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"Beats me. This is an absolutely disgraceful example of a small group of people using the power of the state to extract huge rents from all Canadians. There's no excuse for it."

How about applying that to bankers in the USA and probably in Great Britain too?

More putrid than fragrant.

The argument made by the Conference Board is, unhappily, an example of sloppy economic reasoning.

You can't have it both ways.

One argument goes as follows: the value of the milk quotas is capitalized in the price of the quota (say $28,000 per cow). In this case, all of the rents associated with the quota are received by the people who were initially granted the quotas - they received an immensely valuable asset gratis. But if you take into account the cost of (or the opportunity cost of holding) the quota, no dairy farmer now is earning a super-normal rate of return on their assets.

The other argument goes as follows: the value of the quota isn't capitalized, and so dairy farmers earn great wads of money. But you can't have it both ways.

Why might dairy farmers have large cash incomes relative to other farmers? The capital investment required to operate a dairy is much larger than the capital investment required to, say, grow organic vegetables. There's economies of scale.

And Steve, you of all people should know why dairy farmers have so much political influence - the majority are located in rural ridings in Quebec, and the votes per riding in rural Quebec are relatively low, making them relatively cheap places to buy votes. (PEI is the cheapest place to buy votes - I don't know how many dairy farmers are there)By way of contrast, buying votes in suburban Calgary is very expensive, because there's so many more voters per riding, so a given per voter bribe costs much more.

To get rid of the quotas would overnight destroy an asset valued at $2 million per farm, bankrupting every dairy farmer overnight - or requiring a one time payout of $2 million per farm * 13,600 dairy farmers using the numbers above. Can you really see any government going for this?

But it hurts to pay $10 for a small block of rennet-free Stilton that my family eats in one sitting, it really hurts...

True enough. But it doesn't have to be overnight.

I pay $1.40/gallon in the US but less than an hour's drive from the border, I paid about $7.40/gallon back home. I did the math once on what that cost my family growing up with three kids and got really depressed.

Isn't there an issue too with the main Quebec dairy distributers hoarding quotas to further drive up the price? I don't know a ton about the issue, but I was talking to someone who was doing research in this area and he said the distrubtors tend to buy the excess quotas from farmers, so if you're looking to expand your farm or looking to get into the business you have to cozy up to one of the distrubtors and basically promise them your loyalty. Which would likely create rents for the distributors, and make it difficult for new distributors to find suppliers.

It's hard to get rid of milk quotas, because even if you phase them out slowly over time, that still means a capital loss to the current holders. If phasing them out slowly meant half the capital losses, it would presumably also mean half the benefits, both measured in NPV terms. And if the taxpayer buys them out, that raises the deadweight costs of taxation, plus has further distributional consequences. Best policy is never to introduce them in the first place, of course.

On distribution equity grounds, I think one needs to argue that the capital values of milk quotas are "ill-gotten assets" in some sense, in order to counter the argument that it would be unfair to current dairy farmers. I think that case could be made.

(I would be much more seriously conflicted in debating this topic if I hadn't persuaded Dad to sell the milk quota and dairy herd back in 1989 ;). I think it was Mrs Thatcher who introduced milk quotas into Britain, ironically enough. I think she did it as a second-best policy, because milk prices were already supported, so there was over-production, and it was cheaper than getting rid of the "milk lake" by other means.)

Again, true enough. But I think we've spent entirely too much time worrying about milk producers' welfare for far too long.

The reason the dairy producers have so much political influence is simply because they are organized, whereas consumers are not. The organized few will always win out over the unorganized many, so it figures that such a policy would be put in place and then kept in place because we are more worried about the welfare of darily farmers than the other 99.8 percent of population.

Recently the House of Commons voted unanimously to instruct Canadian negotiators that the supply managed dairy industry is off limits in the upcoming Canada-EU trade negotiations. The costs to the many of maintaining this outmoded policy for the benefit of the well-connected few is pretty high.

Supply management in dairy is perhaps the most egregious example of how Canadians consumers get screwed by their policy makers. Others include cable tv and wireless communications.

"To get rid of the quotas would overnight destroy an asset valued at $2 million per farm, bankrupting every dairy farmer overnight..."

I echo your pessimism about any government taking this on, but it's not as if the economic activity generated from dairy farming is lost for all time. Some farms will survive, others will merge. In the long-term we will still have a dairy industry in Canada, but one that has to be more competitive.

"Best policy is never to introduce them in the first place, of course.'

But that's done. No point in crying over spilt milk.

"I think one needs to argue that the capital values of milk quotas are "ill-gotten assets" in some sense, in order to counter the argument that it would be unfair to current dairy farmers. I think that case could be made."

I'm not sure that's fair. There is probably some moral hazard here, but the rents went to the farmers who first received quotas.

