Reforming Canada's Dairy Sector: USMCA and the Issue of Compensation

Abstract

Supply management (SM) in Canada's dairy sector was an obstacle to the successful renegotiation of the North American Free Trade Agreement. Reform of agricultural SM regimes in sugar, peanuts, tobacco, and dairy in various jurisdictions are reviewed, and an analytic framework is developed to investigate how Canada might eliminate its dairy quota regime while not overcompensating producers. Compensation based on quota values amount to $5.9 billion if untargeted, but only $2.9 billion if targeted; in contrast, theoretically correct estimates of the loss that dairy producers would face range from $0.2 to $1.9 billion. Such costs are low enough not to impede the elimination of supply management.

Reforming Canada's dairy supply management scheme and the consequences for international trade

“…However, if supply management were to be reformed in the future, dairy producers could then be covered under Canada's existing business risk management programs, helping them manage risks in the same way that farmers do in other sectors. Nonetheless, to facilitate a transition away from supply management, it will be necessary to provide dairy farmers with compensation, especially those who have not yet recouped the cost of purchasing quota ( van Kooten, 2020a). The benefits of restricting milk output accrue to very few in society, while imposing a large burden on consumers, especially the poorest in society.…”

“…Barichello et al (2013) suggest that growth in quota value over the past decades had created an asset price bubble, reaffirming that compensation should not equal the value of the quota asset. Subsequently, van Kooten (2020a) estimated that a quota buyout program, based on theoretically correct welfare measures, should cost somewhere between $0.8 and $1.9 billion. 3 2 Export subsidies here refer to actual, production-distorting payments to the dairy producers that required the EU effectively to dump product on the international market using subsidies.…”

Agriculture in the United States, Mexico, Canada Agreement: Agreeing to keep things pretty much the same

“…Academic agricultural economists provide little help as there is no agreement on the methodology to be used to determine compensation. While compensation in the case of concessions given in trade agreements has received less attention, the compensation that might be required from the abandonment of the supply management policy has received considerable attention, but with little consensus on methods or results—examples include Barichello, Cranfield, and Meilke (); Busby and Schwanen (), Grant, Barichello, Liew, and Gill (); Nogueira, Barichello, Baylis, and Chouinard (); Schmitz and Schmitz (); Schmitz, Haynes, and Schmitz (); Schmitz, Haynes, and Schmitz (); Van Kooten (); and Vercammen and Schmitz (). Given the complexity of the Canadian dairy market under supply management, determining the appropriate compensation is challenging as it deals with future counterfactuals, future income streams, appropriate discount rates, the post change equilibrium, and, in the case of concessions arising from trade agreements establishing the ceteris paribus conditions so that the changes that can be attributed to the concessions can be isolated from those arising from other factors over lengthy phase in periods.…”

“…Van Kooten (), using conservative assumptions, estimates the value of dairy quota being as high as CAN$30 billion.…”

Supply Management 2.0: A Policy Assessment and a Possible Roadmap for the Canadian Dairy Sector

“…The pure free-market economic model tells us that the Canadian dairy industry cannot currently compete with the marginal production costs of dairy producers in other countries. Therefore, it would be more efficient for Canada to dismantle supply management, halt all subsidies for the dairy industry, and allow consumers to access cheaper international dairy [ 33 ]. While free-market economics may produce an efficient outcome, it does not necessarily create an optimal situation when we consider the livelihood of dairy farmers, domestic food autonomy concerns, our rural economy, and our values as Canadians.…”