How Australia got out of supply management – A lesson for Canada: Milk prices fell from 18% to 29%

Canadians are now paying more for milk and milk products, with the price paid to farmers having gone up again Feb. 1. The current system benefits some dairy producers, but on the other hand it clearly penalizes consumers and stifles entire industries that have to pay more for their milk. It erects an obstacle to competition throughout the Canadian dairy industry, impeding the growth of most dynamic producers by means of extravagantly expensive quotas.

Coinciding with the new price increase, the method used by the Canadian Dairy Commission to calculate support prices has come to an end. The Commission will be consulting consumers and industry players «to hear their views on the direction that the pricing methodology should take.» Instead of just increasing the prices year after year, whatever the new formula, the time is ripe to consider a more fundamental reform of supply management in Canada, comparable with what Australia did in 2000.

Australia, which invented supply management in the 1920s, eliminated all dairy support prices and quotas in 2000. Tax relief for losses of quota value and a transition package worth more than A$1.7-billion (about $1.5-billion) were offered to dairy farmers. The package was financed by a new tax of 11 cents per litre of fluid milk sold at retail, intended to disappear in 2010.

This full deregulation followed previous reforms starting in the mid-1980s aimed at removing export assistance and controls on prices paid by processors and retail buyers. By scrapping its supply management system, Australia enabled its dairy industry to remain today one of the most dynamic in the world. Why wouldn’t Canada be able to do the same?

When it comes to reforming the dairy supply management system in Canada, two main concerns have been raised to which the Australian experience provides answers. None of them turns out to be justified.

On the one hand, there is the fear that, without artificial support prices imposed by government-backed agencies, such as the Canadian Dairy Commission, milk production will dwindle. This did not happen in Australia, although competition from New Zealand products has been very strong.

Sure, adjustments were made and the number of farms fell by 25% between 1999 and 2004. But most importantly, milk production stayed relatively stable. Without the severe drought that befell the country between 2002 and 2004, Australian production would no doubt have risen, as occurred in 2002 – the only year with normal climatic conditions – when 4% more milk was produced than before the reform. Maintaining production levels was made possible by farmers increasing their individual production by one fourth.

Dairy producers acted quickly to compensate for income loss linked to elimination of support prices. For example, almost half of producers expanded their cattle herds; 27% of them increased their non-agricultural income; others enlarged their farms, modernized their equipment or developed other areas of agricultural production. The competitiveness of the industry was thus enhanced.

Secondly, the argument heard most often from defenders of supply management is that, even if prices drop at the farm gate, dairy producers would be hurt without benefiting consumers because processors and retailers would raise their margins. In fact, Australian consumers have been the big winners of the reform. Retail prices for fluid milk in Australia have come down considerably, whether for brand-name or «no-name» milk. Not counting the new 11 cents-per-litre tax, the decline in real terms has been 18% for brand-name milk and 29% for «no-name» milk. In the first year of the reform, savings to consumers on milk purchased in supermarkets are estimated at more than A$118-million annually.

By protecting inefficient producers, the current system makes the Canadian industry less competitive. Even with a temporary reprieve from the latest WTO talks in Hong Kong in December, 2005, the supply management system in Canada’s dairy industry will have to be reformed sooner or later. By returning to real market prices for milk and other dairy products as Australia did, we could save our industry, benefiting producers and consumers alike.

Valentin Petkantchin est directeur de la recherche à l’Institut économique de Montréal.