I see a few options:

- set a ceiling on the price of quotas around where it is now. The government will issue additional quota at that price. Over time inflation will erode the value of the quota. This prevents further rents from accruing to quota holders.
- buy up the remaining quota, deregulate the market, and place a tax on milk to repay the cost of the repurchase. I did some digging and it seems milk production in Canada was 8 billion litres. Assuming 5% cost of borrowing, it would take a bit less than 20 years to retire that cost at $0.30/L. I doubt this would cause the retail or wholesale price of milk to rise in the interim, and it would allow us to actually put deregulation in dairy on the table in trade negotiations. Now, if the EU wants to sell us milk below cost, great! Imported milk and dairy products can be taxed at the same rate (assuming a given milk-fat ratio).

Andrew: "But that's done. No point in crying over spilt milk." ROFL!

But, a tax and quota are equivalent (if the tax revenues go to the people who held the quotas)!

I think the point being missed here is the one indirectly or partly brought up by Frances. As it exists, the Milk quota system costs me significantly more for my cheese - not just that the Stilton costs more, but in the sense that there are cheeses I can never hope to see here in Canada. My only consolation (and its not enough)is that the absurd levels of protection the system affords have allowed a few interesting artisanal cheese producers to grow up in Canada, though I have to pay stupid-ass prices for their fare.

Suppose there are two political parties, that alternate in power (or each have a 50% probability of winning). Leave aside political economy, and just assume that probability is exogenous (yes, I know). The "silly" party always imposes a milk quota. The "sensible" party maximises a generalised utilitarian SWF. I think that the solution to the sensible party's problem depends on whether it is cast as a discretionary or pre-commitment problem. That's because the price of the quota, and so the distributional consequences of eliminating the quota, depend on people's expectations of the sensible party's policy.

I reckon there's a Public Finance paper waiting to be written here, unless it's already been done. "Optimal Tax Theory: rules vs. Discretion". What do you think, Frances?

Quotas - just another form of equalisation for QC.

Ideally Nick, we'd have the sensible city party and the sensible rural party. The sensible city party only wins seats in the cities so they eliminate the dairy quota since they don't win seats in the countryside anyway. Then the sensible rural party takes over and they retaliate by removing taxi quotas since they don't win seats in the city anyway.

"But, a tax and quota are equivalent (if the tax revenues go to the people who held the quotas)!"

Yes, but a temporary tax, declining in real terms until in can be eliminated altogether. The tax seems more palatable than shelling out for the quotas and piling it onto the debt or 'stealing' the value of the quotas from farmers. There's no easy answer. I also imagine that eliminating quotas will increase competition in dairy and lower prices, despite the tax.

Whether or not the milk quotas are a good thing depends on the value system used to evaluate them. If price minimization is the absolute value standard they are horrible. If giving farmers a reasonable income is a higher value they are very successful. More effective than taxi licenses. Given that value system the problem is not with dairy farmers, it's with all the other farmers who are going broke.

With respect to the international price. How much of that is driven by the use of bovine growth hormone? High milk prices reduce the pressures to use unsafe practises to increase volume.

Stephen the strongest case for your proposal is NZ. There, the quotas were slowly bought-out over, I think, 5 or 6 years. Not sure that the outcomes in NZ are a good guide to what would happen in Canada though. NZ is an island with a small population so the transport costs of milk probably give them a natural cushion vis a vis foreign competition. The Canadian problem is that the proximity to the US means that not only would quotas have to be bought out, but a period of consolidation would also have to take place so that the remaining dairy producers could compete with the economies of scale south of the border. Also there would have to be some quid pro quo with the Americans that they abolish their subsidies to the dairy industry. The other possibility would be to buy out the quotas and then provide a subsidy that was equal to the G-7 average.

I'm with Matthew. It's like US import tariffs on sugar. Or the recent bank bailouts. Classic case of dispersed costs, concentrated benefits. The extra amount consumers pay isn't sufficient to piss them off enough to organize against it (well, US banks are pushing it). And the benefits accrue to a small group of people who are well organized and who use their ill gotten gains to buy political power to maintain their ill gotten gains. I like Andrew's proposal: have the gov't buy them all out at current market value and retire the system.

I suppose the other benefit of lower milk prices would be that soya *milk* prices would decline and for the neo-hippies and lactose intolerant that would be a good thing to. 4$ for 2 litres of bean juice is just too high for the one of the most industrialized crops.

I think the easiest way to implement the phase out would be to increase each quota holder's quota by x% per year, until the market price of the quotas fell to zero.

a lot of those dairy farmers are in ontario as well! people from ontario want to point to quebec lobbying as the problem but ontario is almost as bad.

But nick you are not addressing the fact that within the G-7 Canada may have the highest level of protection for its dairy industry but it is not the only protection racket in the group. They all have them to some extent. Economists do not help themselves when they deny the political economy at work in the other major trading partners. The point should not be to make the Canadian dairy industry prostrate but but them on a level footing with their immediate competition.

