By Jake Fuss and Alex Whalen, The Fraser Institute
If you’ve gone to the supermarket recently, you might have noticed that several items are in short supply.
As concerns mount over the COVID-19 pandemic, global supply chains have been challenged to keep up with increased demand for products such as toilet paper and hand sanitizer. However, there is a unique reason why shelves in Canada may be running low or even bare for staple goods such as cheese, milk, eggs and chicken — supply management.
Supply management is a national regulatory framework that allows producers of raw milk, eggs and poultry to maintain higher prices for their products than would exist in a competitive market by fixing farm level prices and restricting supply. Licenses and quotas issued by provincial government agencies control who can produce, what can be produced, when and how much.
Meanwhile, access to products offered by foreign suppliers is impeded. Importers of large quantities of chicken, cheese and butter are compelled to pay taxes exceeding 200 per cent. The result is that domestic suppliers have the Canadian market mostly to themselves.
While there are shortages presently for many goods that aren’t supply managed, the supply management system in Canada creates an intentional shortage. The point of supply management is that the availability of dairy products, eggs, and poultry are lower and their prices higher, than they would otherwise be. The counterproductive outcomes from farm level price fixing, production quotas, and high import taxes on Canadians are intensified by the COVID-19 pandemic.
Production quotas legally preclude producers from adjusting their businesses to keep up with the recent increase in demand. Without supply management, producers would respond to prices generated through market processes, rather than government processes. In time, farmers could increase their scale and scope of production to meet increased demand among families in Canada and elsewhere for goods from their farms.
In addition, supply management stifles consumer choice and makes them worse off. Consider, without 200 percent import taxes buyers in Canada could obtain more products and at lower costs from foreign suppliers. The financial burden on Canadians is significant.
Studies have revealed supply management causes the average Canadian household to bear an extra cost of $300 to $444 annually.
Moreover, this burden falls disproportionately on low income Canadians because they spend a larger share of their income on food. A 2016 study calculated that the poorest 20 per cent of households pay $339 more per year on dairy and poultry products than they would in a competitive market. Higher prices matter a lot, especially for these households. That money could be used to satisfy many other urgent needs, but supply management prevents it.
Governments in Australia and New Zealand have moved away from supply management and other anti-market systems. The same should be done in Canada. Competitive markets would help lower consumer prices and ensure producers can efficiently respond to changing market conditions. These reforms could abolish production quotas and open up trade to benefit Canadian families and improve the quality of life for poorer households.
In Australia, the dairy industry went through a transformation period during the early 2000s. The industry was deregulated, in part, by eliminating organizations that set prices and managed supply. The government simultaneously implemented a package of measures to help producers adjust to the new marketing environment.
The results were positive. Consumers enjoyed immediate benefits of milk prices falling by 12 cents per litre. Producers were able plan production activities in response to market based price signals, enabling them to respond efficiently to changing economic circumstances.
In response to a fiscal crisis in 1984 the government of New Zealand removed a variety of market distortions within their dairy sector. The result was a more competitive industry, with output expanding to the point that dairy is now one of the country’s leading exports.
The supply management system in Canada is a contributing factor to why grocery stores across our country currently struggle to meet consumer demand for cheese, milk, eggs and chicken.
The system imposes significant costs on Canadian families, especially the poorest households, by restricting the supply of dairy and poultry products.
We can accomplish more and do better without it.