Bruno Larue - Current Issues in Supply Managed Commodities

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Current Issues in Supply Managed Commodities
Bruno Larue
Canada Research Chair in International Agri-food Trade
CREATE and Laval University
Growing Our Future
Institute for the Advanced Study of Food and Agricultural Policy
Ottawa, April 5, 2012
Strong feelings toward Canada’s supply mgt programs
The best way to get a rise out of Canadian economists is to ask
us about our dairy supply management system. It’s simply
indefensible...
Stephen Gordon
U. Laval
Globe and Mail Blog
Posted on Tuesday, November 15, 2011
Canada’s Dairy system is the best in the world and we are proud
to be part of it.
Dairy Farmers of Canada
http://www.yourmilk.ca/news/5/canada___s_dairy_system_is_the_best_in_the
_world_and_we_are_proud_to_be_part_of_it_
Introduction
Canada’s supply management (SM) programs for dairy, eggs, chicken
and turkey were developed in the 1970s to increase and
stabilize farmers’ revenues and to mitigate interprovincial
disputes.
Domestic production is constrained by production licenses/quotas
while imports are constrained by tariff-rate-quotas (TRQs): a
minimum level of imports (quota) is taxed at a low rate and all
additional imports are taxed at a high over-quota rate.
Because of biological constraints, the supply of many agricultural
commodities is not responsive to price changes in the short
run. Low and high prices can persist over extended periods
and various types of programs have been used to regulate
supply (acreage set asides, « herd buyouts » programs,
marketing quotas… and SM programs).
The CWB and the political equilibrium

The CWB has lost its monopoly on Canadien wheat exports and some
commentators argued that SM programs are next to be axed;

Western wheat producers were divided over the CWB monopoly (60%
liked it vs 40% did not);

Notwisthanding legal actions undertaken by some farmers, there is no
farmers’ compensation associated with the termination of the CWB
monopoly;

Compensation would be justified if SM programs were terminated;

Credible reform (no return) requires a quick and costly transition with
compensation. Unlikely given the budgetary situation.
Regional trade agreements and the political
equilibrium

Early on in the Canada-EU bilateral negotiations regarding a regional trade
agreement, the EU seemed intent on forcing Canada to give up its SM
programs.

The United States and New Zealand also seem intent on making Canada’s
participation in the Trans-Pacific Partnership Agreement conditional on giving
up SM programs.

Typically, regional agreements address in a limited way trade liberalization in
agriculture. Fulponi, Shearer and Almeida (2011, p.2) argue that “traditionally
sensitive sectors such as dairy, meat, sugar and cereals are still covered by
numerous exemptions and tariff rate quotas (TRQs).”
A window of opportunity for major SM reforms

Canada is increasingly isolated in its defense of SM programs at the WTO,
but little is happening at the WTO.

Canada’s position would be easier if SM programs were to undergo
substantial reforms (like the European Union did with its Common
Agricultural Policy).

Traditionnal and new irritants must be addressed to appease the
international community.
Traditional critique #1: Multiple marginalisation
Multiple marginalisation is the successive taking of significant margins all along the supply chain.
The fact that SM programs have lasted this long signals that rent distribution has been done in a
way to prevent processors-producers quarrels and disputes between provinces from threatening
the foundation of the programs. The international coffee agreement of 1983, which was a SM-like
program, did not last nearly as long.
Because SM programs are set to cover the average cost of production of most farmers, pressure
to innovate and reduce costs is not as intense as in other sectors.
Differences across commodities: The OECD Producer Single Commodity Transfer estimate,
defined as the value of specific transfers relative to the value of production, jumped from 2.83% to
16% for chicken between 2004 and 2011 and from 19% to 29% for eggs and from 49% to 60% for
milk.
The farm price for milk in various countries (US$/cwt)
40
35
30
25
US
20
EU
15
CA
10
NZ
5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Retail prices in the United States and Canada

In 2011, the simple average price for a gallon of milk converted on a 4-litre
basis, assuming parity between the US and Canadian dollars, was $3.09, with
a low in Dallas of $2.29 and a high in New Orleans of $3.85.

Statistics Canada data shows 2011 average retail prices of $4.45 for Regina
and Windsor, $5.87 for Quebec City and $6.95 for Charlottetown.
Traditional critique #2
Distorting consumer prices is a less efficient and progressive way to
redistribute wealth than an income tax;
SM programs put a relatively heavier burden on low-income
households.
Traditional critique #3
High quota prices make expansion and entry difficult, …,
but quota value reflects profitability.
First generation SM farmers got quota for free.
New critique #1: Productivity, Scale and Efficiciency

Because cost of production plays such an important role in SM programs, it
is essential for farms to produce at the lowest possible costs.

