Econ 4300
Supply Management in Canada
Schmitz, Furtan and Baylis Chp. 9
Supply and Demand of
Agricultural Products
• Inelastic demand
• Supply is more inelastic in the short-run
• Impact on price and quantity from
restricting supply
• eg. OPEC and supply constraints
Supply Management in Canada
• Purpose: stabilize and increase prices
• Method: restrict supply by quota limits (in
the USA and EU, set-aside has been used to
limit supply)
• Success: requires inelastic demand, the
ability to restrict/prevent imports, and
ability to restrict domestic supply
History
• In the 1960s, producer marketing boards
• Boards negotiated with buyers
• Some boards attempted to “prop” up the
price by holding back commodity
• Voluntary supply restraint was ineffective
• Federal and Provincial legislation required
to establish supply management
History
• Dairy:
– “soft” quotas failed, in 1971 a national supply
management system
• Poultry:
– Eggs (CEMA) in 1973
– Turkey in 1974
– Chicken in 1978
Governance of Supply Mgmt
• Dairy: Canadian Dairy Commission
– Appointed by the Fed. Min. of Ag.
– Pricing power for industrial milk
– Fluid milk pricing is a provincial responsibility
• Poultry and Eggs:
– Governed by a board of directors
– Pricing and quota is provincial
– National Farm Products Council approves level of
output, but level is proposed by the provinces
Pricing
• Pricing is based on cost of production
(COP)
–
–
–
–
All production costs (variable)
Depreciation costs
Return to labour
Return to capital (investment return)
Quota and Values
• Quota is required to produce: milk, broilers,
eggs, turkeys and hatching eggs
• Factors determining quota values:
– Price, price risk, technology changes, risk of
quota value (WTO?), economies of size, …
Supply and Demand Analysis
• Production controls are required
• Imports can not be totally excluded, there is a
requirement to allow some tariff free imports,
known as minimum access commitment (MAC)
• The MAC reduces domestic demand
• Importers with a share of the MAC have the right
to capture the value benefit
• Consumers not affected by MAC, producers lose
Supply and Demand Analysis
• Price: could be set as a monopoly, but more
likely to be based on COP + some amount
to insure adequate return on investment
• Impact of MAC changes will also depend
on any changes to domestic price
Processor Impacts
• Processors will typically have higher
production costs because input costs are
higher
• Other possible impacts: economies of scale
more difficult to capture, smaller domestic
market (magnitude depends on demand
elasticity)
• Domestic processors are protected from
foreign competition
Tariffication of Quotas
• 1994 GATT required countries to convert
quotas to tariffs rate quotas (TRQ)
• The TRQ sets the MAC as well as the tariffs
to apply above the MAC
• Currently: MAC relatively low and tariffs
about TRQ are high
Doha Round of WTO
• End state trading enterprises by 2013
• For “sensitive” commodities, a 22% reduction in
tariffs
• Increase the MAC
• Non “sensitive” products to have tariffs reduced
70%
• Canadian supply managed commodities not
viewed as “sensitive” by the rest of the world
Increased MAC and Lower Tariff
• Consumers would gain – lower commodity
price
• Producers would lose – lower commodity
price and likely less quantity supplied
• Importers could gain or lose – import more
at world price, but domestic price would be
lower
Why Supply Management
•
•
•
•
Price is stable
Eliminates low prices and low returns
No direct payments from the treasury
However, is it more or less costly to society
than grain and livestock payments? (ASA,
WGSA, SGP, GRIP, ISA, AIDA, CAIS, …)
Supply Management in the USA
• Marketing orders are used to price
discriminate and by supply managed (SM)
commodities
• Dairy – not SM, but price discrimination
• Peanuts – acreage/quota allotments
• Tobacco – supply limits
• Sugar – not SM, but highly protected
Impact on Substitutes
• Sugar and high fructose corn sugar (HFCS)
• Milk for cheese and milk protein
• An industry setting high prices can
encourage the development of alternative
and competitive industry (HFCS)
Insurance in Agriculture
• Farm income is a function of commodity
price, yield and cost of production
– Price can be highly variable
– Yield can be highly variable
– COP is less variable but can vary over time
• Insurance to reduce price and yield risk
Price Risk
• Forward sell, contract, futures markets
– Risk if production is short and can not deliver,
or can not deliver (eg. wheat futures in the US)
– Futures in Canada are limited (canola, feed
barley)
– Sell puts in Minneapolis, for example, but there
is currency risk
Quantity Risk