The Protectionist Market Regime of Canadian Dairy Farms

Freshta Raoufi 

The Canadian Dairy Commission currently faces domestic and international pressures to change its course of action and adopt a free market principle. In an attempt to incentivize restaurant owners to buy Canadian cheese, the Canadian Supply Management Committee recently introduced a discount on mozzarella. The subsidy, however, further reveals the distortions present within the Canadian dairy market. The federal government must consider the economic potential of removing the supply management system and allowing the market to produce at the optimal free market equilibrium.

Created in 1966 as a Crown corporation, the Canadian Dairy Commission coordinated federal and provincial dairy policies and created a control mechanism for milk production. Its original intention was to stabilize revenues and prevent costly surpluses. The Commission uses supply management to set the support prices of dairy products and the market sharing quota, which is essentially a national milk production target. Access is limited to those who can afford the cost of entering the highly regulated market.

Prior to supply management, the dairy market faced significant strains due to surplus production, low levels of investment, lack of industry coordination, technology changes and costs, among other factors. As a result, the federal and provincial governments intervened to stabilize the industry through supply management. Supply management is production driven, meaning the prices are determined by levels of supply rather than the market. Supply management has failed to clear the dairy market, resulting in the industry failing to operate at a pareto efficient point.

The protectionist policies of the Canadian Dairy Commission have a significant impact on trade. Supply management policy limits foreign dairy products from entering the Canadian market by imposing a 200-300 per cent tariff.  Several studies have argued that this policy significantly affects all Canadians, as people are forced to pay much more than they would under a free market system.  For example, the Conference Board of Canada estimated that Canadians pay 60 cents more for a one litre carton of whole milk than Americans, and $1.50 more for a one-pound package of butter than Australians. The OECD has estimated that dairy prices in Canada are more than double those of the world market.

The effects of supply management policies, however, extend beyond Canadians’ wallets.  As Canada pursues international trade deals such as the Trans-Pacific Partnership, the Dairy Farmers of Canada claim that there are no gains to be made in the agreements.  However, global commodities and trade experts argue that Canadians are missing out on the potential to grow their outputs. Dairy production is rapidly increasing in the U.S., Australia, and New Zealand, where the industry’s supply is not controlled.

Taking a closer look at the cheese market provides a better understanding of how businesses have reacted to high dairy prices in Canada. In 2012, the Canada Border Services Agency and the U.S. Department of Homeland Security’s border enforcement security task force arrested three individuals for “large-scale smuggling scheme to distribute cheese products and other food items into Canada.” According to the police, over $200,000 worth of cheese was being smuggled across the border for resale to restaurants in the Niagara region. Others have found a legal alternative to the high costs of buying from Canadian producers. Restaurant owners have started ordering from companies in the U.S. that sell cheese and pepperoni “pizza kits” that are shipped together. This very clever discovery has allowed pizzerias to avoid the high prices in the Canadian market and dodge hefty tariffs. The Canadian International Trade Tribunal declined to intervene to reverse earlier rulings that allowed this import in the Canadian market.

Two days prior to the ruling, the Canadian Supply Management Committee introduced a discounted pricing scheme for a specific type of cheese: mozzarella. The discounted price applies only to restaurants that prepare and cook pizzas and not to the broader public or industry. This policy change is likely in response to the increasing use of imported cheese by Canadian pizza-makers.

Canadian pizzeria owners are certainly at a disadvantage: the price of mozzarella cheese in the U.S. is $4.20 a kilo compared to $8.50 a kilo in Canada. The new price offered to Canadian restaurants has been set to $7.80. Canada’s Agriculture Minister Gerry Ritz applauded the Commission and expressed hope that it would result in more consumption of Canadian-made cheese. However, restaurant owners already have very slim profit margins (generally 8-10 per cent), meaning the economic incentive for those who are already purchasing the American pizza kits to make the switch to Canadian cheese makers just isn’t there.

Rico Razaiy, the owner of Cobourg Steakhouse and Pizzeria who has been in the restaurant business for over 20 years, explained that in order to qualify for the reduced mozzarella prize owners must register for the subsidy. “My supplier said that this is a government subsidy offered to pizzerias that register and claim the amount, and that they will be reimbursed at about $0.70 per kilo every three months.  I am not going to go through the hassle of filling paperwork and adding another task to my list…it’s just not worth the headache for such a small discount.”

The Commission claims that they are taking this route because they want to see if there is market growth after the discount came into effect.  When asked about his reaction on how the media has been reporting the story, Razaiy expressed that the savings don’t always make it down the supply chain, and consumers don’t always benefit from the discount.

The call for the dismantling of Canada’s supply management regime has both domestic economic incentives as well as international trade gains. While eliminating protections may not yield immediate results, with support to farmers to make the transition to a free market economy, Canadians are likely to reap the benefits of market growth. This type of policy transformation will require great political will followed by widespread public support. The dairy market is currently producing a deadweight loss. Can Canada transform or reverse such an embedded historical policy choice to benefit both producers and consumers? There are different answers depending on who you ask.

Freshta Raoufi is a 2014 Master’s of Public Policy candidate at the School of Public Policy and Governance. She has a BA (Hons) from the University of Toronto and is currently completing her policy internship at the City of Toronto in the Project Management Office of 311.

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