Milking the System: How Agricultural Supply Management Impedes Trade Opportunities and Egregiously Transfers Income
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HUNGRY FOR CHANGE SERIES Milking the System How Agricultural Supply Management Impedes Trade Opportunities and Egregiously Transfers Income June 2012 The Economic Implications of Agricultural Supply Management in Canada CHRISTOPHER SARLO AND LARRY MARTIN Canada’s Trade Opportunities at Risk from Supply Management IAN LEE Edited By JASON CLEMENS AND BRIAN LEE CROWLEY A Macdonald-Laurier Institute Publication – June 2012 1 A Macdonald-Laurier Institute Publication True North in Canadian Public Policy Board of Directors Advisory Council CHAIR Purdy Crawford Rob Wildeboer Former CEO, Imasco, Counsel at Osler Hoskins Chairman, Martinrea International Inc., Toronto Jim Dinning Former Treasurer of Alberta MANAGING DIRECTOR Brian Lee Crowley Don Drummond Former Clifford Clark Visiting Economist Economics Advisor to the TD Bank, Matthews Fellow in at Finance Canada Global Policy and Distinguished Visiting Scholar at the School of Policy Studies at Queen’s University SECRETARY Brian Flemming Lincoln Caylor International lawyer, writer and policy advisor Partner, Bennett Jones, Toronto Robert Fulford Former editor of Saturday Night magazine, columnist TREASURER with the National Post, Toronto Martin MacKinnon CFO, Black Bull Resources Inc., Halifax Calvin Helin Aboriginal author and entrepreneur, Vancouver DIRECTORS Hon. Jim Peterson John Beck Former federal cabinet minister, Partner at Chairman and CEO, Aecon Construction Ltd., Fasken Martineau, Toronto Toronto Maurice B. Tobin Erin Chutter The Tobin Foundation, Washington DC President and CEO, Puget Ventures Inc., Vancouver Navjeet (Bob) Dhillon Research Advisory Board CEO, Mainstreet Equity Corp., Calgary Janet Ajzenstat Keith Gillam Professor Emeritus of Politics, McMaster University Former CEO of VanBot Construction Ltd., Toronto Brian Ferguson Wayne Gudbranson Professor, health care economics, University of Guelph CEO, Branham Group, Ottawa Jack Granatstein Stanley Hartt Historian and former head of the Canadian Chair, Macquarie Capital Markets Canada War Museum Les Kom Patrick James BMO Nesbitt Burns, Ottawa Professor, University of Southern California Peter John Nicholson Rainer Knopff Former President, Canadian Council of Academies, Professor of Politics, University of Calgary Ottawa Larry Martin Rick Peterson George Morris Centre, University of Guelph President, Peterson Capital, Vancouver Christopher Sands Jacquelyn Thayer Scott Senior Fellow, Hudson Institute, Washington DC Past President, Professor, Cape Breton University, William Watson Sydney Associate Professor of Economics, McGill University For more information visit: www.MacdonaldLaurier.ca Table of Contents Executive Summary ...........................................2 The Impact of Supply Management on Producers of Introduction ....................................................... 2 Regulated Farm Products ...................................... 14 Clarifying Terms ................................................. 2 The Value of Quotas .........................................14 Income Transfer Implicit in Supply Higher Revenues to Farmers ............................ 14 Management .......................................................3 Canadian Farm Businesses ................................14 Supply Management as a Barrier to Trade ..........3 Canadian Farm Families ....................................15 Conclusion ......................................................... 4 A Note on Quotas .............................................15 Sommaire ...........................................................5 Conclusion ............................................................ 16 Introduction ....................................................... 5 About the Authors .................................................17 Précisions terminologiques ................................ 5 Endnotes ................................................................18 Le transfert de revenus inhérent à la gestion de References .............................................................18 l’offre ..................................................................6 Appendix 1 Ontario Marketing Boards ................. 20 La gestion de l’offre en tant qu’obstacle au Canada’s Trade Opportunities at Risk from commerce .......................................................... 6 Supply Management .......................................21 Conclusion ......................................................... 7 Introduction .......................................................... 21 The Economic Implications of Agricultural Trade as a Government Priority .......................... 