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Good post. Neat diagram.

I was wondering about the average cost curve for firms in the processing industry. In your diagram, if we ignore fixed costs, the firms are making positive profits, equal to the white area between the price line and the marginal cost curve.

There seem to be two possibilities: either there are fixed costs per firm, and so firms enter and share the quota of import at the world price, until all profits are dissipated by those fixed costs; or, new entrants cannot get a share of that import quota, and so would make losses, while incumbents would make super-normal profits.

Nick "incumbents would make super-normal profits."

"For most products, the privilege of importing at the within-access commitment rates of duty is allocated to firms through the issuance of import allocations (or "quota-shares")." See: this report .

Here's a list of the natural milk constituents quota holders from the Department of Foreign Affairs and International Trade:
milk quota holders

My guess would be that incumbents can hang onto those quotas.

So, yup, there is one sweet way to make money from Canada's dairy supply management system without ever having to get up for a 7:00 a.m. milking.

One other point that I neglected to mention in the original post: there is a minimum level of duty of $34.50/hl (what's a hl?) on milk coming in over access commitments. If this is a binding constraint, it will make bringing in cheap milk even less attractive.

hl=hectolitre = 100 litres. $0.345 per litre.

Frances,

I'm curious, doesn't your post undermine the Canadian Dairy Farmer's argument for protectionism based on the disputable notion that it is neccesary to ensure that Canadian milk is "high quality, fresh, safe and free of antibiotics and hormones"

I mean, on your numbers, the price of certified organic milk in the US ($3.29 for a half gallon) is more or less the same as the price of non-certified organic milk in Canada ($3.15). Unless there's some basis for asserting that ordinary Canadian milk is comparable in quality to certified organic milk (which makes you wonder why Canadians are willing to pay twice as much for it), that seems to blow the Farmers' argument out of the water. In the absence of protectionism, Canadians would still be able to buy high quality, fresh, safe and antibiotic and hormone free milk - namely certified organic milk - for more or less the same price as they currently do (for milk which may or may not meet any of those criteria - we sort of have to take the dairy farmers', undertandably partial, word for that), but they'd also be able to buy ordinary milk at half the price.

As for buying a goat, do you have a goat milk quota?

Bob - and, of course, you spotted the weasel words "Canadian see Canadian milk as being..." I think a lot of Canadian milk does have antibiotics in it.

I don't think it does completely blow the protectionist argument out of the water - there's a case to be made that Canadian agricultural inspection/regulations are tighter than US ones. Farming methods are different - the average dairy farm in Canada has 70 cows, in the US some of these industrial operations have thousands. Organic agriculture on an industrial scale is not a pretty business - click on the link 'thousands of cattle' in the post. If you figure organic milk from cattle raised on Alberta grassland is better than organic milk from cattle fed Brazilian or Chinese organic soy products, then there's a good case for Canadian. (Of course, you can't buy organic milk from Alberta because Alberta has very few milk quotas).

The best argument for protectionism is that we have protectionism, as I say in the last lines of the post - eliminating it without some kind of gradual transition plan would wipe out the dairy industry entirely, and any kind of transition plan would be very expensive.

Sorry for the tangent, but I've always viewed organic products as a tax on the upper-middle class.

Why do you buy organic milk? I've tried different organic milks at the supermarket and can't really differentiate based on taste, so it must be something else (or maybe my palette isn't sophisticated enough :)

You could just tell me to google it, I won't be offended. :)

I like the post, Canadian milk market is always provides great 'real world' analysis of monopoly behaviour in an evolving global market. When a WCI poster brings them out, I'm always interested in the conclusions.

I did a back of the envelope calculation on a previous milk post here that it would cost us on the order of $30 billion to retire the current quota system. Milk production in Canada seems to be about 3 billion litres per year. Expensive!

Mark: "Why do you buy organic milk?" Because I'm honest and always pay my taxes ;-)

Probably for the same reason that people order unnecessary medical tests and do so many other things "I can afford it, it can't harm, and it might help." BSE is enough to make anyone slightly paranoid!

I've actually become much more selective about the organic products I buy, for precisely the reasons outlined above. So I buy St Albert's (Canadian) cheese over President's choice organic cheese. Harmony organic milk in Ontario or, in the West, Avalon dairy milk arguably tastes different, but that might be because of the glass bottles. Pinehedge farm yoghurt tastes different too.

What really *does* taste different is organic vegetables, I buy mine from Robert Rivard http://www.fermelarosee.com/ and they are so good. Unfortunately he can't do much by way of livestock because of quota restrictions - and even if he could raise chickens he wouldn't be able to sell them in Ontario because of restrictions on the interprovincial transport of chickens. Which is very sad.

Coincidentally, the CBC has a disturbing story about food quality today:

http://www.cbc.ca/consumer/story/2011/02/10/cons-supermarket-superbugs.html

Don't want to get too OT, but it seems worth pointing out that organic food production is way, way less productive than the admittedly horrid industrial farming practices. It's not entirely out of a desire to do pure evil and poison people that we use industrial practices. Even as a backyard gardener of some modest skill, it's really not easy to get decent yields. You're in trouble if your soil isn't great. Soil improvement is *hard*. Even a small patch of ground can suck-up enormous amounts of compost, biochar, manure, etc and still show very little improvement. But if you just toss a little miracle grow on that same patch of ground, your tomatoes will be 5 feet tall and dripping with fruit. And pests can really take their toll. Good luck controlling an aphid or grasshopper infestation without pesticides. Collecting your own seeds can help breed for your local condition, but it's a slow, labour intensive process and sacrifices some of your crop. I can't imagine how much work organic farming must be.

