $90,000 income is slightly harmed by the policy change. Canadian price supports, as shown in the first graph above, keep prices at much higher levels than their U.S. counterparts, and we should expect proportionately larger gains to Canadian consumers from their removal.

Summarizing, dairy supply management harms everyone except the firms initially allocated quotas back in the 1970s, and those harms fall disproportionately on poor households. There is no equity-efficiency tradeoff here: we get more of both by ending supply management. How can we get rid of this very bad policy?

Apparently we cannot turn to our major political parties. All of the major parties love yuppies and despise orphans.

The Conservative position: Simply deny reality, as illustrated by Gerry Ritz above.

The Liberal position, as expressed by agriculture critic Frank Valeriote, is apparently that the interests of capitalists trump the interests of consumers, and anyone who claims otherwise is a free market ideologue:

The Harper Conservatives are in the process of killing the Canadian Wheat Board so it is not a far stretch to think that supply management could be the next victim in their ideological quest to put free market ideology ahead of the interests of Canadian farmers.

The NDP concurs that only the interests of capitalists matter:

New Democrats will continue hounding the government until it formally commits to protecting supply management. “This system, which has proven its value, protects our dairy and poultry producers from foreign competition and allows our family farms to survive,” she reminded.

Meanwhile, the Green Party lauds the noble, selfless efforts of Canadian capitalists to band together to protect Canadians:

Farmers are under intense global pressure to cut costs and cut quality. American hormone-laced milk and antibiotic-filled chicken could easily flood into Canada and put our Canadian farmers out of business. Perishable food producers have banded together to protect Canadians from poor quality by managing the supply and guaranteeing fair prices.

(The Green Party platform on agricultural policy reads like a support program for upper middle class foodies—the “200km diet,” farmers’ markets, and small-scale niche farming are all great for yuppies, very bad for orphans.)

I even looked up the Canadian Communist Party position. Perhaps they do not feel bound to cater to special interests, or even the median voter, and surely they’ll side with the orphan rather than the yuppie? Nope:

In auto, forestry, mining and other sectors, workers are recognizing the right to resist the predatory anti-labour anti-Canadian attacks of the monopolies and governments in their service in all sectors of the economy. They are joined by Prairie farmers fighting the destruction of the Canadian Wheat Board and by small farmers in Ontario, Quebec and the Atlantic provinces who will be wiped out by the nation-wrecking moves to destroy the egg, poultry, dairy and other marketing boards.

Political failure here is quite remarkable: this is a policy which should be hated across the political spectrum, yet all of the major political parties—and the Communists—want to take ice cream from orphans and give it to yuppies, even though some of the ice cream melts on the way.

Supply management is effectively a hidden tax: Would any the major political parties support this inefficient and regressive policy if it had been implemented as a tax on consumers combined with a subsidy to firms?

[*] Thanks to Eric Crampton for correcting my claim regarding current policy in New Zealand.

10 Comments to “Dairy supply management: Orphans versus yuppies”

  1. First rule of Globe & Mail Economy Lab is don’t read the comments. But I read the comments on Stephen Gordon’s piece arguing that we should buy out Canadian dairy farmers, using a tax on dairy to fund the buy-out (mechanism ensures losers are compensated, winners pay the compensation, etc). Comments: what, a tax on dairy? That’s awful for kids!

    My favourite tweet of the last week: “Democracy has successfully conquered tyranny. But it has yet to conquer stupidity.”

    My read is that the median voter likes the idea of small dairy farms, can’t figure out tax/regulatory incidence, and has woolly worries about the kinds of things the Green Party notes (although he’d throw them aside if a bottle of organic, free range milk cost a nickel more than a bottle of standard milk).

    Ever read Tyran and Sausgrubber on tax incidence? It’s a beautiful experiment.

  2. Eric, the Tyran and Sausgrubber piece is very cool, thanks. I wonder if the median voter would be a little more savvy on basic economic matters if economics were taught in grade school? Perhaps not, as you say, half your third year econ majors don’t get tax incidence.

    If I can find better data than I’ve currently come up with I might try an Economy Lab post calculating what ad valorem sales tax on milk would have to be to mimic prices under supply management. I will of course refrain from reading the comments.

  3. The ad valorem tax will be complicated. The pricing that comes out of supply management, I’d thought, put most of the markup on industrial milk rather than fluid, keeping liquid milk on store shelves closer to US prices but ramping up the price of processed goods (where customers can then blame those darned processors). But I could have that wrong. Will be keen to see what you find.

  4. Yeah, the system is very complicated, I was intending a simple back of the envelope, (very) partial equilibrium, calculation of just fluid milk. Industrial milk is punished less than fluid for some reason (trade agreements?). A now dated but good discussion of the history of the system can be found in this paper by Kathy Baylis. There are some more recent statistics and analysis in this paper which has since come out in J Canadian Ag Ec.

  5. All right. I accept the criticism of the current system. Then do you have a solution that does not involve an open market? I do not want any policy that increases the influence of a market system on distribution.

  6. Thanks for the post Chris (and Eric for the link). I’ve traded mail with Ritz a few times over the past few years, and his responses reek of Quebec vote pandering – haven’t yet figured out another angle. The Liberals should also know better, but I can almost (but of course, not even remotely) give the NDP, Greens and Communists a pass as they have shown themselves to be utterly unable to fake coherence on unintended consequences of their proposed policies. They are also so far from capable of getting a majority mandate that the ability to pander is limited.

    Mandos, what are your concerns about an open market solution? Following that, if an open market solution is utterly unpalatable, what would you propose? (Why should dairy/poultry be treated any differently than lettuce, tomatoes, beef, tissues, ball caps, action figures, etc.?) Ultimately I’d suggest that proposition is in your court – if you don’t like the idea of people able to voluntarily buy what they want, when they want, from whom they want, then you’re proposing intervention, and the responsibility lies with you to say why interference is better than none. A “I don’t like open markets” position doesn’t obviate your obligation to justify your interference position. (As a supporter of free and voluntary exchange, I don’t have to justify anything as I am not suggesting any interference).

  7. Todd: “I’ve traded mail with Ritz a few times over the past few years, and his responses reek of Quebec vote pandering – haven’t yet figured out another angle.”

    That’s probably right, but who knows what the thinking is there. The Tories just proved that you can win a hefty majority without significant gains in Quebec and Quebec’s relative pull in Ottawa is about to get a lot smaller with the expansion of the house of commons (and, one suspects, rural Canada’s pull, more generally, will get reduced if new riding boudaries give recognition to the faster growth of urban and suburban Canada).

    I’d like to think that the government’s current position is a bargaining ploy – that they really want to pull the plug on supply management, but they figure they can use that as a bagaining chip in trade agreements (“OK, we’ll give up supply management, if you give up, x, y and z”) – but I’m afraid that that’s not the case.

  8. Is nobody going to have a go at the Freshwater Fish Marketing Corporation? Single-desk buyer and processor of fish caught in Manitoba, Saskatchewan, NWT…

  9. The Spanish movie version being, http://www.imdb.com/title/tt0395296/

    Or, The Bonfire of the Vanities meets EC agricuture policy.

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