The Supply Management System versus the Market Oriented System

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					The Supply Management System versus the Market Oriented System of Milk Production – a
Canadian Case Study

Qigao Fu, A. Ag.

Introduction

Canada is the 2nd largest country by territory in the world with the low population
density of 2.9 persons per km 2. With 7% of land suitable for farming, Canada is
one of the world’s formost producers and exporters of food and livestock. Over the
last century, Canada’s domestic farming has changed dramatically. In 1900, 45 %
of Canada's population were employed on farm, whereas in 1990 only 3 % were
still directly involved in food production, but now 25 % had found employment in
various elements of the food chain. Farming is becoming a sophisticated industry
with over 40 percent of operations using computers as a management tool. Today,
farming in Canada faces challenges including environmental regulations, labour
shortages and consumer demands domestically, world trade regulations, food
safety and sovereignty issues globally.

Canadian Dairy Industry

The dairy sector is the 3rd largest agricultural industry in Canada with about 20,624 dairy
farms producing 8 billions litres of milk (3.6% fat) per year. More than 95% of the dairy farms
are family owned. A typical dairy farm has 50 cows produces 8,738 kg of milk in 305 days of
lactation generates farm revenue about $175,000. The dairy industry creates 50,760 on-farm
jobs, 66,560 processing jobs and 25,185 farm service jobs, with an overall economic activity
of about 26 billion dollars.

More than 80% of Canada’s dairy farms are in Quebec and Ontario. More than 85% of the
cows are Holsteins. Of the total milk production, 39% and 61% goes to fluid milk market and
industrial milk market respectively. Quebec is the number one producer of cheese, yoghurt
and butter and the number two producer of ice cream in Canada.

Supply Management System

The key element of Canadian national dairy policy is a national milk supply management
system combined with the control of dairy product imports through tariff rate quotas.
Supported by the Canadian Dairy Commission, which is a federal corporation funded by the
federal government, dairy producers and the marketplace, the Canadian Milk Supply
Management Committee, represented by consumer, processor and producer, oversees the
application of the National Milk Marketing Plan and sets the national Market Share Quota
(MSQ) for industrial milk and establishes the share of each province in the MSQ, based on
previous year’s domestic consumption, anticipated changes in demand, projected dairy
product stocks, import commitments and export obligations.

First adopted as a dairy policy in Australia in the 1920s, the supply management system as a
national policy in Canada was implemented in the late 1960s to enhance income stability for
dairy producers and to maintain market stability. Defined as a national program authorized by
federal legislation, it was designed to use production control regulations rather than price to
match the supply of milk with the demand for milk. Today, in Canada, as well as in Israel and
Europe Union countries, quota is the main tool to control the domestic milk production.

Market Oriented System

In contrast to the Supply Management System, a market oriented dairy policy uses price
rather than production control regulations to balance the supply of milk and the demand for
milk. According to the law of comparative advantage, market oriented activities with a fair
pricing policy encourage milk producers maximum their milk production and minimum their
cost of production. As price is a signal to economic players, high price will push buyers to
reduce their demands and encourage the most efficient producers to overproduce and the
high cost producers exit the industry.

The Market Oriented System advocators claim that the Canadian supply management system
penalizes the most dynamic producers and benefits the high cost of production producers by
means of expensive quota, which therefore reduces the competitiveness of the Canadian
dairy industry. In the meantime, Canadian consumers pay extremely high price for milk and
milk products as the system not only imposes prices at the farm gate but also refuses
imported products through tariff barriers from 200% to 300% depending on the category of
milk products.

Cons of Market Oriented System

In the global market economy, milk from farmer to consumer in the chain goes through 4
different levels, on-farm, off-farm, national and international. On-farm milk production capacity
is largely determined by natural, technological, manpower and financial res ource. It is obvious
that price can’t balance the supply of milk and the demand for milk. It is even difficult to
achieve a fair price in the global economy.

