Fraser
MarketA solutionslert to public policy problems February 2009
What does the future hold for Quebec agriculture?
At first glance, Quebec’s agricultural scores of farm subsidies in favor of sanctioned by the federal and pro- sector appears to be stable.1 How- an open and competitive market. vincial governments. ever, this apparent stability belies a Canadians finance the country’s number of ill-conceived public poli- So far from a market economy: sub- farmers in two ways: first, through cies that threaten to destabilize agri- sidies, quotas, protectionism, and their taxes, which fund direct pay- cultural economics in the province. administered prices ments to agricultural producers, This report examines these policy and second, by buying farm prod- issues and recommends reforms As in the rest of Canada, Quebec’s ucts at grocery stores, where they necessary to ensure the viability of agricultural industry is character- pay more for some of their food Quebec’s agriculture. Most impor- ized by strong government inter- than they would in the absence of tantly, the province needs to replace vention in the form of subsidies and supply management. According to the supply management system and a highly regulated market Marcel Boyer (2007), the supply management system costs a family of four in Quebec at least CA$300 Main Conclusions per year. He also notes that in
• Quebec agriculture is stifled by a number of ill-conceived Jean-François public policies that do not serve the interests of farmers, Minardi is a senior consumers, or taxpayers policy analyst at • Quebec’s agricultural sector needs a more competitive the Fraser Institute. environment in which consumers pay less for better quality He holds a Master’s products and farmers have incentives to be more creative, degree in political productive, and innovative science from Université de Montréal and a Master’s degree • One viable alternative to the regime of subsidies and supply- in economic expertise and inter- management is to dismantle Quebec’s current system and national project management eliminate government subsidies to farmers. from Université Paris XII. Canada, the price of milk has crops of natural disasters and guarantees an income of CA$163.77 increased by 53% over the last 12 uncontrollable hazards, including per pig, for a compensation of years, twice as much as inflation, floods, droughts, windstorms, and CA$44.57 per animal slaughtered. while production costs fell 3.8%. insect devastation. The Canadian For 7.5 million pigs, that is CA$335 This additional cost is regressive, and Quebec governments pick up million, to which must be added the imposing an especially heavy bur- 60% of costs and farmers pay the cost of a similar subsidy system for den on low-income households, remainder. In 2005-06, this pro- piglets at another CA$182 million which spend a greater share of their gram insured over 13,500, or 44%, (Dubuc 2008). Overall, this aid and budget on food. of Québec farming operations for a other forms of support cost CA$477 value of CA$892 million. Farmers million in 2007, and it is expected paid CA$49 million in dues and that when the calculations are in for Subsidies received CA$56 million in compen- 2008, the CA$550 million ear- The first type of government assis- sation. (CAAAQ 2008: 54) The marked for that year will be tance to producers is subsidies. The Farm Income Stabilization Insur- exceeded. The two-year total for Pronovost Report notes that Quebec ance Program (FISI) is, according to this one industry is more than farmers received CA$725 million in the Pronovost Report, by far the CA$1.1 billion. direct payments from the federal Quebec government’s biggest finan- cial aid program. The provincial and provincial governments in Supply management 2004; CA$722 million in 2005; and, government provides 67% of its CA$838 million in 2006 (all financing while 33% comes from The other mainstay of Quebec’s amounts mentioned are in nominal farmers. The provincial government agricultural sector is the supply dollars; Statistics Canada, 2007). covers all administrative expenses management system. It sets quotas These are not the only subsidies on behalf of La Financière agricole, on production in order to maintain farmers receive, however. They also which were CA$57.8 million in artificially high commodity prices. collect CA$67 million in federal and 2006-07. The report draws attention When it was first introduced, the CA$136 million in provincial tax to the fact that FISI eligibility does rationale behind this policy was to assistance by way of capital gains not extend to supply-managed sec- stabilize the incomes of farmers exemptions, tax exemptions on cap- tors (dairy, poultry, and eggs) who had been facing large fluctua- ital, and partial reimbursement of described in more detail below, tions in production levels and fuel taxes, among others. Overall, which already benefit from special prices. The supply management sys- the report determines that govern- protection against foreign competi- tem is a mechanism of supply regu- ment support (federal, provincial, tion (CAAAQ 2008: 55). The pur- lation that aims to ensure stable and municipal) for agriculture has pose of FISI is to guarantee farmers prices for producers of dairy, poul- increased 248% over the past 25 a positive and stable net