Ending supply management would not cost $30b

In Canada, the debates over supply management – the system of production quotas and import duties limiting the supply of dairy and poultry products – has intensified in recent years.  For ten years now (literally), I have been writing, testifying and researching this insane system which moves the supply curve leftwards (even if some try to deny it in some non-nonsensical arguments stating that prices would be higher if the supply increased).

One of the groups that has been spewing non-sense is, obviously, the dairy farmers union. In one of their often-made claim, which some politicians are taking up, is that ending the policy would cost $30 billions.

That is incorrect, widely off the mark and not properly contextualized.

First of all, the number relates to the market value of the quotas (see here). Many farmers bought the quotas many years ago at a much lower price and as such, compensation would be slightly below the $30 billions. More importantly, most quotas are acquired through mortgages by farmers. These mortgages represent a value of $30 billions (capital and interest). However, farmers are riskier borrowers than governments. If the government bought back all the mortgages, it would actually become the borrower (it would hold the liability). However, since the Canadian government is at a lesser risk of insolvency than farmers, it can easily renegotiate with banks for a haircut. In fact, banks would easily accept this. They know that the government won’t default on this which means the risks on their balance sheets have just dropped dramatically and they now hold a much safer asset. I guess that they would be willing to negotiate a form of haircut on the assets that would be somewhere between the new (risk-adjusted) value and the old value.

Secondly, who the hell said the quotas needed to be bought back in one shot? Farmers could be offered a choice between many options. First, there would be the option buy-back plan that gives them 50% (in government t-bills) of the value of the share of the mortgage that they paid. The second would be a higher percentage spread out over many years. The third could be over 100% of the value of the permit in tax credits. Basically, if a farmer has paid $200,000 of a $1,000,000 mortgage, the government would commit to pay the difference to the creditor institution and offer more than $200,000 in tax breaks to farmers and their families. For example, a farmer with a tax liability of 25,000$ every year would end up paying no taxes for 10 years (as such, he would 125% of the value of his quota). As such, the cost is spread over 10 years making this a $3 billion expense annually.

And what about the context? Well, according to the famous article (recently published) on the burden of supply management, the cost in higher prices is equal to 0.84% of household income. In short, this means 0.84% of the Canadian economy or $17.3 billion a year or $173 billion over 10 years. Now, this is annually – the savings are recurrent – and the estimates does not account for the fact that productivity gains might finally allow Canadian farms to benefit from the international increase in demand. So, the $173 billion figure is pretty conservative and yet, the inaccurate $30 billion figure accounts only for roughly 17.3% of the benefits. In terms of return on investments, I am pretty sure this qualifies as a great move through which you would not even need to go down the Australian route (imposing a transitory tax for ten years).

I am sorry, but there is no way that the cost of the buyback should be considered a deterrent especially if a buyback plan is spread out over many years.


Please keep it civil

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s