Many people believe that housing agency Canada Mortgage and Housing Corp. (CMHC) has facilitated the formation of a bubble in the Canadian housing market by insuring so much mortgage debt. But due to what’s called supply management, a similar situation may be taking shape within the Canadian farming community and it needs to be addressed.
Particularly in the dairy, egg, turkey, and chicken sectors, farmers rely on supply management to keep product prices high. Under this arrangement, government-backed agencies set prices on the basis of costs, and then support the prices by restricting supply via a limited number of production quotas allotted to farmers.
Because the quotas are a scarce resource tied to the production of goods whose prices are raised almost every year, their value keeps going up. For example, in Ontario, the price to buy a quota in dairy farming climbed from $1,400 to $33,000 per cow between 1981 and 2007. The value of the quotas also spills over into higher prices for farmland, especially whenever quota prices are capped (dairy quota prices in Ontario are now fixed at $25,000).
For persons who wish to buy a farm in supply-managed sectors, the upward spiral in prices has made it very expensive. Enter the government-backed Farm Credit Corp. (FCC), described by one farmer as “Canadian agriculture’s Freddie Mac and Fannie Mae.” It has lent against the quotas and agricultural acreage to facilitate purchase of farms. It has also eased lending terms over the years—notably, amortization periods have been extended from 5 to 25 years.
In short, the FCC, like the CMHC and its U.S. counterparts Freddie Mac and Fannie Mae, has facilitated borrowing against an appreciating asset and contributed to further price inflation. But as happened in the U.S., the price of this asset could go into reverse and cause negative equity to emerge in farm quotas and land. This could not only produce financial hardship for heavily indebted farmers but also wreak havoc with the FCC’s credit portfolio.
As long as politicians remain afraid of saying anything negative about supply management, it’s hard to imagine quota and farm prices collapsing anytime soon. Still, the unintended consequences of the quota system are piling up. For example, in the case of the dairy industry, some of the problems studies have found include:
- prices for milk and other dairy products in Canada are among the highest in the world (incentives to control costs are weak when prices are indexed to costs)
- since the introduction of supply management, the consumption of milk (an essential food in the rearing of children) and other dairy products in Canada has declined on a per capita basis, and is nearly a third below levels in the U.S.
- despite very high tariffs, dairy imports into Canada have tripled to 24% of the market over the past decade
- to buy quotas, Canadian dairy farmers have amassed unprecedented debt levels, “seen nowhere else in the world”
- young farming families in Canada are fleeing to the U.S where the absence of a quota system lets them purchase better operations at less than half the price of supply-managed sectors in Canada
At some point, the accumulating side effects may reach a critical mass and force a critical review of, and change to, the supply management system. If and when that time comes, there could be adverse implications for farmers and the FCC.
However, one suspects taxpayers will end up on the hook for the brunt of farmers’ transition costs—as well as the non-performing assets of the FCC. The ultimate cost of Canada’s supply management system could therefore end up much higher than what an analysis of current benefits and costs would indicate.