Milking Canadians: The Consumer Costs of Supply Management in the Dairy Industry

Connor Colvin

Canadians pay more for dairy products than residents of almost any other developed country in the world. They shell out significantly more, for example, for milk, cheese, and butter than the United States. According to a report by the International Dairy Foods Association, dairy prices in Canada have increased by 59 per cent since 1996, with Canadians now paying 20 to 35 per cent more for dairy products then their neighbours south of the border.

So what is driving these high prices? Put simply, the dairy industry in Canada is a highly regulated industry that runs on a system of supply management. This means that it is a system of controlled production that has set prices, high tariffs, and production quotas over time. The Canadian Dairy Commission sets prices for dairy products on the basis of costs of production, rather then allowing prices to be determined by the market forces of supply and demand.

This system is also characterized by high tariffs (168 to 300 percent) put in place to block imports and external competition. Production quotas that determine the level of national production — established by the National Milk Supply Management Committee — effectively limit entry to the industry. Yet while this system does lead to stable prices and guaranteed returns for Canadian dairy farmers, it simultaneously hurts consumers, processors, and even many dairy farmers themselves.

The inefficiencies inherent in a system of supply management bear high costs to consumers and processers alike. The system’s price setting mechanism leads to higher prices than would exist if market forces were left alone to determine the price, or if competition was in fact encouraged between dairy farmers and processors. Although a guaranteed price does mean that dairy farmers are generally guaranteed profits, the current supply management system stops dairy production beyond a certain level, thus preventing growth in the market. If production were allowed to increase, prices would likely fall — something that the Dairy Commission has worked actively to prevent.

As a result, Canadians pay some of the highest prices for dairy in the world. Critics of the supply management system have pointed out that this negatively affects low-income Canadians in particular, who are forced to pay large shares of their already limited income for essential dairy products.

Canada’s most efficient dairy farmers — the 25 per cent of farmers who produce over half of the country’s milk products — are also negatively affected by the current system. Production quotas and high tariffs prevent these farmers from expanding their operations both in Canada and abroad, while protecting the country’s less efficient farmers (who collect guaranteed profits) from competition.

Despite its obvious inefficiencies, the Canadian dairy industry’s supply management system has persisted over time. This can be credited in large part to the dairy lobby, one of the most powerful lobby groups in Canada, which spends an estimated $80 to $100 million annually to maintain what is, for their members, a fairly lucrative status quo. It has argued that liberalizing the dairy industry will have devastating impacts for Canadians, claiming that prices will rise, lower quality products will flood the market, and excess production will be “flushed down the drain.”

Yet a look at the experience of Australia, a country that liberalized its dairy industry from a supply management system back in 2001, offers a clear contradiction of the Canadian dairy lobby’s claims. Within two years of moving away from a supply management model, Australian dairy farms increased their total output by about 20 per cent; within eight years, the price of milk fell between 18 and 29 per cent. Dairy farmers were forced to adapt to new market conditions and to compete amongst each other for profits, and were allowed to expand their operations into international markets — and the majority have thrived from doing so.

Despite the existence of empirical evidence supporting a shift away from a supply management model, Canada’s dairy industry continues to operate on just such a system — benefitting only a select group of dairy farmers, often to the detriment of the most efficient dairy producers and, more generally, to the consumer. If Canada were to liberalize its dairy industry, dairy prices would be lowered to those found in comparable jurisdictions, free trade agreements such as CETA would be easier to negotiate, and dairy producers would be able to compete both domestically and internationally.

At current, the Canadian dairy industry operates under a system dedicated to ensuring high prices and guaranteed profits. It is no wonder that the dairy lobby has fought so hard to keep such a lucrative system in place. However, as income inequality continues to rise and low to moderate-income households come under increased fiscal constraint, it is long past time that this system is replaced with a model that bears the consumers in mind.

Connor Colvin is a 2016 Master of Public Policy candidate at the School of Public Policy and Governance, University of Toronto. He previously completed an Honours Bachelor of Arts in Economics at McMaster University. Connor is interested in a broad range of policy issues, but his main areas of interests include economic, employment, education and health policy.

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