Take the US and Viet Nam as an example. The accelerating technological gains in milk
production keep the US milk supply more than the demand since 1979, although milk price
fluctuates in a considerable range. As a result US milk producers often faced a crisis situation,
which needs government intervention. Heavily subsidized with an aggressive export policy,
the surplus of US milk has a negative effect on the milk production in the importing countries.
In Viet Nam, although the country’s milk production is lagging demand, pressed by the
imported milk products, the wholesale price of dairy produce is low so that the return to dairy
farmers against their high investment is low. The result is the domestic milk production is not
encouraged so that, even with imports, the supply still can’t meet the demand.

As John Ralston Saul, the author of The Collapse of Globalism and the Reinvention of the
World, pointed out, market-oriented system which preaches maximized production for lower
price doesn’t work and the supply management system practised by Canadian dairy farmers
now economically makes far more sense.

Pros of Supply Management System

Although supply management system is not perfect, it has the following merits.
First, the system empowers the Canadian milk producers. Producer empowerment is the key
to industry growth, or even to maintaining the status quo, in any dairying nation. If the
producers can’t have a fair share of the consumer dollar, they will quit the business. Although
its farmers have a strong technical expertise and a rich dairying experience, the UK is the
only country in the EU that can’t fill its milk quota due to milk producers not having a voice in
the marketplace. In Canada, this balanced agricultural policy delivers real gains for all
Canadian farm families. Furthermore, the system provides milk producers a stable and
predictable domestic market that is not readily found in the export market. Farmers are more
willing to invest for a long-term interest instead of making short-term gains, which therefore
reduces the opportunity cost and avoids overproduce waste.

Second, the system provides Canadian consumers with a consistent supply of the highest
quality dairy products anywhere in the world at very reasonable prices. Although the supplies
and the milk prices changed dramatically in the global market, Canadian milk producers,
processors and consumers are not affected and all benefit from the system without sacrificing
the interest of one another.

Third, the system has a positive effect on global market. When there is surplus milk in the
world market and price is low, Canada opens its door for more imported dairy products. When
there is strong demand in the world market and price is high, milk producers can deliver in
excess to their quotas, with quota incentive or receive world price for production exceeds
quotas. Therefore, the contribution of the Canadian dairy industry to the international dairy
market are monitored and minimized in a positive way.

Fourth, the system encourages domestic competition through a well-regulated and supported
environment, achieving a highly competitive Canadian dairy sector on the world stage. For
example, in Ontario, before implementing the supply management system in the late 1960s,
there were about 100,000 dairy farms with about 900,000 cows producing around 3,000 litres
per cow. There was also a very volatile milk market that was very different from today. In
2005 there were less than 5,000 dairy farms with less than 370,000 cows producing more
than 7,000 litres per cow. Canadian dairy farmers have not only a rich dairying experience
accumulated over generations of farming practices, but they also enjoy the best technical
services in the world. As a result, semen and embryos from Canadian genetics remain in high
demand and live animals command the highest prices at auctions on the world market.

Fifth, the system positions Canada in the best place ever as the world takes a turn toward
environmental, food safety and sovereignty issue. As food print or food mileage is being more
discussed, more Canadians are willing to buy domestic products to contribute to
environmental protection and relieve climate change. Canada also has a complete milk
production and recording system with a increasing number of animals identified and
registered at the farm level. Through a comprehensive National Livestock Identification
Program, every dairy animal in Canada is identified and can be traced back if there is a food
safety threats. The system gives the dairy sector strength to safeguard its domestic food base,
to minimize the impact of the global market, and to reject the food safety threats outside the
Canadian border.

Is the supply management a possible model for other countries? Jack Wilkinson, president of
the International Federation of Agricultural Producers (IFAP) said, “implementing supply
management system for farmers in poorer countries is one way to raise farm incomes and
alleviate poverty.” In Canada, as the Minister of Agriculture and Agri-Food reiterated, “Canada
consistently stood up for supply management sectors and will continue to do so.”

Summary

   1. The Canadian dairy sector is one of the most competitive dairy industries in the world
      and benefits greatly from the Canadian national dairy policy – the supply management
      system.
   2. The Market-oriented system failed to achieve a fair price and price failed to balance the
      supply and the demand in the dairy market not only domestically, but also globally.
   3. The Supply management system built a safe and stable domestic dairy food base for
      Canadian consumers and empowers the dairy producers.