21 Supply Management in Canada ........................8 Introduction ............................................................ 8 A Short History of the Trans Pacific Partnership ...22 Supply Management versus the Market .................. 9 Canada’s Trade Partners ........................................23 The Basic Economics of Supply Management .........9 Trans Pacific Partnership Countries and Asia-Pacific Region: Opportunities for Canada ......26 Ontario and Marketing Boards ........................ 11 Opposition to Canada’s Entry ............................... 29 The Impact of Supply Management on Food Prices .......................................................11 Conclusion ............................................................ 29 The Impact of Supply Management on Low-Income About the Author .................................................. 30 Canadian Consumers .............................................12 Endnotes ................................................................30 The authors of this document have worked independently and are solely responsible for the views presented here. The opinions are not necessarily those of the Macdonald-Laurier Institute, its Directors or Supporters. Executive Summary Introduction Agricultural supply management and marketing boards are normally sleeper issues in Canada. However, an unusual confluence of events has necessitated greater scrutiny of both policies and in particular, supply management. Specifically, the decision by the federal government to unwind one of the more prominent marketing boards (the Canadian Wheat Board) coupled with the obstacles supply management poses to trade negotiations with both Europe and the Trans Pacific Partnership (TPP) have put these issues front and centre in the public mind. As our contribution to informed public debate on supply management, the Macdonald-Laurier Institute (MLI) commissioned two essays. The first, by Chris Sarlo and Larry Martin, looks at who wins under supply management and who pays the bill. The second, by Ian Lee, details the obstacles supply management poses to Canada’s efforts to gain access to important foreign markets. Clarifying Terms The terms “supply management” and “marketing board” are often used interchangeably in Canada. The term “supply management”, however, is a narrow concept that applies to a few agricultural commodities such as milk, cheese, poultry, and eggs. Supply management is a government-provided mechanism to raise agricultural prices and farm incomes. This is achieved by controlling who is allowed to produce these commodities as well as how much they’re permitted to produce, thanks to a strictly enforced system of licences and quotas. In addition, high tariffs are imposed on imports of the supply-managed commodities. By thus controlling both domestic and foreign supply, supply management increases the price producers can charge for their commodity. Marketing boards, on the other hand, involve a broader range of agricultural products and include such tasks as promotion, collective sales, price negotiation, and facilitation of international trade. The majority of marketing boards do not possess the power to control supply, prices, and restrict imports as does supply management. 2 Milking the System: How Agricultural Supply Management Impedes Trade Opportunities and Egregiously Transfers Income Income Transfer Implicit in Supply Management Christopher Sarlo of Nipissing University and Larry Martin of the George Morris Centre marshall a host of evidence to demonstrate that supply management increases the cost of the commodities they cover. In the Canadian context, these commodities include basic food necessities such as milk, cheese, eggs, and chicken. A vital question then becomes, “Who foots the bill for this income transfer to a small group of farmers?” In answering this question Sarlo and Martin begin by establishing the degree to which different households spend their income on food products. They Supply management examined different households based on income levels, ranging from low redistributes money from income (less than $20,000) to upper income (over $80,000) to determine lower income households the proportion of income spent on food. to a small group of Not surprisingly, the lower the level of income for the household, the higher the share of income spent on food. Specifically, lower income households farmers. spent nearly a quarter of their income on food compared to upper income households, who spent less than 6 percent of income on food. In other words, higher food prices matter a lot for the least advantaged households because they are already spending so much of their income on food. Middle and upper income Canadians, by contrast, routinely spend between 5 and 10 percent on food. A low-income family facing higher food prices, especially for staple goods such as milk, butter, eggs, and chicken, will