by Deron Johnston
For decades, Supply Management has been a hot topic of political discussion across Canada. However, outside of the agricultural sector, it appears that not many people truly understand how it works, or who pays to help ensure that Canadian farmers have a stable income. Farmers in the turkey, chicken, egg and dairy sectors operate within arrangements that are governed by Supply Management.
Back in the 1960’s, there was a period of overproduction beyond the needs of Canadian consumers, and this resulted in many farmers receiving very low prices for what they produced. This overproduction was due, mainly, to technological advancements in farming. Though the federal government has been involved in supporting agricultural pricing policies for over a century, at the time it was believed that direct financial support to farmers was too costly. Hence, the creation and subsequent evolution of our current Supply Management system.
Supply Management is based on the principle that, by controlling the amount of agricultural products produced in certain sectors, it will help stabilize the prices of those products and, subsequently, the incomes for farmers without direct government support. In the U.S., the agricultural industry largely relies on direct government subsidies, so Americans pay to support farmers directly through taxation. In Canada, we pay higher prices for agricultural products that are supply-managed, but are not supported through taxation.
Common wisdom is that Supply Management has been constructed using three pillars: pricing controls, production controls, and import controls. Like a house with walls, if one of these pillars falters, then it weakens the others and the system may collapse.
Pricing controls: Farmers who are part of the Supply Management system are guaranteed a minimum price for what they produce. These minimum prices, or “farmgate prices”, are most often established through provincial sector marketing boards representing farmers in that sector. Factors such as costs of production, capital costs, labour costs, and the condition of the Canadian economy in general, are considered when establishing farmgate prices. Depending on the sector – let’s use the dairy sector as an example – the farmers sell their raw products to the processors at farmgate prices. The processors then mark up the prices and sell their processed products to retailers, who then mark up the price again. The final price paid by consumers is often significantly higher than what the farmer received for producing those products.
Production control: Through the collective efforts of national organizations and provincial marketing boards representing each sector, forecasts are created anticipating the demand for each product. Production quotas are then set for each province, which are then divided up among individual farmers, providing them with the specific amount of product that they need to produce each year. Each individual farmer must have a quota, which is essentially a licence to produce a set amount of product. The quota system prevents the overproduction which causes prices to dip and reduces the income of farmers. Quotas were initially granted to farmers for free, but are now quite valuable. Quota can even be bought or sold under certain conditions.
Import control: In order to solidify Canadian-produced products as the first choice for Canadian consumers and safeguard the income of Canadian farmers, agricultural products (that are covered by the Supply Management system) that are imported from other countries are often subject to Tariff Rate Quotas (TRQs). Canada sets TRQs, with some foreign products (about 10 per cent of Canada’s domestic dairy market), entering tariff-free, but all other imports face high tariffs to prevent products from other countries from flooding the Canadian market.
According to the website of one dairy industry organization: “Without supply management, due to the volatility of the global market, the comparatively high costs of production in Canada (due to a colder climate), and the perishable nature of their products, many Canadian family farmers would simply go out of business. This would hurt Canadian communities, Canadian consumers, Canadian farmers, and the Canadian economy”. With this in mind, it’s easy to see why some American dairy farmers might be envious of the predictable income provided by our Supply Management system.