Supply management costs poor families five times more relative to household income: study

Posted on February 27, 2015 in Policy Context – Full Comment
February 26, 2015.   Ashley Csanady

Canada’s system of supply managed eggs, chicken and dairy costs the poorest households almost five times more than wealthy families when its effects are adjusted proportional to income, according to a new study.

On average, supply management costs each household $444 a year, “$585 for households with children and $378 for households without,” the study titled Milked and Feathered: The Regressive Welfare Effects of Canada’s Supply Management Regime, states. The less you make, the more that eats into disposable income and the deeper the effects of this “implicit tax” created by government policy are felt.

Supply management is a system of production quotas and set prices by farmers supplemented with high trade barriers to protect the Canadian dairy and poultry industries from global competition.

Families at the highest end of the income spectrum spend about 8% of their annual expenditures on food, compared to 16 at the lowest end, the study to be printed in the March 2015 issue of Canadian Public Policy states. That’s why supply management is about five times more costly for those household budgets.

“Higher dairy and poultry prices would therefore impose a proportionally larger penalty on households that spend more of their incomes on food,” it states.

Families with kids spend, on average, over $1,200 a year on supply-managed groceries; those without about $774. According to the authors that means, “Canada’s supply-managed system imposes an implicit tax on the poorest households with children that ranges from $466 to $592 per year.”

That means, if you calculate the extra cost supply management tacks on relative to annual income, low-income families pay an “implicit tax” of 2.4% each year

The implicit tax rate of this policy is about five times higher on the lowest-income households

The richest pay just under 0.5%, the authors state.

That’s what makes supply management a “regressive” as opposed to “progressive” tax, explained Ryan Cardwell, one of the study’s authors. The more money you make the more you pay in relative taxes, but the opposite is true when calculating the impact of supply management on grocery bills (the study did not include spending on restaurant and take-out food).

“The implicit tax rate of this policy is about five times higher on the lowest-income households,” the agricultural economics associate professor at the University of Manitoba said.

With two major free-trade deals still being hammered out – one with the European Union that would allow in a bit more of their cheese and the Trans Pacific Partnership – the authors wanted to highlight supply management’s cost while our governments are batting for it around the table. And, in an election year where every party says they want to cut costs for the middle class, Cardwell wanted to know what burden the system placed on families.

“That result flies in the face of what all federal parties are saying about poverty reduction and families,” he said.

But what’s the answer? There’s $30 billion worth of supply management quotas out there (anyone who farms dairy or poultry commercially must buy into the system to benefit) and tariffs ensure Canadian dairy and poultry prices remain higher than what we could theoretically import.

There are many ways to slowly pick apart the system, Cardwell said, but for him one of the simplest would be using free-trade negotiations to open up the markets and then the existing quota system would adjust its systems and prices accordingly.

Concerns about hormones or other contaminants in foreign milk can be dealt with through regulation or labelling, like with so many other products, he said.

Completely dismantling supply management is no guarantee of a price cut either. When Australia did it in 2000, a consumer tax to help compensate farmers mean prices remained flat or even rose, according to Sylvain Charlebois, a professor of food distribution and policy at the University of Guelph’s college of business and economics.

He said discussing supply management in terms of affordability alone “simplifies a very complex issue.”

As a society we’re heavily invested in supply management

“Tomorrow morning if you opened up borders kiss goodbye to our dairy sector,” he said. “As a society we’re heavily invested in supply management.”

The quota system itself is ingrained; he said banks accept their value as collateral.

“You can’t just pull the plug on a very complicated system overnight,” Charlebois said.

So what can you do? Well, encourage the system to reform. Charlebois said for the first time in 22 years, the board that sets farmgate prices for milk (what farmer’s are paid per litre) lowered it this year.

“The Canadian Dairy Commission is showing to the Canadian public that it actually can work… but for last 30 years it only showed the Canadian public it cannot work on behalf of consumers,” he said.

There are three ways he suggested to build on that and try to reframe the current system as a more consumer-friendly regulator:

One, open up new quotas for a second class for entrepreneurial farmer who wants to export more goods. There’s a growing international appetite for milk products in particular, and developing countries consume more poultry as incomes rise.

Two, continue to change the pricing formula so it benefits the most productive producers so they “step up or get out.”

Thirdly, reduce tariffs on imports to allow more products from abroad, as Cardwell also suggested, “to entice the dairy sector to become more market-driven,” he said.

“At the end of the day of course consumers win.”

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