income. try, and eggs, who for the most part years (CAAAQ 2008: 53). Compensation is paid when market are located in Quebec and Ontario. prices are lower than established Specifically, over 80% of Canada’s La Financière agricole du Québec is production costs (CAAAQ 2008: 57). dairy farms are located in the two the only provincial government provinces, while 60% of all poultry agency responsible for managing According to Alain Dubuc, this production takes place in Ontario the bulk of lending, insurance, and compensation system can lead to and Quebec (Vieira, 2008, Aug. 5.) subsidy programs for Quebec’s absurd situations as is the case with A significant portion (80% by reve- farmers. The main income support pork production in Quebec. There nue) of Quebec’s agricultural sector programs for farmers in the prov- is currently a crisis of overproduc- specializes in dairy products; the ince are the joint federal-provincial tion in North America, but the largest number of farms are dairy Crop Insurance Program and the compensation system encourages farms—they alone represent 31% of provincial Farm Income Stabiliza- Quebec pork producers to increase all farms (AGÉCO 2007: 7). tion Insurance Program (FISI). The their production. Thus, in 2008, the Crop Insurance Program is market price for a 85.4 kg pig is According to the Pronovost Report, intended to mitigate the impact on CA$119.20. The program over 40% of Quebec’s agriculture is
What does the future hold for Quebec agriculture? 2 www.fraserinstitute.org regulated by supply management the demand is predicted by the producers to determine their prices (CAAAQ 2008: 48). However, Canadian Dairy Commission and output, and charge consumers almost all sectors of Quebec agricul- which makes a recommenda- higher prices than would prevail ture (for example, the production of tion to the Canadian Milk Sup- under competition. However, as maple syrup, pork, apples, poultry, ply Management Committee will be shown below, it seems potatoes, etc) are subject to regula- (CMSMC) on the Market Shar- doubtful that this arrangement tions that are similar to the supply ing Quota (MSQ)—the national made in favour of a minority over management system in the form of production target for industrial the interests of the majority will be Plans conjoints or Joint Plans for milk and dairy products. The able to carry on for a long time. marketing agricultural products. CMSMC then allocates milk Basically, a joint plan is a legally production among the prov- Supply management versus established tool that allows Que- inces, and each provincial board bec’s producers who decide to take allocates its share of national trade liberalization part in these agreements to organize milk production among quota The first obstacle to a long-term the marketing of their products. holders. The boards buy all the prolongation of the status quo in Once in force, it enables them to milk produced in the province Quebec agriculture is the incompat- establish policies and collectively at a guaranteed price; milk reve- ibility of the protectionism of the negotiate the conditions governing nues are then pooled and paid supply management system with the the marketing of their products, back to producers. Among the trade liberalization process. including price. provinces, Quebec receives the largest share of MSQ (46.5%), The World Trade Organization Supply management is, in essence, a followed by Ontario (31.2%), (WTO) launched the Doha round system that is intended to limit sup- whereas the shares of all other of global trade negotiations in 2001. ply of commodities in order to provinces are relatively small. The talks, which were focused on maintain artificially higher prices. (OECD 2008: 9) cutting tariffs and farm subsidies This would not be possible without and on liberalizing trade in services quotas, and protectionist high tar- Retail prices of fluid milk are also broke down last July. According to iffs that restrict imports. Because regulated in Quebec and Nova Sco- Paul Blustein, “The guts of the deal the supply is “managed,” support tia, raising consumer prices in those involved a tradeoff in which the prices are set a priori at levels high provinces well above the national United States and other rich coun- enough to achieve a regulated rate average (OECD 2008: 9). According tries agree to cap subsidies and of return. High tariffs are imposed to Sylvain Charlebois (2008), in protections for their farmers in on imports to ensure that the regu- 2007, a four-liter container of milk exchange for greater assurances of lated prices of domestic goods are (2% fat) in Quebec was about 12% access for their industrial products not undercut by inexpensive foreign more expensive than in Toronto, 37% in developing countries” (Blustein produce. According to the Pronovost more than in Vancouver, and 42% 2008). Report, these customs tariffs are cur- more expensive than in Winnipeg. rently 299% for butter, 246% for In this context, Canada’s negotiat- cheese, 155% for whole turkeys, ing position was ambiguous, to say 238% for whole chickens, 164% for Are subsidies and supply the least. It was torn between the shell eggs, and 238% for hatching management really in interests of the outward-oriented eggs (CAAAQ 2008: 68). our best interest? grains and meat sectors, concen- trated in the West and responsible In a report titled Modernising Can- As we have seen, government sup- for about 80 percent of Canadian ada’s Agriculture Policies, the Orga- port for agriculture in Quebec is exports that operate largely on the nization for Economic composed of both payments to basis of globally competitive mar- Co-operation and Development farmers in the form of subsidies, kets, and those of the domesti- (OECD) describes how the system and policy support for a supply cally-oriented dairy and poultry works in dairy: management system that allows sectors, concentrated in Ontario