Average cost curves for ag products are L-shaped (Chavas, 2001).

Are farms producing at the lowest efficient scale or beyond?
Dairy : Average Cost decreases rapidly with farm
size (Moshein and Lovell, 2009)
Herd size (% of sample cow AIC(oe)
inventory)
$30.61
Herd < 30 (1%)
$20.73
30 ≤ Herd < 50 (3%)
AIC(ti)
AIC(ai)
AIC(oi)
MC(oi)
$42.45
$28.84
$59.53
$39.66
$82.91
$55.46
$31.78
$22.58
50 ≤ Herd < 100 (11%)
100 ≤ Herd < 200 (16%)
200 ≤ Herd < 500 (18%)
500 ≤ Herd < 1,000 (19%)
1,000 ≤ Herd < 2,000 (16%)
2,000 ≥ Herd (17%)
Average
$15.10
$10.78
$9.00
$7.15
$20.66
$14.35
$11.31
$8.69
$27.60
$18.58
$14.56
$10.91
$37.88
$24.78
$18.33
$13.25
$18.01
$13.88
$12.35
$10.11
$6.81
$7.13
$8.18
$8.30
$10.14
$10.00
$12.18
$11.66
$9.72
$10.12
$16.76
$19.82
$31.06
$42.72
$19.27

aOE = no technical or allocative inefficiency; TI = technical inefficiency and allocative efficiency; AI = technical efficiency and allocative inefficiency; OI =

technical and allocative inefficiency.

Note: Ho: diff = meani − meanj = 0.

Differences across herd sizes significant at single asterisk (∗) 10%, double asterisks (∗∗) 5%, and triple asterisks (∗∗∗) 1%.

Differences of AICOE and AICOI across models within a herd size are all significant at 1% level. All differences of AIC OI and MC are significant at 1%.
New critique #2: Expansion and quota auctions

“New auctions” for quotas: eggs, turkey and chicken in Quebec.

The purpose is to make markets for production quotas more competitive
and more efficient (i.e., quotas should end up with lower cost producers
who value them most).

Problem: thin markets, no interprovincial trading.
In the first 8 eggs quota auctions, the volume traded varied between 0 and
21000 units for an average of 7681 units. The average Quebec egg farm has
around 35000 layers. Number of participants unavailable for last few
auctions.


Price ceiling on dairy quotas in eastern Canada decreases volume traded.
Dairy quota price and quota volume traded in Quebec
Volume traded
Price
1000
30000
Volume Traded
900
29000
800
28000
700
27000
Price
600
500
26000
400
25000
300
24000
200
23000
100
0
22000
2003
2004
2005
2006
2007
2008
2009
2010
2011
New critique #3: Interprovincial chicken sales

Interprovincial chicken sales between Quebec producers and Ontario processors
and between Ontario producers and Quebec processors were stopped.

This is a case of what Brander and Krugman (1983) would call « reciprocal
dumping ».

Seemingly inefficient because of transport costs on out-of-province sales, but
efficient because quantities « desired » by processors are larger than under noreciprocal.
New Critique #4: Bounds on retail prices

Quebec and Nova Scotia have minimum retail prices;

Minimum prices are often used as collusion-deterrant instruments;

Collusion is sustained by credible threats/ability to punish cheaters by
flooding the market and bringing down prices;

Collusion is not an issue under SM programs: nobody can flood the
market;
New Critique #5: Trade liberalization path

TRQs are peculiar instruments that can induce perverse
trade liberalization outcomes (Pouliot and Larue, 2012)

Tariff reductions or minimum access expansions?

Larue et al (2007) show that tariff reductions yielding the
same domestic price as minimum access expansions entail
larger production. This is good « welfare-wise » if the
market share of domestic producers is « large enough»
under free trade.
Sourcing costs differentials for price-equivalent tariffs and quotas when
domestic production accounts for 25%, 50% (dark black), 55% (small
dash) and 75% (long dash) of consumption under free trade.
SC R SC t
2
1
admissible
0
1
-1
-2
-3
2
3
4
tariffs
Conclusions





Political equilibrium under attack from the outside, but solid inside
(farmers, processors, input and service suppliers and distributors are
making money);
Time for a new contract: provincial barriers were not so bad in the 1970s
when there were many more farms and processors than today.
Interprovincial trade in commodities and quotas would allow best
producers and processors to exploit competitive advantage.
Scale problem is huge in dairy. Average dairy herd has about 60 cows and
MES is between 1000 and 2000 cows.
Price ceiling on quota values should go.
TRQs should be replaced by tariffs. Insisting on a long list of sensitive
products is counterproductive.

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