In an Economic Note published by the Institute, Marcel Boyer, its vice-president and chief economist, explains that astronomical customs duties and the setting of high prices for these food items constitute a particularly regressive tax on low-income consumers. "This system, motivated by protectionism, operates largely as a cartel and is obsolete, costly and unfair," Mr. Boyer says. "The food and agriculture sector must adapt to international competition and stop penalizing consumers, as well as farmers themselves in the long run."

The supply management system

The supply management system lets Canada's milk, poultry and egg producers, most of them located in Quebec and Ontario, adjust production to protect their incomes. For this purpose, quotas are set to match an arbitrary evaluation of domestic demand and meet desired prices. The Canadian Dairy Commission handles market quotas for milk, while the marketing of eggs and poultry is subject to a similar quota system. Moreover, Quebec is the only province that still regulates retail milk prices. The Régie des marchés agricoles et alimentaires handles this process, which tends to favour upward manipulation of prices.

Consumers are the losers

Under the supply management system, consumers' interests are secondary, In Canada, the price of milk has risen 53% in the last 12 years, double the rate of inflation, whereas production costs actually declined by 3.8%. This is reflected in consumption, which has fallen 18% for milk and 30% for butter since 1980. Consumption for milk is forecast to decline a further 12% by 2020. There exists a huge gap, over 37%, between retail milk prices in Quebec and prices observed in the United States. For eggs, the gap is 55%. Chicken sells for twice as much at the retail level.

Supporters of the supply management system, along with pressure groups in the food and agriculture areas concerned, take pride in receiving no subsidies. However, supply management resembles in practice a taxation power granted by the government. Rather than subsidize farmers directly with money collected from citizens, the government lets producers raise prices by giving them monopoly privileges. This amounts to the same thing, except that the government does not face the ire of consumers, who are unaware of the situation.

Canada's isolation on the international scene

These Canadian farm marketing mechanisms are regarded by the international community as protectionist government action that runs counter to greater openness to international trade. This policy of economic isolationism and the notion of "food sovereignty" risk hurting Canada's reputation and could lead to reprisals in non-agricultural areas. Given that Canada is the world's fourth largest exporter and fifth largest importer of farm products, it can potentially play a leadership role in resolving the current impasse in the Doha round of World Trade Organization negotiations. By abolishing its supply management system, Canada would acquire the legitimacy needed to demand that the United States and Europe eliminate their own government assistance to farmers. Success in the WTO talks, besides providing Canadian consumers with better prices, would improve access for farm products from developing countries to markets in the industrialized world and enable poorer countries to emerge from misery.

Despite a general trend toward liberalization of markets and competition, most politicians and people involved in Quebec agriculture continue to defend the obsolete supply management system. The longer the delay in adapting to competition, the harder the transition will be. Rather than protect an inefficient industry, Canada could prepare to meet increasingly diversified demand. Only the creation of international distribution channels will provide the Canadian agricultural industry with access to indispensable strategic information and offer innovative products to compete with Brazil, Australia, China and India, which have taken a lead on the road to a globalized, competitive and open agricultural sector. It would also help Canada compete with the United States and Europe, which hold and will continue to hold dominant positions.

The Economic note, titled Supply management of farm products: a costly system for consumers, was prepared by Marcel Boyer, vice-president and chief economist of the Montreal Economic Institute and holder of the Bell Canadian chair in industrial economics at the University of Montreal, and by Sylvain Charlebois, associate professor of marketing at the University of Regina.

The Note is available at www.iedm.org

The Montreal Economic Institute is an independent, non-partisan, non-profit body that takes part in public policy debate in Quebec and across Canada, offering wealth creation solutions on matters of taxation, regulation, and reform of health and education systems. Its publications since 2000 have included the Report Card on Quebec's Secondary Schools. In 2004 it won a Templeton Freedom Award for Institute Excellence for the quality of its management and public relations.