What does the future hold for Quebec agriculture? 3 www.fraserinstitute.org and Quebec and responsible for a supply management explains why farm receipts of more than nomi- miniscule share of exports and the Farm Income Stabilization nal CA$250,000 was 57.3% in imports that depend on the protec- Insurance (FISI), the main income 2005, the highest among all types tionist policies of the supply-man- support program for farmers that is of farmers. Indeed, the share of agement system (Hart 2005: 2). theoretically only an insurance plan, such farms had been only 6% in has paid out CA$5.5 billion during 1986, similar to the all-sector aver- Eventually Canada will have to the past 10 years to compensate for age” (OECD 2008: 10-11). choose between free trade and pro- production costs that were not cov- tectionism. Free trade is ultimately ered by revenue. La Financière There are two types of farms in in the interest of the Canadian agricole du Québec, which adminis- Quebec: the ones outside the supply economy, including the agricultural ters all agricultural support pro- management system that are often sector. Canada is the OECD’s fifth grams in Quebec and is funded by struggling, and the ones inside the largest exporter and importer of the federal and provincial govern- system who appear to be doing well. agricultural and agri-food products ments, and FISI are running deficits Still, the profitability of farms under (OECD 2008: 5). As noted by that reached almost CA$890 million supply management is an illusion Valentin Petkantchin, Canada has in April 2008 (CAAAQ 2008: 48). and a different reality emerges once been condemned by the WTO after According to the report, the situa- the opportunity cost of quota is complaints filed by New Zealand and tion of La Financière agricole du added to costs. the United States going back to 1998 Québec is of utmost concern. Total for price-fixing practices in the dairy compensation rose from CA$255 When the supply-management sys- sector, ruled as equivalent to export million to CA$782 million in four tems were established, the antici- subsidies (Petkantchin 2006: 3). years. The actuarial deficit of pated market had to be divided insured funds now sits at CA$606 among producers who have been Financial unsustainability million. The cumulative deficit of the allocated quotas for free (in order to public corporation’s operations is control the level of production to The second obstacle to the long- CA$342 million (CAAAQ 2008: 62). avoid surpluses) as an acknowledge- term sustainability of the status quo ment of their “right” to produce in Quebec agriculture is the finan- On the surface, the sectors under without competition at a high price cial situation. There are disturbing supply management (poultry, eggs, relative to operating costs. How- signs that the profitability of farm- and dairy) are more profitable than ever, over time farmers began to ing in Quebec is decreasing (which the rest of Quebec agriculture. buy and sell quotas, which continu- will inevitably lead to calls for more According to the OECD, farmers in ally increased in value because of government support). Even with the national supply-management the fixed quantity of quotas and the the subsidies, farm revenues are systems have substantially higher knowledge that prices would con- often lower than operating costs. income than other farmers and tinue to rise over time (CAAAQ According to AGÉCO, in 2004, 30% Canadians in general, as well as 2008: 70). The Pronovost Report of all farms in Quebec were unable having higher net worth, primarily notes that in 1981, the overall value to meet their expenses, 28% had a by virtue of their quota assets of the quotas granted to dairy, poul- net income between 0 and (OECD 2008: 12). The OECD try, and egg producers in Quebec CA$24,999; and 42% had a net study also notes that: “producers in was estimated at CA$1.15 billion (in income of CA$25,000 and more the supply-managed sectors face nominal dollars). By 2005, it was (AGÉCO 2007: 6). In fact, 23% of lower financial risk than their CA$9.15 billion (CAAAQ 2008: 70). farms in Quebec would lost money counterparts who farm other prod- One explanation for the sharp had they not benefited from govern- ucts: in 2005 only 6% of dairy increase in the value of marketing ment support (AGÉCO 2007: 21). farmers and fewer than 14% of quotas since 1995 is that quota buy- poultry and egg farmers were ers expect governments will com- The dependence on government unprofitable, compared to 33% of pensate them for any loss in quota support by the majority of Quebec all farmers in Canada... The pro- value resulting from policy changes farms that are not covered by portion of dairy farmers with gross (Barichello et al. 2007: 14).
