The Future of Supply Management

Keep it exactly as is? Make a few minor tweaks? Undergo a major overhaul? Or just get rid of these systems altogether? These are some of the options being considered — and hotly debated — when it comes to Canada’s supply management systems for dairy, poultry and eggs in 2014.

First implemented in the early 1970s, national supply management systems were put in place as a way to protect Canada’s farmers in these sectors from economic instability. “The Canadian dairy sector opted to operate under a system of supply management in the early 1970s to address unstable prices, uncertain supplies and fluctuating producer and processor revenues, which were common in the 1950s and 1960s,” explains Patrick Girard, senior media relations officer with Agriculture and Agri-Food Canada.

The dairy industry was the first to institute supply management in 1970. It was quickly joined by the egg sector in 1972, followed by turkey and chicken later in the decade, and the broiler hatching egg industry in 1986. Each of these sectors has its own supply management boards, but all of these industries share three basic pillars of supply management in common: price setting, protection from foreign competition, and control of supply.

Basically, these systems operate as such: the supply management board for each sector sets the prices that consumers and/or food processors pay for the raw goods, be it milk, poultry or eggs. These prices may vary from the standard in many other countries, so there also must be protection from excessive foreign competition. There is therefore a very small, set amount of each of these products that can be easily imported each year, and anything above that is subject to prohibitively high tariffs. At the same time, to prevent the problem of overproduction, farmers in these sectors have all been issued production quotas, which nobody is permitted to exceed.

Even critics of the system typically agree that when supply management was first implemented in the ’70s it was for good reason. And indeed, farmers in these sectors are still benefiting today from the stability these systems provide. In general, dairy, poultry and egg farmers strongly support maintaining the status quo. The Dairy Farmers of Canada is certainly working hard to publicize the benefits of supply management. As it explains on its website: “While farmers around the world face unexpected and inexplicable wild market fluctuations, Canadian farmers sell their milk at constant and stable prices. As a result, Canadian dairy farming is one of the few agricultural sectors that is self-sufficient — providing income security for farmers and requiring no government subsidy.”

And from the Canadian government perspective — at least when it comes to an “official” stance — it’s all good. “Supply management has served Canadian farmers and consumers well for over four decades. In the recent speech from the throne, our government underscored our strong support for supply management,” says Girard. But Martha Hall Findlay, a former Liberal MP from Toronto (currently working as Chief Legal Officer at EnStream LP and as an executive fellow at the University of Calgary’s School of Public Policy), says that while she was working on Parliament Hill she encountered a great number of fellow MPs who would secretly say, “We know [supply management] has to go, but we just don’t have the votes.” Says Hall Findlay, “That just drove me crazy.” She feels many politicians are with her in the belief that supply management should be dismantled, but that doing anything that might be perceived as harming farmers can be a political landmine.

In Hall Findlay’s opinion, there are several reasons why Canada should completely dismantle supply management. Canadian consumers are paying much more for supply-managed products — particularly milk and dairy products — in comparison with other countries. Canada is being hindered on the international trade table in general because of its refusal to budge from a system that so strictly limits and hinders imports in these sectors. And food processors that produce food items based on dairy, poultry or egg ingredients are being obstructed from successfully exporting their products because of the high price of their raw ingredients.

Some food processors, says Hall Findlay, may be quite happy operating solely within the Canadian marketplace right now, and they might not see supply management as a huge problem. “If you’re charging more than you might otherwise for a tub of ice cream, you’re only competing against other Canadian processors who are buying their ingredients at the same prices. And quite honestly, it’s kind of cushy — because any time you have a product that sells for $5 instead of a product that sells for $4, you have that much more of an opportunity for a margin,” she explains. “But it’s a shame that we’re exporting all of these jobs to other countries when, if we were dealing with world market-priced milk, we could actually be dealing with world markets for our processed foods…the opportunities could be huge.”

