Consumers would enjoy a long-term reduction in dairy prices and the industry could be even more profitable than it is under the existing supply management system, under a reform proposal released by The Conference Board of Canada.
The report, Reforming Dairy Supply Management: The Case for Growth, proposes a three-part reform in which Canadian consumers could eventually save an estimated $2.4 billion annually, and farmers could gain almost $2.5 billion from exporting high-quality dairy products to markets where demand is growing rapidly.
"A win-win reform package needs to be accompanied by a new vision for industry growth," said Michael Bloom, Vice-President, Industry and Business Strategy. "Dairy producers and rural communities have a lot to gain from reform under a growth scenario. More efficient producers are more likely to see an upside. But we have to change the way we do business."
- Supply management reform needs to co-ordinate three policies: liberalizing prices, unwinding milk production quota and reducing trade barriers.
- A temporary consumer levy on dairy products could serve as transitional funding as the system is reformed.
- Under reform of supply management, consumers would see lower prices over the long-term and Canadian producers would more than make up for lower domestic prices through export sales.
The report argues that the transition to a new system must address issues of funding, efficiency, equity, and duration (FEED) in a comprehensive manner.
"Supply management reform must coordinate the three major aspects of supply management: price setting, quota, and trade barriers. Cutting out any single part of the reform makes the entire system unstable," said Bloom.
Production quota reform
Production quota is, in effect, a licence to produce milk, which serves to limit the supply. Quota has become a valuable asset in the dairy industry, with large sums of money tied up in its purchase and sale. Any policy change must address quota reform; the Conference Board recommendations that it be done through a book value buyout-(the price paid for the quota at purchase). Such a reform would cost an estimated $3.6 billion to $4.7 billion, according to the report.
This approach is particularly important for farmers who have recently bought quota and therefore not yet realized the full value of the quota, which takes about 10 to 15 years. A market value buyout is unfair because it would compensate farmers for quota where they have already realized a return, effectively paying them twice for the same quota .
The buyout cost could be funded through a consumer levy on dairy products, as was done in Australia. In the short-term, Canadian consumers are unlikely to see a significant change in dairy prices from current levels, which the Organisation for Economic Co-operation and Development has estimated costs about $2.6 billion more than prevailing world prices, or $276 per family. Within about five years, prices would likely settle at about the world average and consumers would see this amount returned to them in lower prices.
While price and quota reforms are taking place, trade policy negotiators need to gain access to international markets for Canadian dairy products. The worse-case scenario is one in which the domestic market opens to dairy imports before Canadian farms are ready to compete by scaling up production.
The strategy will be launched at the 3rd Canadian Food Summit 2014: From Strategy to Action, March 18-19 at the Metro Toronto Convention Centre.