A Note on Dairy Compensation
There has been considerable discussion about the compensation package for dairy producers recently announced by the Liberal government. It is worth noting that compensation was originally promised by Stephen Harper’s Conservative government when the original agreement with Europe was signed. There have been two subsequent trade deals which incrementally ceded a share of the Canadian dairy market to other countries.
I am not going to get into a discussion on the merits of supply management. It is the current policy in place and no party likely to be in government is inclined to change it. I think there are credible arguments for and against supply management. However, I do wonder whether compensating the dairy industry for the loss of domestic market share is the right approach.
In the proposed program, every dairy farmer in Canada will be paid for the lost market share and associated lost production. The thought process is likely that the government replaces the income lost to trade concessions for every dairy farmer. In principle this makes sense if dairy is a “loser” in the trade deal made to create opportunities in other sectors.
My question is whether it might have been more effective to take a different approach. Dairy is supply managed. This means that individual farmers have production quotas for milk (the system is a little more complex than that, but the structure is a matter for another discussion). The quota is trade-able, and farmers sell quota as they exit the market or scale back and buy quota to enter the industry or grow an existing farm.
Farmers buy quota to achieve efficiencies based on the technology they have. Farmers often build facilities larger than they need and slowly obtain quota to grow into them. If the trade concessions are applied equally across the country and all farms, then over time everyone’s production is constrained by approximately 10% with small incremental growth as the market grows (the market and, therefore, quota has grown slowly as population grows). Eventually production will return to current levels and the compensation should end. This means, however, that in the short term we are not producing milk as efficiently as we were and that those producers who built larger barns will take longer to fill them.
An alternate approach would have been to spend the compensation dollars on purchases of quota to take the necessary volume out of the system. This would allow those producers who don’t sell to maintain their current level of production with no economic impact on their operation.
There are clearly some challenges with this approach as well.
Buying that volume of quota might be difficult and may increase the value of quota. The volume decrease may actually decrease the value of dairy farms and quota if the current compensation process stands.
It may be difficult to buy quota evenly across the country making it unpredictable for processors and meeting local domestic demand. The current approach will spread the compensation and the volume reductions evenly across the country.
The increased demand for quota could make it difficult for those trying to expand to get quota.
There are also political considerations. The dairy industry is an important voting block – particularly in Quebec. It is likely no coincidence that the announcement of cheques for all dairy producers came in the months before an election. Paying individual producers to exit the industry would have been less politically effective. The optics of larger payments to a smaller number of producers may also be difficult politically. It is worth noting that the government has paid for exits in the past, most recently with swine producers in a very difficult market.
My suggestion would have required more analysis and research but I do wonder if it might have improved outcomes.
Recommended citation format: von Massow, M. “A Note on Dairy Compensation”. Food Focus Guelph (52), Department of Food, Agricultural and Resource Economics, University of Guelph, August 26th, 2019.