Blame Canada's Dairy Cartel for Our Expensive Milk and Cheese

Hey cow, you're gonna make me rich! via Flickr user fishhawk.

If you've ever been into a grocery store south of the border, you may have noticed that milk and cheese are notably cheaper in the Land of the Free. There are often more choices, too and fancy imported cheeses are easier to come by. If you ever thought this price difference was some kind of lactose-influenced hallucination, you're not crazy—Canadians do pay more for dairy.

One of the main reasons we pay up to three times more for milky-goodness is because we're living under the thumb of a powerful dairy cartel that enjoys the full protection of the Canadian government.

This seemingly bizarre arrangement has an appropriately Canadian, non-threatening title: Supply Management. Which of course means that the total supply of dairy in the country is constrained by a dairy board in combination with punishing tariffs (taxes) on imported milk, cheese, and so on.

While this system is nothing new, it's certainly been flying under most peoples' radar for quite some time. So let's quickly unpack how it works.

The system is underpinned by the Canadian Dairy Council, which sets bulk prices for milk destined for cheese, butter, ice cream, and yogurt. Provincial boards determine their own prices for fresh table milk. Dairy products from outside the country are restricted to a very small quota before they're taxed out of the realm of profitability, which severely limits outside competition.

Cheese imports, for instance, are limited to about 8 percent of the national cheese market, which is itself smaller than it might be without price controls. This explains why you can't find that nice French Morbier or Spanish Casin outside of a few specialty shops.

Total supply is essentially capped by a system of quotas, or permits to legally produce milk for sale. Dairy farmers buy and sell these production quotas amongst each other. The permit to produce milk from a single cow now costs $25,000—and prices could be even higher, but they've been capped for the last few years. Needless to say, this creates some perverse incentives.

Farmers who own these permits will usually oppose any expansion of production that could devalue their valuable assets. Meanwhile, anyone getting into the game had better come up with some serious (ahem) cheddar if they want to start herding dairy cattle.

Consumers, for their part, pay the costs of the quotas through higher retail prices, which is decidedly not very fun.

Why bring in such a system in the first place? Supply management had a few good arguments going for it when it was introduced in the 1970s. For one, it helped to insure small farmers' livelihoods against price fluctuations. This price control supported a network of family farms, and everyone likes family farms. These farmers, the bulk of whom were (and still are) in Ontario and Quebec, came to be a powerful political bloc.

But much has changed over the years. As Bob Wolfe, Professor of Public Policy at Queen's University wrote,

"In 1976, Canada had 96,909 active dairy farmers with 1,993,427 cows, or 21 cows per farm. In 2011, there were only 14,883 remaining dairy farms with 961,726 cows, or 65 cows per farm, but each of those cows produced more milk than her great-grandparents – milk output per cow in Ontario, for example, doubled from 1976 to 2012."

In other words, a good number of the family farms are giving way to factory farms. Any small farmer looking to make a go of it today from scratch would need millions of dollars to get into the milk game. So far, Canadians have been happy to pay more to support the idea of friendly families churning butter. But there's a growing disconnect between this bucolic perception and the gleaming, mechanized reality in the country.

This begs the question: is it worth paying extra to an ever-smaller set of large, wealthy dairy producers and firms? A Canadian family of four might just want their extra $276 a year back. The problem is compounded by the fact that Canada's poorest people put the biggest fraction of their incomes towards food. Are these the right people to bear the burden of supporting dairy farmers?

If we were serious about fairness, it would likely make good sense to greatly scale back the price subsidies that dairy producers currently enjoy to relieve consumers. Then, dairy farmers in need could be helped out with direct transfers from government tax revenue, which is collected more progressively.

Of course, the above plan sounds a lot more like a handout. But in practice, it's effectively the same thing as our current arrangement. And by dropping supply management, we could ease restrictions on imports of delicious foreign cheese or high-fat butter.

The current complicated wealth transfer is largely invisible to consumers, who are stuck wondering why milk feels expensive and the cheese selection for their dinner party is embarrassing. As the Canadian dairy sector has modernized and consolidated, supply management hasn't kept up with the times.

Naturally, getting rid of Canada's dairy cartel wouldn't be easy. WIth the current value of all milk production quotas well over $28 billion, the government would have a tough time buying farmers out of their permits before enabling a free-for-all. This means that any moves to ditch supply management could leave a very sour taste in Ontario and Quebec.

External factors could potentially provide the push to begin chipping away at the milk monopoly. American agricultural interests are pushing for Canada to open up its dairy market as part of the Trans-Pacific Partnership, a vast trade agreement among Pacific countries. Additionally, European countries stand to export moderately more cheese to Canada under the proposed Canada-Europe Trade Agreement. But, as Wolfe argues, neither of these deals is big enough to cause radical changes, and "the debate about the future of supply management needs to be conducted on other grounds."

There's no doubt that supply management has benefited rural Canada since its inception in the 1970s. But there's a strong case to be be argued that it's time for an overhaul—the program now often amounts to a payment scheme from middle and low-income consumers to wealthy producers. At the very least, if we're going to keep living with our dairy cartel, we need a much more informed public discussion going forward.

Navigating strange subsidies is tough for governments—it's hard to improve things for one set of people without screwing another over. Getting Canada's dairy farmers off the public teet must feel like a chicken-and-egg problem. Indeed, it is just that—poultry and eggs are supply managed too.

Chris Malmo is a donor relations coordinator at OpenMedia.

Follow Chris on Twitter.