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.