Rising milk prices: the Montreal Economic Institute takes aim at supply management

Montreal, February 1, 2005 – The Montreal Economic Institute (MEI) capitalized on today’s rise in milk prices, as set by the Canadian Dairy Commission, to shed light on the higher costs imposed by Canada’s current milk supply management system on consumers and industries using milk.

The Canadian policy is based on exceptionally high import tariffs and administrative control over prices, marketing and production volumes. Since 1986, Canadians have paid two to three times the global price for milk, according to the Organisation for Economic Cooperation and Development.

“These artificially high domestic prices correspond in reality to an implicit tax that governments have authorized farmers to impose on consumers,” says MEI Research Director Valentin Petkantchin, author of Dairy Production: The Costs of Supply Management in Canada, an MEI Economic Note released today.

“The costs of the supply management system,” clarifies the economist, “are reflected in retail prices and are ultimately financed by income transfers from consumers to Canadian farmers, who also receive subsidies from taxpayers.”

A closed system

In 2002, a milk producer had to spend an average of $22,000 to obtain the quota needed to make use of one cow and sell its milk in Canada. Paradoxically, almost as much is spent obtaining quotas as is spent on truly required production assets, such as animals, land and buildings, machines and agricultural supplies.

“It is obvious that quotas have become a barrier to entry for anyone wishing to start a new operation in this sector,” Valentin Petkantchin writes.

International pressure

The MEI’s Economic Note describes international pressure to remove Canadian import tariffs and price-fixing strategies, which the World Trade Organization has already condemned.

Since the system will inevitably be reformed, Petkantchin suggests that Canadians follow the model of reforms in New Zealand and Australia, where the transfer of revenues to milk producers via domestic price subsidies is now non-existent.

This Economic Note Dairy Production: The Costs of Supply Management in Canada has been sent to provincial agricultural ministers and marketing boards, as well as the federal Agriculture Minister and officials at the Canadian Dairy Commission. It is available on MEI’s Website.

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Information and interview requests: Patrick Leblanc Director of Communications Montreal Economic Institute / Telephone: (514) 273-0969 / E-mail: pleblanc@iedm.org