Person: The great news is that the Dairy farmers vote conservative, at least out west. Its like they are copying the Banks: "Foreign competition for everyone except us".

Travis: one of the more surprising things about the argument that a country can benefit from free trade is that it works regardless of whether prices in the rest of the world reflect subsidies etc.

Yah Krugman wrote that somewhere too. I remain sceptical given the aggregate benefits are supposedly amenable to redistribution in order to compensate the losers but that non-distorting mechanism is usually not identified and almost never agreed upon and practically never implemented. But what I am proposing creates both a benefit and a level playing field. Why are you so maximalist?

My earlier comment on distrubtors hoarding quotas was mistaken. I found the paper my prof was talking about, and it discusses how input suppliers such as feed producers hoard egg quotas in Quebec. Here's a link: http://www.cirano.qc.ca/pdf/publication/2009s-43.pdf

I'm not sure if a similar situation occurs in the milk industry, but if there's a hoarding of quotas, driving up the size of each quota over time would have reduced effects if there are indeed "quota brokers" who buy and sell the vast majority of quotas. The quota brokers would probably hoard more quotas to keep the quantity of quotas in use down and keep their rents up.

If you want to phase out quotas, the most effective way to do it is probably for the government to announce it's deregulating the industry and that it will make all quotas ineffective by a certain date. It then offers more than fair market value to buy back the quotas from farmers. A few might kick up a fuss and there'd be a sizeable up-front cost to the taxpayer, but you fix the problem in the long run. If you throw enough money at people, they'll give up their livelihood; the Conservatives did it a year ago with tobacco farms (http://www.cbc.ca/canada/story/2008/08/01/ot-tobacco-080801.html).

And Travis, a trade war doesn't help consumers. Creating a level playing field for dairy farmers on an international scale isn't necessarily the best policy if it comes at the expense of Canadian consumers. Plus, isn't milk really perishable? I'm not sure how susceptible the Canadian industry would be if it had to compete with dairies from other countries that were protected by their countries. I'm guessing we're not shipping tons of our milk out of the country and we can't start importing tons, because it will probably turn sour before it arrives.

David: about 40% of Canadian milk production is for 'table milk', cream etc. The rest is for industrial food production. Much of that goes into cheese, butter, yogurt, ice cream etc. some of which have fairly long shelf-lives. For instance, a decent amount of the UK's butter comes from New Zealand, from what I understand. Presumably its shipped by sea, over the course of several weeks. Nonetheless, a decent chunk of the market would have to remain in North America, but a large part could be replaced by foreign production.

Because of agricultural protectionism in Japan and Europe since the 19th century, food and land prices are depressed in Canada, the US, Australia and New Zeeland, and have been for 150 years. However when India, China and other very large densily-populated countries eventually industrialise and start importing food from us, land and food prices in N. America will rise to similar levels as in Europe. Until then, we need price support mechanisms to keep our farmers in business and land controls so that urban sprawl doesn't pave over our best farmland. These large Asian countries account for 60% of the world's population as compared to 6% for Canada, the US etc. When Asia industrialises, and if we assume we all have roughly similar diets in terms of daily caloric intake and % in protein, they just have to import 10% of their food from us, and we will be exporting half our food to them.

That'd be a lot more convincing if dairy farmers donated their excess profits to charity. But they don't, so it isn't. This is rent extraction, pure and simple.

Alex: " Until then, we need price support mechanisms to keep our farmers in business and land controls so that urban sprawl doesn't pave over our best farmland."

I'm trying to think this through. A subsidy to milk production in Canada would increase land prices and prevent urban sprawl. But I think milk quotas do exactly the opposite.

Right. The value that would flow from the land is instead flowing from the quota.

Andrew: Thanks for the chuckle!

Nick: Slowly adding quota so the value converges to zero would be nasty and lead to conflict.

If dairy quotas and other agricultural subsidies are the only things stopping more urban sprawl, then we are indeed doomed. Maybe there is a compromise of additional quota that could be distributed to existing producers at some reasonable cost?

In casual conversations I find most Canadians are highly supportive of generous subsidies for farmers. Pointing out that farmers are among the biggest polluters in Canada doesn't seem to influence that attitude.

Canadians also seem indifferent about the massive public subsidies that help commercial fisheries overharvest and bleed social wealth.

westslope: I suspect that most Canadians (who are urban) think of farming in terms of family farms. They have an image of the noble family farmer scratching out a living to provide us with food, and they like the idea of helping the guy in their image. Of course, that guy doesn't exist anymore and hasn't for at least a generation.

