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A fair way to end supply management

November 25, 2011

VANCOUVER, BC, Nov. 25, 2011/ Troy Media/ - Government supply management programs for agricultural products are a policy made in politicians’ heaven. It allows politicians to buy the electoral and financial support of farmers and their suppliers without having the costs show up as government spending. Instead, the costs are passed on to consumers, who end up footing the bills through higher food prices.

No wonder that politicians during the past three decades have ignored all demands from academics and international trade partners for the elimination of Canada’s supply management system. However, we may be reaching a point where politicians are forced to confront the inequities of supply management.

Tariff protectionism

At its most basic level, supply management sees government restricting imports of certain agricultural products through high tariffs. The means Canadian farmers have no need to be price competitive. As a result, consumers pay higher food prices. For example, during a recent visit to Los Angeles, I found a quart of ice-cream priced at $2.50 compared to $7.00 in North Vancouver. Prices of other products like chicken, eggs and turkeys – all subject to supply management – are also lower in the United States.

Moreover, it’s become increasingly apparent that the Canadian government has been willing to sacrifice the interests of some export industries in order to gain agreement from other countries to allow Canada to continue restricting imports of products protected domestically through supply management. As a result, the number of Canadians adversely affected by import restrictions and high tariffs far exceeds those who benefit from supply management.

It is therefore encouraging that the federal government recently declared that supply management is ‘on the table’during upcoming rounds of trade negotiations. It is also encouraging that the government has begun to use its parliamentary majority to eliminate other unnecessary interventionist policies that were created by past governments, like the Wheat Board and Long Gun Registry. Supply management of dairy and poultry would be an excellent addition to this list.

However, before governments can totally eliminate the existing agricultural supply management system, it will need to find a way to address the risk facing farmers who borrowed heavily to purchase production quotas. Without the protection provided by supply management, many of these farmers may be unable to pay the interest on their bank loans, and some could possibly face bankruptcy.

It can be argued that these adverse consequences should have been anticipated by farmers when they bought production quotas and by banks when they loaned money to the farmers. Presumably, the risks associated with these transactions have always been reflected in the returns embodied in the purchase and loan contracts so there is no need for government to act on the farmers’ and banks’ problems.

While this economic argument is valid and goes over well in academic debates, government needs to take into account risks such as economy-wide financial instability, temporary supply and unemployment problems, as well as public perceptions of fairness. Therefore, government needs to find a way to reduce the risks and costs of adjustment that may result from eliminating supply management.

One possible method involves slowing the increase in the number of quotas, which would eventually cause them to lose all value while causing consumer prices of agricultural products to fall to efficient levels. The problem with this approach is that it would only slow down the adjustment costs and risks.

These costs and risks could be avoided altogether if the government simply purchases the production quotas from the farmers. The prices paid for the quotas should be based on their book value as reported in farmers’ business accounts, net of depreciation used to reduce taxable income in the past. The value of quotas in the proposed compensation scheme should be adjusted downward for the length of time the quotas have been held and used to make the extra profits generated by the supply management system.

Acceptable costs

The value of all quotas outstanding in recent times has been estimated at $30 billion for all supply management programs, but because compensation would be based on declining book value, the actual cost to government would be much less.

These costs would be worth incurring if it helped make the elimination of supply management politically acceptable, brought lower prices to consumers, and made possible additional international trade agreements.

While Canadian consumers and retailers would love it, shed a tear for the poor American retailers, who would lose all that business from cross-border Canadian shoppers.

Herbert Grubel is a professor of economics (Emeritus) at Simon Fraser University and a senior fellow with the Fraser Institute.

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