June 22, 2012
EDITOR’S NOTE: A recent study released by the Frontier Centre for Public Policy argues that supply management policies have left Canada’s dairy industry ill-prepared to compete in an increasingly liberalized international market. This three part series provides evidence that a serious problem exists, and offers policy solutions that can help make our dairy sector competitive.
WINNIPEG, MB, Jun 22, 2012/ Troy Media/ – The Canadian dairy industry is currently run by supply management systems that control production quotas, set prices, and restrict international competition by imposing limits and tariffs on imported dairy products. Initially, supply management was applied to the dairy industry to stabilize prices for producers and to secure supply for processors.
Proponents of supply management argue the system is still necessary to ensure stable and rising incomes for producers in a volatile market. However, critics point out that supply management causes inefficient economic distortions, contributes to a lack of product innovation and offerings and contributes to rising retail prices (at considerable harm to low-income consumers).
For these reasons, supply management is a contested issue. Regardless of which of these arguments one considers more compelling, the reality is that international forces are currently working to liberalize the markets for agricultural products. International negotiations, such as the Doha Round of international trade talks, are partly focused on this objective. The liberalization of international agricultural market means unless Canada was willing to forgo participation altogether, precluding access to a wide variety of markets, Canada may well be forced to end its supply management system.
In the past, Canada has stated its desire to preserve supply management, even as other efforts at trade liberalization are pursued through the Doha Round. However, the number of countries that will be willing to support Canada’s position appears to be diminishing. Nations such as Switzerland, Australia, New Zealand and Korea once shared an interest in preserving supply management. However, all have begun to eliminate supply management in their domestic sectors and, as a result, Canada now stands alone in its stated interest to preserve supply management within the Doha Round Agreement. The Doha Round passes agreements by votes, and it is therefore likely Canada will be outnumbered in its desire to preserve supply management. Canada will have little choice but to accept the Doha Round’s demands so it can gain market access and maintain active trade relationships with other countries.
Since powerful international forces make the long-term survival of supply management questionable, the question of whether Canada’s dairy industry is currently well equipped to compete in a more competitive and open international market becomes crucially important. Unfortunately, the best available evidence suggests that Canada’s dairy sector is not well prepared to succeed when international agricultural markets are liberalized in the years ahead.
The most troubling evidence that Canada’s dairy sector is not presently prepared to compete in a liberalized market comes from comparisons to the United States. The much larger American dairy sector is currently outperforming the Canadian industry, according to several metrics. Additionally, the U.S. dairy industry produces almost twice as much milk as the American population consumes, which enables U.S. farmers to be international exporters. In contrast, the Canadian dairy industry produces only slightly more milk than Canadians consume, which means Canada currently has minimal export capabilities.
In a liberalized market, the United States is positioned to be an exporting superpower, partly because it enjoys greater cost efficiencies in the dairy industry thanks partly to economies of scale. Following liberalization, competition from American producers could jeopardize the Canadian dairy industry almost overnight. In this scenario, the U.S. dairy industry could quickly devastate the Canadian dairy industry by flooding the market with low-cost products. In addition to competition, the United States, Canadian producers would also face fierce competition from firms in other countries with strong dairy sectors including Australia, New Zealand and India.
Further, Canadian producers are not sufficiently productive that they would be positioned to offer cost-effective products to emerging countries to which we would theoretically have increased access during the Doha round. The evidence suggests that, if international liberalization were to occur overnight, the Canadian dairy industry would be harmed by competition from the United States without enjoying substantial benefits from access to other markets.
Trade liberalization would bring important benefits to consumers, including lower prices for dairy products. However, the evidence suggests that if liberalization were to happen overnight, the Canadian dairy industry would not be well positioned to succeed. Fortunately for dairy producers, liberalization will not occur overnight and the sector has some time to prepare. In the next section of this series, we will discuss Canada’s competitive advantages and how they can be leveraged in the global market.