"Plus, isn't milk really perishable? I'm not sure how susceptible the Canadian industry would be if it had to compete with dairies from other countries that were protected by their countries. I'm guessing we're not shipping tons of our milk out of the country and we can't start importing tons, because it will probably turn sour before it arrives."

Well milk is perishable but it is not that perishable. Once pasteurized and refrigerated it has a relatively long shelf life and there are other techniques which allow milk to be stored at room temperature. Take a look at the dispersion of dairy farms in the US and the proximity to major Canadian markets. Quite well within merchantable transport range. Also there is the issue of milk solids (AKA powdered milk) and the Americans have a huge capacity here and I believe the EU too.

I suspect that politically this is (and has) going to play itself as continual reform around the axillary dairy products (cheese, yoghurt, ice cream etc., and milk solids) until it is just the milk quota that is left.

Nick: as an aside maybe you want to wait on your deflationary dairy program until after inflation gets somewhere around the two percent mark.

If the supply management system is ever dismantled you can bet the farmers will get a sweetheart deal to compensate them for their decades of rent seeking.

"Rent seeking" in this context is a polite word for theft. If they took the money straight out of my pocket, they'd go to jail.

Patrick: The family farm is still by far the norm in Canada, certainly there are very large beef/swine finishing operations as well as very large grain farms across the prairies, however the significant majority of poultry, young swine and Dairy are run by individual family units. The average Alberta Dairy farm has 106 producing cows, with only a few having more than 300. Less economies of scale, but also less concentration of waste so less risk of catastrophic environmental contamination. If you compare that to the US where Dairy farms of 30000 cows are normative and where hormones that increase milk production at the expense of poorer health of the animals and shortening their life span by several years. It is certain that there are economies of scale but I am not convinced that it is a system that is good for society.

As for costing consumers more, in the US there is a oligopoly of milk processors, which results in similar or higher prices for a complete basket of dairy products as in Canada, while forcing overproduction by the (highly subsidized) US Dairy farmer population in an attempt to meet their narrow margins, this excess, subsidized milk is then exported, a large reason for the low world price for milk. The data for the comparable baskets is produced every year, I found data from 2002 in a Ottawa to US embassy report to include here (it's prepared by DFC but uses a straightforward and reasonable methodology).

CANADIAN DAIRY CONSUMERS CONTINUE TO GET A "GOOD DEAL": According to the annual Dairy Farmers of Canada (DFC) survey conducted in June, Canadian consumers continue to have access to quality dairy products at very reasonable prices. This latest cross- border pricing survey reveals that consumers pay 21.3% less for a nutritional basket of dairy products in Canada than for the same basket of dairy products in the U.S. "This is good news!" said Leo Bertoia, DFC President. "Supply management continues to deliver quality milk and milk products at reasonable prices." The Consumer Price Index (CPI) indicates that, since 1992, prices of dairy products have not risen as much as the average price for food in general (15% vs. 17%). DFC looks at four different baskets of dairy products in its surveys. The nutritional basket of dairy products was put together by Agriculture and Agri-Food Canada (AAFC) in 1991. This basket contains a variety of commonly purchased dairy products including cheese, milk, butter, yogurt and ice cream. DFC has added three other baskets of dairy goods to reflect different buying patterns: typical product purchases of DFC staff, typical family expenditures (used by Statistics Canada to calculate CPI), and a simple average of all products. These additional baskets have also shown similar results.

The economic problems of quotas are an interesting and important discussion to have, but lets at least use real data when we're talking about the effects on consumers instead of anecdotal evidence about a single product in adjoining State/Provinces.

If you're worried about excessively sized farms, why not cap the number of cows per farm to 500? Also, growth hormones are not permitted for use in Canadian dairy production. It has nothing to do with supply management.

Seems to me that we are developing better technology for dealing with animal waste. Anaerobic digesters are useful for killing pathogens in manure, capturing some methane, and providing renewable energy, often in a cogeneration arrangement (providing heating for barns, etc. as well as electricity). Of course, scale is needed to justify the investment in a digester.

Wow, so many comments on an agricultural issue and not one mentions quality. Biggest problem is going around grocery store looking for things to buy, but leaving them behind because of poor quality. Where can you buy good tasting fresh tomatoes for example ? There is a huge problem with corporate mentality when it comes to agricultural products. They think every product must look the same, taste the same (crappy) and be cheap. It's a race to the bottom. The problem with food is certainly not that it is too expensive as a share of our incomes IMHO. We need some innovative thinking and competition. Corporate agriculture and quotas must go. Don't grain farmers complain very loudly that the people selling cereal are getting rich while the producers are going bust ? Using government or corporate power in this manner is wrong but farmers themselves must find a solution by providing superior products that people want to buy.

Perhaps, james, but quoatas are not ensuring small-scale, high quality agriculture. It ensures we all pay high prices for industrial food, in order for farmers to extract rent.

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