Can Canada’s dairy sector compete? Part 2 of our three part series

Canada's competitive advantages

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.

In the medium-term, international agreements will likely leave Canada with no choice but to abandon the supply management system that currently controls our dairy industry. Liberalizing agricultural markets is a central objective of the Doha Round of trade talks, and Canada is increasingly isolated in its stated desire to permit the continuation of supply management under future trade pacts.

If liberalization were to occur overnight, Canada’s dairy sector would likely be decimated by aggressive competition from American firms. The Canadian dairy industry must become more efficient if it is to compete effectively in a liberalized trade environment. Fortunately, Canada’s dairy industry has a number of natural advantages which could make Canada’s dairy sector competitive, if policymakers enact reforms designed to leverage those advantages in the global market.

Canada’s geographical location brings several advantages to its dairy industry. Canada’s environmental conditions, combined with the availability of large tracts of land, enable most dairy farmers to produce their own feed, which lowers total production costs. Canada has ample unused land to devote to the dairy industry, specifically in Nova Scotia, Newfoundland and Labrador. Where land is cheap and abundant, farmers have an opportunity to yield lower-cost feed, allowing them to produce more product with increased economic efficiencies.

Further, Canada has excellent access to innovations in genetics and high-quality feed, which positively affect dairy production in terms of quantity, as well as milk quality (greater fat and protein). Access to the most recent innovations, combined with abundant land, means that Canadian farmers should be able to increase production which could reduce costs and increase the sector’s competitiveness relative to foreign producers.

Most importantly, Canada’s true capacity to produce dairy products may be understated and unknown, as supply management has capped production for famers and removed incentives for farmers to improve production efficiencies or pursue economies of scale. As such, the implementation of a liberalized market in progressive steps could lead to a flourishing industry if developed correctly. The industry has created advantages in the area of genetics and higher milk yields. These have given the industry further fringe benefits such as high fertility and natural resistance to disease which have helped keep veterinary costs down.

In the past, Canada’s has failed to benefit from these impressive natural advantages because supply management removed incentives for producers to increase production in ways that would allow them to benefit from economies of scale. If they are used with the benefit of economies of scale, Canadian dairy farmers can become more efficient and competitive.

To summarize, the Canadian advantages lie in three primary areas: abundant land, low cost high quality feed and genetics. Individually, none of these advantages are unique to the Canadian environment. However, the combination of these advantages gives famers the ability to significantly increase their production if supply management restrictions are removed, and they are allowed enough time to expand before facing aggressive competition from American firms.

Canada’s dairy industry has a unique combination of advantages that ought to make it a competitive player in a globalized trade environment. However, as a result of restrictions on innovation and production under supply management, Canadian producers have not grown large enough to benefit from economies of scale and fully benefit from these advantages. The result is, as discussed in part one, Canada’s dairy sector is not currently well prepared to compete internationally if liberalization were to occur overnight.

Liberalization is, however, on its way thanks to international trade agreements that will likely forbid the continuation of supply management in Canada. While Canada’s dairy sector is not presently well positioned to compete, we have seen that the industry has many advantages that, if properly leveraged, can enable its producers to compete effectively. In the final installment of this series, we will examine how policymakers can help bring this about, by presenting a series of policy recommendations that will best situate the dairy sector to compete in the event of an imposed liberalized market.

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