Reply to the C.D Howe Institute Report

With all that brain power you would think that Canada’s think tanks could stop focusing their attacks on farmers and find a new scapegoat for all that ails the economy.

I appreciate that the C.D. Howe Institute is keen on finding out why Canadians pay more for the same goods and services than Americans. Anyone who visits the US or even shops online knows that numerous thing costs more here.

But to focus blame on poultry and dairy farmers is becoming absurd. For more than 40 years, the system of supply management has allowed farmers to get fair returns for their efforts and to supply Canadians with high quality, fresh domestically produced food.

Yet, according to CD Howe logic, getting rid of supply management will help align the price of new cars, ketchup and cookware sets.

Here’s the thing. Focusing on tariffs and supply management ignores a host of other issues affecting the Canadian market for consumer goods. The Canada-U.S. price gap exists across numerous sectors.

A few months ago, this very newspaper commissioned a survey comparing prices of 16 goods at Walmart in the U.S. and Canada. It found that prices in Canada were on average 23 per cent higher. That finding is supported by the OECD’s Purchasing Power Parity reports that show, on average, Canadians pay that same markup – 23 per cent -- for all goods and services.

If this gap exists across all sectors, it cannot exist due to this piece of farm policy or that obscure tariff schedule. One should consider the possibility that it exists due to structural factors that demand that prices be higher in Canada.

Don’t take it from me. Take it from the retail community.  Every time our dollar is at parity with the US, retailers spend time educating the public (and media) about several factors that explain why prices in Canada are higher. The list includes higher costs for transportation, distribution, fuel, wages, tax rates, and – especially – a vastly different population distribution from the densely-populated United States, preventing Canadian companies from taking advantage of some economies of scale.

When the Senate Committee on National Finance issued a report on the Canada-US price gap, it made similar conclusions.

But they were talking about the economy in general. When it comes to food, specifically, I’d like to offer a few points for discussion.

First: On average, Canadians spend roughly 12 per cent of their disposable income on food – compare that to the portion of your monthly budget dedicated to housing or gas and auto insurance.

Second: Supply management only deals with the farmgate price of food – the consumer price is substantially higher, due to costs associated with marketing, pricing strategy and processor and retailer markups. Farmers receive a fraction of the retail price, for instance, roughly $8 for a kg of specialty cheese. Compare that to the price you pay at the grocery store.

In the end, there’s a lot that goes into setting a price – and the price of inputs is only one part. A processor or distributor has to consider geographical distribution, the concentration of the retail market and the supply chain needs of each company. A retailer has to consider rent, labour costs, disposable income in the local market, and local preferences when it comes to marketing and branding.

  

The solution is a lot more complicated than simply abolishing supply management and impoverishing farmers. If they are serious about resolving the Canada-U.S. price gap, I suggest the CD Howe Institute starts by documenting appropriately the reasons for this price gap.

Letter in reaction to the latest conference board study on dairy supply management

I salute the interest and resources the Conference Board of Canada (CBOC) has dedicated to the dairy sector and subsequently all supply managed productions.  What’s unfortunate is the negative attitude that transpires from its messages in recent media activity. In fact, I had difficulty linking the press release with the latest report they published with the help of some Canadian academics.

For instance, they concentrated on a supposed $2.6 billion or $276 per family gain if we were to dismantle supply management. These numbers were not developed by my Canadian colleagues, it is an OECD measure of price support. OECD indicates that this is the differential between world price and Canadian price at the farm gate. The OECD measure is not a transfer from consumers which is why it is wrong to transpose that number to savings for families. Consumers, in the OECD language, is the first buyer – which is the processor, not a family.

Thus, the CBOC study wrongly implies that every cent taken from farmers would be given to Canadian families. Numerous studies demonstrate this does not happen. For example, as recently as last year, when pizza makers got a break on the price of mozzarella last year, they were not shy to admit they had no intention of passing any of the savings along to their customers.

Supply management often seems to be the scapegoat for price differentials with US products, but the reality is a bit more complicated. For instance, beef producers in both countries do not work under supply management. Yet, at regular price lean ground beef in Quebec is 35% more expensive than in upstate New York. Canada is a significant world exporter of pork, but boneless pork chops at regular price are 135% more expensive in Quebec City than in Upstate NY.  Similarly, a bottle of Heinz ketchup is 86% more expensive in Quebec City than in upstate NY. This is common across a number of industries, as a Toyota RAV4 AWD limited made in Ontario (one might say with Canadian taxpayers subsidies) cost $42,700 in Canada and $35,000 in upstate NY[1]. Nevertheless, the CBOC suggests by dismantling supply management, the price of dairy, poultry and eggs in Canada would be at least the same as in the US.

Another triumph the CBOC claims in the media was how positive and easy dismantling supply management would be. That’s not what I got from reading its report, which talks of options where the taxpayers will have to pay for the transition. It also ignores the generous insurance program mostly subsidized by the government that US dairy farmers just received in their new Farm Bill. US experts expect this program to be very expensive and generate false market signals. If Canada dismantled supply management, Canadian taxpayers would be asked to pay for the transition payments and for programs as generous as the ones in the US, to allow our farmers to compete with American farmers

I also found the CBOC report quite optimistic regarding the capability of Canada to be a significant player (larger than New Zealand) in the export market of dairy commodities. Don’t get me wrong, I believe in our Canadian farmers are world class, but the climate in New Zealand means farmers don’t need barns for their cows. In comparison, the average winter temperature in Montreal is colder than in Oslo, Norway.

The report rightly points out that New Zealand will reach a production limit, but other low cost exporters are not likely to sit idle. While I believe we should and can do more export wise, we need to look at more value added products for which the higher costs related to our climate are compensated by our good product quality, innovation and knowledge. While it’s not the only example, Canadian cheeses have a growing global reputation with numerous international prizes. Note that supply management does not prevent exports per se.

Lastly, the CBOC has ignored the current era of consumer awareness regarding how and where food is produced. In the US, one egg producing company has more than enough capacity to supply all of Canada year round. Domestic egg producers, the vast majority of which are family farms, could not hope to compete with such economies of scale. Under this scenario we might pay less for our eggs, but as indicated previously with my examples, it’s not a sure thing. More importantly, according to recent surveys, Canadians want more local food.

I believe supply management needs reform and evolve, but to eliminate it and hope for the best does not seems appropriate for a sector that contributes more than $25 billion to GDP and provides in excess of 300,000 jobs across Canada.

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[1] Price on Mars 7, 2014