I am an expert on the goat milk market, I drank the stuff for years before non-lactose milks became available. Goat Milk, while not quota controlled is usually higher in price/litre than cow's milk, simply due to economies of scale. Furthermore goat's milk keeps less and turns sour much more easily than cow's milk does, particularly in warm weather. Checking best before dates on goat's milk is critical. Three days over and you can be sure the milk will be sour. Sour milk from the store in August? Happens a lot.

That's just the nature of the barnyard beast.

The goat milk market is also very concentrated, simply due to the scale needed to operate an efficient and profitable dairy. Hewitt's of Haldimand has the dominant market share in Ontario and you are most likely to see their products in the store.

Strangely though interprovincial shipments of goat milk are common. Stores in Ontario will order Quebec goat milk without a second thought (Quebec uses the Pur Chevre brand) and I was the poster-boy (literally) for the PEI dairy goat industry when they wanted to break into the New Brunswick market in the early 1980's.

I think we need to take the fad-ish aspects out of organics and replace it with reason-based risk-reduction. The current certification allows the use of several highly toxic 'organic' pesticides (esp. copper-based) and unsterilized manure leading to run-off water contamination as well as food-borne illness. We need to take the hippy, new-age bent out of the 'organic' movement--as long as it results in appallingly low yields, it won't be able to gain significant market share in order to help reduce some of the negative aspects of industrial farming.

Canada does not allow the use of Bovine Growth Hormone, but some states in America do. Here in BC I buy Avalon milk which is local and organic, but when I spent a year traveling in America I found it very hard to find organic milk, until I got to Minnesota that is. In Minnesota there was organic milk everywhere. I asked people why and after getting a few puzzled looks, I found someone who know the answer. Minnesota allows BGH and people buy organic milk to avoid it. I wonder if BGH explains why non-organic milk is relatively cheap in America.

Andrew F - " We need to take the hippy, new-age bent out of the 'organic' movement"

May I suggest that organic food lost its hippy, new-age bent the day that Wal Mart started stocking organic foods?

People really do want to support safe food and sustainable agricultural practices. You're right that some current organic practices aren't necessarily safe or sustainable. But the question is: what are the alternative ways of solving the informational problems i.e. we don't know what's in our food.

Another issue is - and this gets back to the earlier point about the tax on the upper-middle class - a lot of the things that really *do* make a positive difference from an environmental point of view are boring and unexciting. Eating coleslaw made with local cabbage instead of organic greens trucked several thousand miles. Eating more beans and whole grains and less meat. Just eating less.

Determinant - are there photos?

Patrick - yes, going 100% organic is difficult. Moreover people aren't always happy when they get proof that their food is really, genuinely organic - they want organic lettuce but no slugs; organic apples but no worms; organic potatoes that are smooth and free of scaly bits on the skin. But producing milk in a way that is less reliant on hormones, antibiotics, soy, etc is feasible - and it's a real pity that it's so hard for Canadian farmers who want to produce milk in this way to enter the market.

Frances:

Actually I was featured in a CBC television news report done in 1985 or so. In return the PEI herd air-shipped us milk through the local airport without charging us an arm and a leg.

Sorry, there are no pictures and I'm not outing myself.

Why exactly do you want to see pictures of a young Determinant drinking milk? ;)

Secondly, I think you may be over-romanticizing agriculture. Canada has long depended on science-based interventions to make productive and reliable crops possible.

Just south of Peterborough, ON is Keene where David Fife discovered Red Fife Wheat in 1847. This strain is resistant to Wheat Rust (a disease) which was a major blight and detriment to wheat yields. Red Fife was an import from Europe through Gdansk, Poland and is believed to be the Ukrainian variety Halychanka based on genetic research. David Fife got it from a friend in Scotland. Red Fife formed the backbone of the Canadian wheat harvest until Charles Saunders crossed it with Hard Red Calcutta (the two varieties never would have met under natural circumstances) and developed Marquis Wheat. Every major Canadian wheat variety is descended from Red Fife and mostly through Marquis.

Wheat has had a steady human hand in development in Canada since the beginning, since the early 1900's that hand was located in a lab.

Frances, you said "I think a lot of Canadian milk does have antibiotics in it."

The fact sheet below from the University of Guelph discusses milk standards and monitoring in Canada. It is very unlikely that Canadian milk contains antibiotic residues, as farmers are required to discard the milk of treated cows while they are taking their meds and for a period afterwards. Testing on samples taken both at the farm and on receipt at the processor monitors compliance.

http://www.foodsafetynetwork.ca/userfiles/file/FACT%20SHEETS%20(2009)%20PDF/FS%20Safety%20of%20Canadian%20Milk%202009.pdf

There may be reasons for preferring organic milk, but in Canada a fear of artificial hormones and antibiotics shouldn't be among them.

GRJ - thanks for that.

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