What does the future hold for Quebec agriculture? 4 www.fraserinstitute.org Because of this inflation in the price cannot be delivered unless they unequally. The government bestows of production quotas, the market acquire new, very expensive quotas upon one group the power to value of farms has increased dra- (CAAAQ 2008: 70). extract terms from other groups matically. For instance, a medium that they could not expect to receive sized dairy farm in Quebec is esti- Thus, once the price of quotas is in relationships of voluntary mated to be worth about CA$2.5 taken into account, farms under exchange. This becomes a particu- million, a price that includes nearly supply management that appear to lar problem in this case when the CAD $1.5 million for the quota be profitable turn into break even favoured group has an income that or even loss-generating operations. is substantially higher than other In the end, supply management is farmers and Canadians in general, ... supply an advantage that is temporary, and has a higher net worth, primar- since the value of the benefit ily by virtue of their quota assets management is an becomes capitalized into the price (OECD 2008: 12). of quota. Only the first generation advantage that is producers who got their quota free Farm reform is necessary, but the temporary, since the of charge made a big gain; for the question of the abolition of quotas new entrants to the industry, there is tricky. Producers who have paid a value of the benefit is no net gain. Consequently, partly lot of money and gone into debt to due to the high cost of quotas, the acquire their quotas will vocifer- becomes capitalized pursuit of productivity gains in non ously support the status quo. supply managed farms, and the Should Quebec farmers receive into the price of increasing size and modernization financial assistance for a transition of farms caused farmer indebtedness period? Michael Hart thinks that quota ... to increase from 28.4% in 2001 to farmers who want to leave the busi- 32.2% in 2005 (CAAAQ 2008: 48). ness should be compensated with a modest adjustment package (2005: (CAAAQ 2008: 70). It is now almost As we have shown, Quebec’s agri- 8). Yet, according to Barichello et impossible for new farmers who cultural sector needs to be reformed al., “Perhaps the strongest argument so it can be released from govern- have to buy quotas at market value against providing assistance, even ment financial support and debt. to turn a profit with a supply-man- with significant cuts in future pro- The reforms are also necessary so aged farm because the cost of the tection, is that producers should that the sector can deal with the quota plus operating expenses have been aware of such risks when possible effects should the Doha exceeds the farm revenue. The they purchased their marketing Development Round of trade talks, result is that these farmers depend quota and up to this point, they which collapsed in July 2008, restart more and more on high support have enjoyed considerable benefits and a deal be reached in the global prices. Moreover, as the Pronovost from owning it. The risks inherent trade liberalization process. Report explains, the current value of in purchasing quota—that the pol- quotas also creates enormous diffi- icy regime may change—are well culties for existing businesses Why is reform so understood by buyers, and there is (CAAAQ 2008: 70). That is because difficult? evidence this risk is built into the if there were no supply managed quota price” (2007: 14). system, farmers would increase The problems with the supply man- their efficiency and profitability by agement system raise the question To make things even more difficult adopting new technologies and of the fairness of any government for reform, the vested interests cre- increasing the size of their facilities. intervention that favors a minority ated by the supply-management The problem now is that when to the detriment of the majority. In system, such as the producers of farmers succeed in increasing pro- fact, by granting a statutory cartel to dairy, poultry, and eggs, wield a lot ductivity, any extra production a specific group, the government of political influence in Quebec. from which they could benefit pits its citizens against each other This influence is mainly the result of
