Milk Boards cost consumers $1 billion a year and will bring more trade disputes

Contact:

Owen Lippert, Senior Fellow,
Law & Markets, The Fraser Institute,
Tel. (416) 363-6575, ext. 564

For Release: 6 November 2001

TORONTO, ON— A new Fraser Institute publication, The Perfect Food in a Perfect Mess: The Cost of Milk in Canada, released today, estimates that Canadians pay between nine and 36 cents more for a litre of whole milk than Americans. For all dairy products, Canadians may pay nearly $1 billion more per year than Americans.

In addition, Canadian milk producers have used high domestic prices to subsidize exports. This will likely result in World Trade Organization (WTO) rulings against milk supply management in December, and could lead to punitive tariffs against other Canadian agricultural exports.

The Fraser Institute study found that every year Canadians pay between $839 million and $2.47 billion more (depending on the measure used) for milk products than they would have without supply management. Data from the Organization of Economic Cooperation and Development (OECD) shows that since 1980 Canadians have paid $50 billion (in 2000 dollars) above international prices.

"If burdening Canadian household budgets is not reason enough to re-examine milk supply management, the system undermines Canada's trade credibility just as federal negotiators prepare to seek concessions at the upcoming WTO meeting in Doha, Qatar," explains Owen Lippert, the study's author. Lippert estimates that milk production quotas (the right of producers to produce milk within the system) cost producers nearly $16 billion during 2000.

Recent trade negotiations have revealed that milk supply management accounts for nearly 99 percent of all Canada's agriculture subsidies judged as trade-distorting.

The study compares Canadian milk prices with US retail prices and with international "farm gate" (wholesale) prices. The Canadian cost of a litre of milk is 6 percent higher than in the US as measured by Consumer Price Indices in the two countries. After adjusting for different levels of income between the two countries, the cost is 25 percent higher in Canada. Furthermore, Canadian farm gate prices for raw milk are now 135 percent higher than the world reference price.

The study makes clear the complicated and antiquated regulations that govern the supply and price of milk in Canada. Supply management restricts the supply of milk to achieve a target price for producers. Ottawa controls the industrial milk used for cheese, butter and other processed products, while the provinces control fluid, or table milk prices.

Examining the impact of the last round of international trade talks in 1995, The Perfect Food in a Perfect Mess explains why Canada now has among the highest tariffs in the world on milk products. With protected high domestic prices, milk producers rapidly expanded low-priced exports. This led to a US and New Zealand dispute now before the WTO. In December 2001, the WTO will likely rule against milk supply management's pricing system. This could lead to punitive tariffs against all Canadian agricultural exports.

"Overhauling Canada's supply management system would leave dairy producers with an immense 'stranded asset' and may make any reform of Canada's milk market, as done in New Zealand and Australia, more difficult," says Lippert. "However, freer international trade in milk products does present milk producers the opportunity to overcome the initial cost of dismantling supply management through increased exports of their products," he added.

The report recommends that federal and provincial governments should investigate a sliding scale of compensation for quota holders, keeping in mind the interest of consumers and taxpayers, and recommends the move to full trade liberalization in milk and milk products.

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver with offices in Calgary and Toronto.