With the conclusion of the Trans Pacific Partnership (TPP) negotiations possibly in sight, there is some discussion of potential changes to Canada’s supply management system for dairy, poultry and eggs. While it is possible that Canadian negotiators will accede to demands by trade partners and liberalize access to the supply managed sectors, after years of living with the current system, we should note that supply management is resilient. Time and time again, supply management has survived trade negotiations and disputes largely intact. Even the concessions made in the Canada – E.U. Comprehensive Trade and Economic Agreement (CETA) negotiations only amount to a mere nibbling around the edges. Supply management will likely end at some point, but that point is probably very far off into the future. This is so for both non-economic and non-trade policy reasons.
Supply managed producers are far better organized than producers in any other Canadian agriculture sectors due to the mechanism established to operate the system. Supply management is directed by a complex web of legislation, regulations and Orders that operate to control the domestic production of supply managed products, like poultry and dairy. Included within this structure are inter-related Federal and Provincial producer organizations that work with their Federal and Provincial supervisory bodies to establish production levels in Canada. Given the coordination within the industry, producer organizations can easily call on their producer members to put pressure on politicians knowing that their members will likely respond favourably.
Supply managed producers also have a tangible interest beyond their daily business operations because of their quota value. When supply management was established, producers were given quota, at no cost, based on their historic production. Since then, producers have bought, sold, and traded quota and many have used it as security. As a result, individual producers have significant value invested in quota which they generally treat as an asset. Taking dairy as an example, in the August 2011 edition of MacLeans, Andrew Coyne reported that the average quota value was approximately $25,000 per cow[1]. According to Farm & Food Care Ontario, there are 70 cows in an average milking herd.[2] At $25,000 per cow, the quota value of an average herd is $1,750,000; a cost that is in addition to the cost of the land, buildings, equipment, supplies and the actual cows required to set up a dairy farm. Farm & Food Care Ontario also estimates that Canada’s 12,529 dairy farms have almost 1 million cows or approximately $25 billion in quota value.[3] Because the $25 billion figure does not include the value of quota held by chicken, turkey, table egg and broiler hatching egg producers, total quota value for the supply managed sectors in Canada would be well in excess of this amount.
Since producers are not expected to willingly walk away from their quota value, it is safe to assume that any major change to supply management would lead to producer demands for compensation for losses based on the full market value of their respective quota. In March 2014, the Conference Board of Canada suggested, in Reforming Dairy Supply Management: The Case for Growth, that Government could buy-out existing dairy quota at a book value rate of $3.6 and $4.7 billion, an amount lower than the market value of quota. The $25 billion value cited by Farm & Food Care Ontario was based on market value. The Conference Board determined the book value of quota by focusing on quota acquired over the last 10 years and treating it as a depreciating asset. Whether producers would accept this formula for determining the value of their asset remains to be seen, but even if producers would be willing to accept a buy-out at this value, this would still represent a significant cost to government that could not be spread out over time without putting producers at risk. Therefore, any significant change in supply management would be difficult due to the opposition from producer groups who would likely demand compensation for lost quota value.
The Government would also have to consider whether supply management, overall, really is a serious impediment to concluding trade agreements. Canada has successfully negotiated trade agreements with a number of countries since supply management was first established without having to make major concessions. The dairy concessions that Canada made in the CETA negotiations, when considered in context, have not seriously undermined the supply management system, as a whole. For most Canadian trade partners, access to the Canadian market, in general, is often more important than access to Canada’s specific supply managed sectors. Consequently, the continued existence of supply management will probably not be a big enough incentive for trade partners to walk away from concluding a trade agreement with Canada; few, if any, have been willing to walk away so far.
Canada should also consider what advantages it would gain from a decision to eliminate supply management altogether? Supply management exists, and is consistent with Canada’s current trade agreements. Therefore, if Canada decides to concede on supply management in the context of trade negotiations, it should get something of equivalent value in return. Greater market access, improved disciplines on domestic and export subsidies, improved disciplines on the use of sanitary and phytosanitary measures come to mind.
It is possible that Canada will take steps to end supply management to ensure access to the TPP markets for Canadian products, but this result seems rather improbable. The most plausiblee outcome is that minor amendments will be made to supply management that will not expose the system to any real risk. The net result will likely be that supply management will continue, and along with it the broad range of regulatory measures required to control production and to control imports. Business as usual, more or less.
[1] www.macleans.ca/general/the-25000-cow