What does the future hold for Quebec agriculture? 5 www.fraserinstitute.org the distribution of electoral ridings budgets of current financial assis- One viable alternative for Quebec that favours rural areas in Quebec. tance programs, but this seems agriculture is in the interest of a As a result, the provincial and fed- unwise and unfair to other Canadi- great majority of Quebecers. That is eral governments persist in blocking ans. Another alternative should be to dismantle the supply-manage- any attempt to reform the system in considered. ment system and, eventually, com- order to preserve the status quo.2 pletely eliminate government subsidies to farmers. In 2006, 46% Some Quebec columnists3 have Set the farmers free of all Quebec farm revenue was called for radical changes to agricul- from products subject to supply tural policies. Nevertheless, the The argument for maintaining high management (CAAAQ 2008: 47). obstacles are considerable because government subsidies and supply- With market-based competition farming is regarded as an integral management regimes in Quebec’s and the law of comparative advan- part of Quebec’s identity that must agricultural sector goes as follows: tage, prices will balance supply and be preserved.4 From this viewpoint, Without support from the govern- demand, and encourage efficient if small, uncompetitive farms were ment, domestic farmers would not production. “Real prices” will signal closed due to the removal of subsi- be able to compete with subsidized which farms are productive and dies, their loss would be perceived foreign imports, so removing the which are not. Competition will as a loss of a traditional cultural way subsidies and dismantling the sup- generate higher productivity growth of life, and thus an “existential ply-management systems would for the sector and consumers will threat” to Quebec society. drive domestic farmers out of busi- benefit from lower retail prices as There is a compelling case for end- ness, leaving Quebec with a much well as a wider range of products. ing the protection of Quebec farm- smaller agriculture industry. Moreover, lower commodity prices ers from market forces. The current will induce consumers to purchase regime of subsidies and supply-man- more, thereby generating more The supporters of the status quo use agement system is a growing finan- income for farmers. the concept of “food sovereignty.” cial burden for taxpayers and They believe that a country that is A stronger and more innovative consumers, and is unjustified. As unable to domestically produce agriculture industry would emerge Michael Hart states: “Maintaining enough food to feed its people is at after such a reform. Countries like the status quo… is unfair to con- the mercy of the world market, and Australia and New Zealand have sumers, who are condemned to is more vulnerable to trade pres- already followed this path. Accord- higher prices and limited choices; sure, global food shortages, and ing to the OECD report, in these unfair to other farmers, whose price shocks. Ever since the repeal countries, competition has gener- chances at better access to foreign of the Corn Laws in Britain in ated not only higher productivity markets are sacrificed in order to 1846,5 the majority of industrialized growth but also the reallocation of protect dairy and poultry farmers; countries have chosen to “feed resources to more productive sec- unfair to food processors, whose themselves” by importing most of tors (OECD 2008: 14). In Australia, access to quality inputs is limited to their food and exporting industrial the government has deregulated the what local suppliers will produce at products thanks to their compara- dairy industries that relied on regulated prices, and even unfair to tive advantage (the ability of a domestic supply management and efficient dairy and poultry farmers, country to produce a particular high levels of protection to sustain whose opportunities to expand and good at a lower opportunity cost them. Dairy support prices and become more productive are than another country). In an age of quotas were eliminated. In 1999, hemmed in by the system’s con- free-trade, this choice has certainly Australian farmers worked with the straints” (2005: 2). not adversely affected their prosper- government to implement reforms Quebec’s agricultural sector is very ity. It is time for Quebec to get rid that would gradually eliminate dairy costly and the bill is rising. We of protectionist agricultural policies quotas and replace them with a could pump billions more dollars and take advantage of the market-based system. Under the into the system and increase the opportunities free trade offers. Dairy Structural Adjustment
