Sunday, March 9, 2014

Supply Management Reform – Dairy Industry - Conference Board of Canada

It is clear that in Canada the supply management system needs to be reformed, specific to dairy, the interests embedded in the present regulatory modality of conduct are retarding the industries growth. As an individual that wants to enter the industry at a scale and at a pace that are practical, as an individual that attempted to seek the support of the present industry complex to engage in business and was in effect rebuked for my efforts, there is no one more enthusiastic to see reform here. I have faith that there is a viable place on the WORLD stage for the Canadian Dairy industry, the question is “how to shed the baggage of the present supply management system”. This posting is in response to the Conference Board of Canada’s Report – REFORMING DAIRY SUPPLY MANAGEMENT, THE CASE FOR GROWTH. This is an outstanding piece of work and warrants study by anyone that wants to see the Canadian Dairy industry removed from the constraints of the past.

 The report does an excellent job of quantifying the industry and the cost of supply management. It understates or to some degree or neglects to stress the mass of capital that is sitting latent, at a market value of 23 Billion dollars, the cost of quota ownership zaps the industry of vital resources. The report shows the 600 million dollars or so each year that it costs farmers to finance quota, it fails to project where farmers would be if they had those resources deployed toward production rather than licensing.
 Also absent was a quantification of the regulatory overhead the industry now carries, other industries are absent Boards to management them, the market manages itself. The incremental increase in product of $260 per family per year would be more tolerable if farmers were getting it, but much of it flows to the administrative aspects of the regulatory process.

 The new industry vision is a welcome expression of a brave and viable way forward with strong argument to support it. There is no doubt the present state of the industry and the regulatory regime it is affected by is stunted, both domestically and internationally. I personally attempted to start a dairy related business that in no way diminished incumbents in the industry, was innovative and at scale and would eventually integrate with the present system – it was met with near violent opposition.
 The present industry quota value of $23 billion is massive, yet the report suggested that we buy the industry out at approximately $5 billion. One understands the rationale presented in the report, the vintage of the quota affects the cost or benefit of ownership; the fact remains however, that any dairy farmer now in possession of quota can sell it for fair market value – to institute a transition strategy that deviates from fair market value is going to meet resistance from the industry regardless of whether one can pencil out a justification. The challenge is that Quota in viewed as an, and is a, asset with a market value, producers if not reimbursed at FMV will be in a position of loss relative to the status quo. One can make the argument and demonstrate relative advantage to one producer over the other; however, you are saying to the industry with quota valued at 23 billion that the buyout is 5 billion - it is a hard sell.

 The quota system was developed by government and it generated quota that had value, at issuance as much as later, the presence of value is substantiated both by the rationale for creating quota and by the subsequent valuation that evolved via government sanctioned and created exchanges. The report states “And the policy can be justified because, as a matter of law, new entrants were required to buy quota as a condition of entry into the business whereas the initial quota allocation was issued at no cost. This approach takes the position that farmers should not need to realize a capital gain on their quota asset funded by taxpayers or consumers.” This is analogous to  the government asserting that because a family has had land since it was homesteaded, or granted by government, they it should be valued less upon expropriation than a family's land the was purchased shortly after. The key consideration here is the government defined and permitted the quota system to evolve and the value in quota was a product of government intervention in the market place. The government chose to effect a subsidy, the license to garner that subsidy had and has value. The transition needs to be equitable yes, the math does count, it must be just as well. It is unfair that consumers have subsidized approximately $260 / household / year – the government intervention in the market generated this unfairness. It would be unfair also to take from farmers an asset that has been held and sustained at the cost of opportunities for gone. 

Transition needs to be as rapid as possible and government will have to pay. The farmers should receive the FMV for the quota over ten years, said rights transferable by sale.  The government can finance this transition from debt, the increase in production and expansion of industrial activities via the export markets will likely go a long way to paying the bill over the buyout period – it surely will over time.  


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