TPP and Canada's misunderstood dairy industry: Don Pittis

As hugely profitable companies from Bell to the banks continue to lay off employees in a quest to squeeze out higher profits, it is a reminder that market driven efficiency, including in Canada's dairy industry, can have a dark side.

So far it appears supply managed agriculture has escaped its worst fears. Nonetheless, commentary on various free trade deals, such as the Trans-Pacific Partnership — which would sacrifice Canadian supply management — usually comes down on the side of lower prices on supermarket shelves.

It may indeed be that a pure free market system for food production would result in lower prices. But in the rush to condemn, the advantages of managed markets in agriculture have often been forgotten.

International evidence reminds us we should understand what we are losing before we decide to erode a system that has worked well for Canadians.

• TPP would allow milk from cows receiving hormones into Canada
• TPP offers dairy sector good news, bad news and a question mark

Agriculture is one of the industries that is historically most subject to the rigours of free market competition. While there may be some variation in quality, farm products like milk, eggs and chicken are a commodity: things that are sold and priced as a class.

Commodity pricing

In commodity markets any unit can substitute for any other. And classical economics tells us that the more a product is like a commodity, the less power the suppliers have, because if one supplier asks too much, the buyer just goes elsewhere.

In global commodity markets, farmers' earnings depend not just on their own efforts and local weather, but on the total global supply of the product they produce.

Influenced by something called cobweb theory, market prices swing unpredictably because farmers can never be sure how much the commodity will earn. 

"One season the price is high and one season it is low," says economist Phil Holden in an online explanation of the theory. "And they never really know how much to supply from one year to the next."

That means the business of farming is prone to failure. In the Great Depression and many times since, farmers have publicly poured out milk because prices are so low it was not worth the cost of production and shipping.

The purpose of supply management is not to make prices higher, but to make sure farmers produce just the right amount to keep prices steady to cover the cost of production.

Until quite recently, the production of many agricultural goods was local. But technology, including ultra high temperature treatment, means UHT milk can be kept for up to a year and shipped without refrigeration, turning milk from local into a global commodity.

UHT takeover

Those not familiar with UHT milk complain about its taste and the fact that it has fewer nutrients, including about one-tenth of the folic acid in regular milk. But in places as diverse as Belgium, Brazil and Hong Kong, UHT milk sold warm in cardboard cartons is often the only kind of milk you can buy.

The world is suffering from a milk glut and a shakeout in the dairy industry not unlike what is happening in oil. Dairy farmers are suffering. And according to The Economist magazine, even the New Zealand dairy industry has turned sour with prices below the cost of production.

As you expect in an undifferentiated commodities market, power has moved from the individual farmers to the giant New Zealand Co-op Fonterra, which The Economist calls "the world's largest dairy-export firm." Meanwhile New Zealand faces price competition from China, including from a new mega-farm with 100,000 cows.

Recently Brian Crowley from the Macdonald-Laurier Institute complained that milk prices were dropping, but not for Canadians. Of course, at the same time much of the world's dairy industry is being devastated, but not the Canadian industry. And yet fresh milk (not the UHT commodity) is as cheap in Canada as in Europe.

Under the current TPP agreement Canadian farmers will lose about four per cent of their market to cheaper overseas milk, and there are worries that this represents the thin edge of the wedge toward the erosion of supply management.

The previous Harper government promised farmers would be given cash as compensation. Maybe cash is not enough.

Going for cheap

It may be that Canada would be a better place if milk production moved to the countries that could produce it most cheaply, while Canadian farmers cut their costs so they could go head to head with global distributors from China and New Zealand.

But knowing how markets work, I am suspicious that losing much of our dairy industry to overseas competitors would not bring food cost down much in the long term. Remember how we thought the arrival of Target would bring American pricing?

I fear the cost difference would merely be absorbed by some other part of the production chain.

Meanwhile, the advantages of having a strong domestic industry are about more than the price of milk.

Canadian dairy farmers don't move their profits overseas so they can pay lower taxes. Producing milk as cheaply as possible is the exact opposite of the trend toward local, organic, fresh and free-range food.

In the current global shakeout in the dairy industry, it might be worthwhile hanging on to that industry at least until the shakeout is over. Maybe well-made Canadian milk products, without hormones, with love, will soon sell overseas at a premium.

Canada may eventually decide that sacrificing our small-scale, local dairy industry, where producers still have power, is worth whatever we can get in exchange at the international bargaining table. But in a world where jobs are at a premium, keeping a thriving domestic industry may be more valuable than cheap milk.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis