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Current Issues in Supply Managed Commodities

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.

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Current Issues in Supply Managed Commodities

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  1. 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

  2. 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 supplymanagement 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_

  3. Introduction Canada’ssupply management (SM) programs for dairy, eggs, chicken and turkeyweredeveloped in the 1970s to increase and stabilizefarmers’ revenues and to mitigate interprovincial disputes. Domestic production isconstrained by production licenses/quotas while imports are constrained by tariff-rate-quotas (TRQs): a minimum level of imports (quota) istaxedat a low rate and all additional imports are taxedat a high over-quota rate. Because of biologicalconstraints, the supply of many agricultural commoditiesis not responsive to price changes in the short run. Low and highpricescanpersist over extendedperiods and various types of programs have been used to regulatesupply (acreage set asides, « herdbuyouts » programs, marketing quotas… and SM programs).

  4. The CWB and the politicalequilibrium • The CWB has lostitsmonopoly on Canadien wheat exports and somecommentatorsarguedthat SM programs are next to beaxed; • Western wheatproducersweredivided over the CWB monopoly (60% likedit vs 40% did not); • Notwisthandinglegal actions undertaken by somefarmers, thereis no farmers’ compensation associatedwith the termination of the CWB monopoly; • Compensation wouldbejustified if SM programs wereterminated; • Crediblereform (no return) requires a quick and costly transition with compensation. Unlikelygiven the budgetary situation.

  5. Regionaltradeagreements and the politicalequilibrium • Early on in the Canada-EU bilateralnegotiationsregarding a regionaltrade agreement, the EU seemedintent on forcing Canada to give up its SM programs. • The United States and New Zealandalsoseemintent on makingCanada’s participation in the Trans-Pacific Partnership Agreement conditional on giving up SM programs. • Typically, regionalagreementsaddress in a limitedwaytradeliberalization 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).”

  6. A window of opportunity for major SM reforms • Canada isincreasinglyisolated in itsdefense of SM programs at the WTO, but littleis happening at the WTO. • Canada’s position wouldbeeasier if SM programs were to undergosubstantialreforms (like the European Union didwithits Common Agricultural Policy). • Traditionnal and new irritants must beaddressed to appease the international community.

  7. Traditional critique #1: Multiple marginalisation Multiple marginalisation is the successive taking of significantmargins all along the supplychain. The factthat SM programs have lastedthis long signalsthatrent distribution has been done in a way to prevent processors-producersquarrels and disputes between provinces fromthreatening the foundation of the programs. The international coffee agreement of 1983, whichwas a SM-like program, did not last nearly as long. Because SM programs are set to cover the averagecost of production of mostfarmers, pressure to innovate and reducecostsis not as intense as in othersectors. 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.

  8. The farmprice for milk in various countries (US$/cwt)

  9. Retailprices 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.

  10. Traditional critique #2 Distorting consumer pricesis a less efficient and progressive way to redistributewealththan an incometax; SM programs put a relativelyheavierburden on low-incomehouseholds.

  11. Traditional critique #3 High quota pricesmake expansion and entry difficult, …, but quota value reflectsprofitability. First generation SM farmersgot quota for free.

  12. New critique #1: Productivity, Scale and Efficiciency • Becausecost of production playssuch an important role in SM programs, itis essential for farms to produceat the lowest possible costs. • Averagecostcurves for ag products are L-shaped (Chavas, 2001). • Are farmsproducingat the lowest efficient scale or beyond?

  13. Dairy : AverageCostdecreasesrapidlywithfarm size (Moshein and Lovell, 2009) • aOE= no technical or allocative inefficiency; TI = technical inefficiency and allocative efficiency; AI = technical efficiency and allocative inefficiency; OI = • technical and allocativeinefficiency. • 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%.

  14. 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.

  15. Dairy quota price and quota volume traded in Quebec

  16. New critique #3: Interprovincial chicken sales • Interprovincial chicken sales betweenQuebecproducers and Ontario processors and between Ontario producers and Quebec processors werestopped. • This is a case of whatBrander and Krugman (1983) would call « reciprocal dumping ». • Seemingly inefficient because of transport costs on out-of-province sales, but efficient becausequantities « desired » by processors are largerthanunder no-reciprocal.

  17. New Critique #4: Bounds on retailprices • Quebec and Nova Scotia have minimum retailprices; • Minimum prices are oftenused as collusion-deterrant instruments; • Collusion issustained by crediblethreats/ability to punishcheaters by flooding the market and bringing down prices; • Collusion is not an issue under SM programs: nobodycan flood the market;

  18. New Critique #5: Trade liberalizationpath • TRQs are peculiar instruments thatcaninduce perverse tradeliberalizationoutcomes (Pouliot and Larue, 2012) • Tariffreductions or minimum access expansions? • Larue et al (2007) show thattariffreductionsyielding the samedomesticprice as minimum access expansions entaillarger production. This is good « welfare-wise » if the marketshare of domesticproducersis « large enough» under free trade.

  19. 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.

  20. Conclusions • Politicalequilibriumunderattackfrom the outside, but solidinside (farmers, processors, input and service suppliers and distributors are making money); • Time for a new contract: provincial barrierswere not sobad in the 1970s whenthereweremany more farms and processors thantoday. Interprovincial trade in commodities and quotas wouldallow best producers and processors to exploit competitiveadvantage. • Scaleproblemishuge in dairy. Averagedairyherd has about 60 cows and MES isbetween 1000 and 2000 cows. • Price ceiling on quota values should go. • TRQsshouldbereplaced by tariffs. Insisting on a long list of sensitive productsiscounterproductive.

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