Thank you, Mr. Chair. I'd also like to thank the committee for inviting me to speak here today.
I'd like to talk to everyone about the supply managed farm sector. It's Canada's dairy, poultry, and egg farmers that together comprise roughly 20% of Canada's agriculture. Under a supply managed system, domestic producers are able to control the price and the supply of their goods. Production quotas limit what leaves farm gates, and large trade tariffs block the entry of similar goods into the country.
Because this type of market intervention has benefits and costs, a straightforward economic analysis cannot answer whether it's a good policy. However, it can outline the issues and the affected parties. Such an analysis leads to some simple conclusions. Although a supply management system allows local producers to obtain larger and likely more stable revenues than otherwise possible, this comes at the expense of domestic consumers and robust competition.
New entrants are restrained. Tariffs shelter existing Canadian producers from foreign competition, and production limits prevent farmers from raising or lowering supplies to respond to changing economic conditions. Farmers who benefit from this system fiercely defend the policy, but competition and domestic consumers are harmed. Looking to the future, it's my opinion that we should develop a greater willingness for a gradual reduction in supply managed support.
The costs of supply management are most easily understood by examining the market value of quotas. Quotas are valuable to farmers because a quota entitles the holder access to the Canadian market and statutorily restrains others who might wish to do so from producing similar goods. The inflation-adjusted value of quotas sold in Canada has increased from $10 billion in 1982 to $30 billion in 2007. Each supply managed farm today possesses on average approximately $1.5 million worth of quota, but purchase quota has nothing to do with the costs of machinery, feed, land, labour, and knowledge that go into making the product.
Many factors have influenced the dramatic rise in quota prices: for instance, higher expectations that the government will maintain the current policy, expectations of higher future profits from production, lower costs of borrowing, and expectations of government buyouts. Further, financial innovation in the past two decades, such as treating quota as collateral, may have also increased its market value.
Since most quotas are openly traded, the quota price captures the value of future profits associated with producing a good, the supply of which is restrained by the quota system rather than by the market clearing price. People can invest money freely, and because all investors are searching for the best and most profitable returns, the rate of return on alternative investments tends to even out over time.
If people see higher profits from producing dairy, for example, they would invest in quota until the return matches investments with similar risks, so the extra profits from the supply managed system get built into the price of a quota. This is why many new entrants are discouraged. They perceive that they can earn similar profits in other lines of production.
Because the quota system restricts the supply of products that would otherwise make it to the market, the benefits that flow to supply managed producers come at high consumer costs. The Organisation for Economic Co-operation and Development measures the cost of Canadian supply management on domestic consumers in 2007 at $2.6 billion. This amounts to a transfer to farmers of roughly $209 annually by each Canadian household.
Despite rising global demand for milk and poultry products, Canadian producers have opted for control over the domestic market, which due to high domestic prices and an aging population appears likely to shrink in the future. They deter foreign access into Canada by imposing a tariff rate quota, otherwise known as a two-part tariff, under which high tariffs are applied on imports above a set level, a minimum access commitment, at a combined average around 250%.
Canada's support of supply management clearly has made it difficult to sustain a credible case for freer trade. As a matter of trade policy, the Canadian dairy and oat producer position is becoming entrenched. Agricultural subsidies, particularly those in the U.S., EU, India and China, led to the July 2008 negotiation collapse of the Doha Development Agenda.
In the short run, the quota system reduces revenue uncertainty for farmers, making supply-managed production less risky than other forms of agricultural production. In the short and long run, quotas act as a barrier to new entrants, because the price of quotas requires financial investments far beyond what would be otherwise be needed to enter the sector. By reducing competitive pressure, existing farmers benefit the most from owning the quota and can out-compete new firms. The ban on interprovincial quota transfers also limits cost-efficient production movements across provinces.
Finally, local restaurants, which compete for market share with food processors, must pay higher input costs because they are not permitted the same exemption from supply managed prices that processors have. Hence, they're placed at a competitive disadvantage.
Other countries’ experience in moving away from supply management has not been painless, but it has been successful nonetheless, and not as bad as many had anticipated. Canadian dairy policy could look to Australia and New Zealand for examples. Australia had a similar system in place until the year 2000, when quotas were eliminated. Prices were allowed to float, and transitional assistance programs were put in place. Dairy farmers reacted quickly. Some farmers expanded their herd sizes, others cut back production, and some producers also left the business. Importantly, however, milk production stabilized quickly and consumer prices dropped.
Canadians can ensure high-quality goods, diverse products, and lower retail prices by moving away gradually from a system of supply management to a system where production costs and consumer demand determine grocery store prices. But before import barriers are lowered, the industry would benefit from having time to adjust to international competitors.
In this context, the following intuitively appealing solutions exist for policy-makers: gradually increase the supply of quotas, forcing the quota price downwards; a full quota buyout, which is an expensive option, but likely the most politically attractive; policy-makers could also conduct a series of reverse quota auctions; offer transitional assistance based on the book value, not the market value, of quota--this would prevent producers from earning returns above the original purchase value of quota; and finally, they could apply a tax on consumers to help pay for transitional assistance.
Because consumers will be the main beneficiaries from reform, the last option, which is the tax on consumers to pay for transitional assistance, probably matches benefits the best in terms of lower prices to the total cost of any potential reform. Transitional assistance that's slightly below the book value of quotas is a sensible option. The obvious downside when phasing out supply management is that it leaves the door open for influence groups to reverse or dampen the reforms. Immediate and decisive reforms, like those in New Zealand and Australia, could be more successful.
To conclude, Canada and other nations seem deeply entrenched in their trade positions. Canada aggressively defends supply management, while developing countries make firm demands for proper access to foreign markets. I am aware of the political sensitivity of this issue, but the durability of a competitive Canadian agriculture and agrifood sector could be enhanced by seizing opportunities in growing international markets and expanding domestic producers’ export potential.
The costs of supply management fall squarely on domestic consumers. All Canadians would have a stake in reform.
Thank you.