Canada's milk shakedown

One of Donald Trump's most frequent complaints about Canada's trade practices concerns the dairy industry.  It's one of the few cases where he has his facts straight.  Canada really does charge tariffs of almost 300 percent on a variety of dairy products, effectively keeping US farmers out of the domestic market.

The tariffs are part of Canada's system of "supply management", in which the government conspires with farmers to limit the amount of particular commodities that are produced domestically, by means of a system of quotas, while keeping virtually all imports out of the country.  It's one of the most egregious examples of "producer capture" (also called producer surplus) anywhere in the developed world, and it means that Canadians pay far more for milk, cheese and eggs than do our neighbours to the south.

The supply management system is something of a third rail in Canadian politics.  The country's dairy farmers, many of them located in Quebec, punch well above their collective weight in maintaining the system regardless of which party is in power. The leader of the federal Conservative Party recently fired one of his most senior colleagues for daring to question the need for it. Justin Trudeau has made it very clear that his government will not make any concessions on supply management in the ongoing NAFTA negotiations.

This article, from Bloomberg via The Toronto Star, provides an excellent summary of how supply management works and how it has distorted the market. Unsurprisingly, Canadian dairy farmers make much more money than farmers producing products for which there is no supply management.  It's remarkable to learn that when dairy farmers look to borrow money, the key collateral they can offer to a lender is not their land and buildings, but their production quota, which is basically a perpetual annuity.  The total value of Canadian dairy quotas is now C$ 35 billion, which suggests that ripping off the consumer is a very lucrative proposition.

There seems little likelihood that supply management will go away any time soon, and the fact that the quotas have been posted as collateral for so many loans would make unwinding the whole mess vary complicated and expensive.  Still, nothing is forever.  Casting about for a comparison to the quota system, I thought about the taxi "medallions" that used to form an important part of that business in many cities, including New York and Toronto.  Those medallions used to change hands for tens of thousands of dollars because they brought with them the right to join a seemingly impregnable cartel.  Then along came Uber and Lyft.  It's hard to see how anyone could do anything comparable in the Canadian dairy industry, given that the government is effectively part of the scam, but we live in hope.