Friday, 31 July 2015

Like Uber, but for dairy

There could be a lot of opportunities for Canadian dairy in opening up their markets to foreign competition, and in having foreign markets opened to their products. But there would be transitional costs.

The Globe and Mail reports on some relevant aspects here. But they miss the supply management angle. One important reason that Canadian dairy farmers oppose changes to the system is that they own a lot of quota rights. Under the Canadian system, the right to milk a cow costs money. And just like taxi permit owners in regulated markets hate Uber, Canadian dairy farmers hate New Zealand. But who can really blame them? If you were sitting on a big regulatory asset somebody proposed wiping out, wouldn't you object? 

There is a way around it though. In simplest form, it requires:
  1. The Canadian government buys all the dairy quota from all the dairy farmers. It'll be very expensive. Probably close to $30 billion.
  2. Canada gets rid of all the tariffs on dairy products at the border. It can maintain whatever sanitary requirements it wants - if some dairy practices in the US result in stuff being in milk that the Canadian government views as unacceptable, they could still ban whatever it is being in milk. Arguments around some kind of adulterated US milk coming over the border are really a separate issue: Canada can put whatever quality controls it wants on milk sold to consumers. It just can't do it in a way intended to set up a trade barrier.
  3. Since tariffs at the border are around 300%, prices on dairy products would plummet. Rather than let them plummet, the government would put in place taxes, applied neutrally regardless of country of origin, that are proportionate to the amount of price reduction you would expect with the change in the system.
  4. Why taxes? Because you need revenue to pay off the bonds you'd have to issue to pay off the farmers in step 1. You retire the taxes as the bonds are paid off.
  5. Since the price of milk to consumers is no higher, and likely a bit lower, than it was before, consumers are better off. They'd see it most in product diversity and quality. Since the farmers are paid off for their quota, they're not much worse off, though some get a lot of value from the lifestyle that comes with farming under that kind of system only some of which might be capitalised into the price of quota. And since freeing up dairy would get Canada into the TPP, if the TPP is of net value, Canada would be better off.
CD Howe had a different plan a couple years back.

Other things you should know: Fonterra is not a monopoly. I know that's the first thing that Canadians and Americans would point to. It's the second comment on that Globe and Mail piece:
New Zealand's milk supply is a monopoly. Fonterra controls almost 90% of the market and set the price according to a private formula. Fonterra includes farmer-owners (over 10,000) who hold shares that they can only sell back to Fonterra (although they are now experimenting with allowing farmers to sell/trade shares among themselves). As well, there is now a proportion of public non-voting "shares" that is legally separate from the actual company ownership.
Essentially, a form of supply management, and the retail price of milk in New Zealand is comparable to Canada.
Some of this is right. I'm not going to check the percentages or numbers - Fonterra is by all accounts the dominant local player. They set prices paid to their farmer members based on their forecasts of the results of the coming dairy auctions. A farmer who doesn't like Fonterra's pricing can join up with somebody else, or start their own processing company. Synlait is one of the bigger alternatives to Fonterra, but there are others. 

Fluid milk prices here are not cheap, but do vary with international prices. Where you see the real differences is in prices of processed goods: excellent ice creams and cheeses, and baby formula, are very reasonably priced compared to North American alternatives. Canada's system runs a really complicated set of protective tariffs and differential pricing on industrial versus consumer milk so that the costs of the whole apparatus remains opaque to consumers. If your cheese is not so hot and very expensive, do you blame supply management? Too many steps in the production chain for consumers to know where to pin the blame. 

Anybody in New Zealand, if they wanted to, could start a dairy farm asking nobody's permission - and certainly not Fonterra's. They could do on-farm processing of their own product, subject to the usual health regs, and then sell it to anybody who wanted it: again, no permission needed other than the check that you're running a sanitary facility. A farmer and his neighbour could write whatever contracts they wanted for the former to supply the milk and the latter to process it.
Fonterra is a big part of the New Zealand market. But if you milk a cow without their permission here, nobody cares. If you milk a cow in Canada without the dairy board's permission, they'll throw you in jail. 

Canadians need to stop seeing the quota management system as this big friendly thing protecting Canadian consumers from bad American milk. Truth is, Canada could set whatever quality controls it wanted on milk for sale to consumers. Some growth hormone that the government doesn't like in milk? You can ban its being in milk for sale to consumers, and you don't need supply management to do it. The dairy system instead is a lot more like the New York taxicab system. It needs a little Uber. 


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