Study Finds Supply Management Superior To Free Market

Despite frequent criticism from free market advocates, Canada has been well served by supply management of milk, according to a new study.

In recent years, dairy prices outside Canada have soared and then plummeted – leaving many producers unable to pay their bills and creating headaches for governments, according to a study prepared by Prof. Maurice Doyon of Laval University and distributed by the Dairy Farmers of Canada.

“Importantly, the Canadian government, unlike its counterparts in the United States and Europe, did not have to intervene in the dairy industry during this (2008) world dairy crisis,” the study states.

“It is clear that the supply management system in Canada enabled the industry to avoid some of the difficulties that were encountered in other developed countries during the 2008-09 period. Supply management is an efficient co-ordination tool, since it co-ordinates the national supply (through production rules at the farm level) and demand.”

In his study, Doyon outlines costly measures the United States and Europe have implemented to protect their dairy farmers in recent years. Even the much vaunted dairy deregulation in New Zealand and Australia has foundered, he argues.

Doyon says that following the Second World War, dairy farmers “adopted a market- oriented mindset. This resulted in a greater dependence on buyers, since dairy farmers’ standard of living were now almost solely dependent on milk revenues. Dairy farmers were then at a market disadvantage since many of them were selling a highly perishable product to a few regional buyers.”

The study notes that was the case in Canada in the early 1970s when it lost its privileged access to the United Kingdom when that nation joined the European Common Market – resulting in milk surpluses here and the need for government support.

Because milk is highly perishable, Doyon argues, “the dairy sector needs co-ordination

that the market alone failed to provide. It is the lack of co-ordination that creates situations that result in the need for budgetary support.”

Canada opted for supply management in the 1970s and Europe adopted a similar system in the 1980s. The U.S. has a support price and Federal Milk Marketing Orders.

The merit of supply management was shown by events between 2007 and 2009, Doyon says.

“Milk prices reached unprecedented high levels in international markets, including the U.S. and Europe. Dairy farmers reacted to these high prices by increasing production.

“Unfortunately, at the same time the price of feed increased significantly while consumption of dairy products decreased, due to rising prices at the retail level and the impact of the global economic crisis.”

By 2009, there was a “major dairy crisis” in both the U.S. and Europe. Doyon said Europe spent 280 million euros on ad hoc subsidies while Washington boosted its dairy support by $350 million in 2009 (for a total of $1 billion that year).

But U.S. dairy farmers didn’t cut back on production because they needed income to pay bank loans, Doyon notes.

“This situation is not particularly efficient given that it is the lack of market co-ordination (adequate supply response) that results in a rationalization of the industry and not the relative competitiveness of players in the industry, like theory would suggest.”

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“ItisclearthatthesupplymanagementsysteminCanadaenabledtheindustrytoavoidsomeofthedifficultiesthatwereencounteredinotherdevelopedcountriesduringthe2008-09period.”

– MAURICE DOYON

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