Robin Horel, president and CEO of the Ottawa-based Canadian Poultry and Egg Processors Council — an organization whose membership consists of food processors who all buy their most significant raw materials from supply-managed farmers — also has some concerns with supply management. “The supply management boards were set up in the 1970s to eliminate the difficult boom-and-bust cycles, and if you look at the last 40 years, it’s done that remarkably well. Great if you’re the farmers — but we’re not the farmers,” he says. Still, “we have learned over 40 years how to live in the system, and have actually become supporters of the system, provided it works for everybody in the supply chain. For the most part, our members would say it’s been good for us, but it could be better for us as the next step in the supply chain.”

Unlike Hall Findlay, Horel isn’t looking to dismantle supply management; he just thinks it needs updating. When it comes to his members, the chicken, turkey and egg processors each have their own particular issues with the system, he says. With chicken, for instance, “it’s the supply [control] pillar…that’s the part that we constantly have issues with on the chicken side,” says Horel. “We as the customer give input and rationale as to why a certain amount of supply is right, but at the end of the day, the board determines what they think, and we cannot outvote them.” The majority of the board members are farmers, and when it comes to the farmers’ viewpoint regarding the appropriate amount of supply, “It’s in their best interest to produce as much as possible. And the folks who have to deal with that in the marketplace are my members, who have to buy whatever is produced, and then somehow sell it into the marketplace. And if there’s too much production, my guys still have to pay the full price — because that’s one of the other pillars of supply management — and then they can’t get their costs recovered in the market.”

Modernizing the system is going to be crucial, says Horel. “If we don’t modernize it — and by we I mean the farmers and the whole supply chain, we’ll be in danger of losing the system. The system has good support from government, but the government support is, in our opinion, based on consumer support. If we lose consumer support for the system, government support will follow. So in order to keep consumer support, we need transparency in cost; and we need to ensure that the farmers understand that this is a privilege, not a right.”

But how, exactly, should all this be done? When asked, Horel says, “That’s the $64,000 question,” with a laugh. “To be honest, we’re still working on that. We’ve had our new strategic plan for about a year now, and we’re working on what modernization means, and it likely means different things in each of those different sectors. It’s almost certain that there’s no silver bullet here. It will be a number of little things and they will vary by sector; but transparency, and ensuring that you can justify the price structure that you’ve got, that has to be one of the keys in all of those sectors.”

The Guelph, Ont.-based George Morris Centre, an economic research institute focused exclusively on the agriculture and food industry, has done a great deal of work on supply management research. In March 2013, the centre released a report with recommendations for reforming the dairy supply management system, which advocates that the system needs some “bold” changes rather than dismantling or replacement. The essential reforms, detailed in the report, fall into the following categories:

1. Make growth in dairy markets a top objective of milk supply management, and mandate growth.

2. Improve the efficiency of the milk supply management system, which includes: eliminating the provincial balkanization (or fragmentation) of the dairy market; improving the efficiency of milk allocation to processing plants; improving the governance of supply management agencies; and liberalizing milk quota transfers.

3. Liberalize milk pricing.

4. Improve the broader trade positioning.

Titled Canada’s Supply-Managed Dairy Policy: An Agenda for Reform, the report explains that “the first element (market growth) and the second (improved efficiency) can create a reduction in costs that helps make feasible the third (liberalized pricing). The third leads logically to the fourth element (improved trade positioning).” The report also stresses that all four of these recommendations must be put in place together to be effective. If only one or two of these were to be implemented, it might make no difference at all.

Al Mussell, a senior research associate at the George Morris Centre and co-author of the report, says those who advocate simply getting rid of the whole system aren’t seeing the bigger picture. “We need to get beyond this ‘good vs. evil’ dialogue around it,” he says. “Let’s be fair, systems like this have advantages. They also have disadvantages…We’ve wasted a tremendous amount of time just trying to demonize this or sanctifying it. Or to make an analogy, many of us might say we’re concerned about the Canadian healthcare system and its ability to fund itself in the future, but we don’t use that as an argument to say, ‘Hey, we should get rid of this. It’s not working perfectly, so let’s just chuck it.’ We need to say, ‘OK, let’s work at this a little bit and see if we can make it better.’”