What does the future hold for Quebec agriculture? 6 www.fraserinstitute.org program, the government intro- prices. Quebec’s agricultural sector transformed the existing system by duced various steps to deregulate needs a more competitive environ- cutting tariffs and farm subsidies, collapsed in July 2008. Even if it was the industry and to help farmers ment in which consumers pay less sometimes critical of the status quo adapt to more market-based cir- for better quality products and by concluding that the traditional cumstances. A modest consumer farmers have incentives to be more model has stifled innovation, the tax—11 cents per litre–helps to gen- creative, productive, and innova- report concluded that “It is not up to erate the funds needed to aid farm- tive. Any reform of Quebec’s agri- the Commission to speculate whether ers in either leaving the industry or culture that is under the dual the supply management system will survive. Governments have agreed to adapting to the new circumstances responsibility of the federal and defend this system and are doing so. (Hart 2005: 7). According to the provincial governments is ulti- The Commission nevertheless OECD (2008: 15), the result is that mately a political decision that will believes that while defending this sys- while the adjustment still continues involve philosophical issues (should tem, the agricultural and agrifood to some extent in Australia, the the majority protect a minority?) sector must also plan for the future and consider several options” industry has become more produc- and economic efficiency (what are (CAAAQ 2008: 69). tive and more export-oriented: over the benefits of lower costs?). 55% of milk production is exported, 2 “Its effectiveness was on display in Quebec’s provincial government November 2005, when federal politi- primarily as manufactured prod- and the federal government will cal parties unanimously adopted a ucts. According to Valentin need to make difficult political motion in the House of Commons in Petkantchin, retail prices for fluid choices if they are to ensure the support of supply management” milk in Australia have come down (Vieira: 2008). competitiveness of Quebec farmers considerably, whether for and the future of Quebec’s agricul- 3 For example, Descôteaux (2008, brand-name or “no-name” milk ture. Nevertheless, for all the rea- August 12),, Elgrably (2008, Janu- (2006: 4). Not counting the new ary 31), Krol, (2008, July 30), sons mentioned in this text, we 11-cent-a-litre tax, the decline in Dubuc (2008, August 3), Pratte believe that the only viable alterna- real terms has been 18% for brand (2008, July 29). tive is to remove the supply man- name milk and 29% for “no-name” 4 “Our roots in the rural world are still agement regimes in favor of market milk. Savings to consumers on milk evident in many ways, as most have forces, and to work towards a com- purchased in supermarkets are become city dwellers only recently. plete elimination of farm subsidies. Aside from producing food, agricul- estimated at more than AUS$118 ture represents a way of life and is a million annually. dynamic method to occupy our vast Notes territory” [Translation] (CAAAQ 2008: 12). Conclusion 1 In January 2008, the government of Quebec published the Report of the 5 These laws were import tariffs Despite the collapse of the Doha Commission on the Future of Quebec’s designed to support domestic British negotiations in July 2008, Quebec’s Agriculture and Agrifood, also known corn prices against competition from agricultural sector will eventually as the Pronovost Report. The commis- less expensive foreign imports sion was formed on June 20, 2006 have to ensure its long-term viabil- between 1815 and 1846. They were with a mandate to report on issues the symbol of British mercantilism ity in the global context of trade lib- and challenges facing the agricultural and their abolition marked a signifi- eralization that is essential to the sector, to examine the effectiveness of cant step towards free trade. prosperity of the Canadian public policies affecting the industry, economy. and to diagnose problems and rec- ommend reforms. The report did not References Because of the problems this Alert question the foundations of the sup- AGÉCO, Groupe (2007). Élaboration d’une has described, it will be increasingly ply management system, nor the typologie des agricultures du Québec. difficult to maintain over the long granting of agricultural subsidies to Quebec farmers. In other develop- http://www.caaaq.gouv.qc.ca/userfiles/F term the current system of subsidies ile/Mandats%20etude/Ageco-final.pdf, ments, the Doha round of global as of January 12, 2009. and supply management, with its trade negotiations launched in 2001 harmful consequences of quotas, by the World Trade Organization Agriculture and Agri-Food Canada (2007). protectionism, and administered (WTO), which could have Government and the Agriculture and
What does the future hold for Quebec agriculture? 7 www.fraserinstitute.org Agri-Food Sector: Producer Support Esti- Boyer, Marcel (2007, August 22). La gestion Descôteaux, David (2008, August 12). Le mates (PSE) and Agricultural Policies in de l’offre de produits agricoles coûte 300 $ lobby agricole nous prend pour des Canada and Other Countries. par famille au Québec. Le Soleil. valises. Le Devoir.
What does the future hold for Quebec agriculture? 8 www.fraserinstitute.org