My Day at the Farm

On August 2, I proposed in this blog that the system of Supply Management in agri-industries requires a “critical examination”.  I stand by that suggestion; however, it is quite possible that certain supply managed industries might actually survive that critical examination.

Many economists believe that Supply Management artificially reduces supply in order to increase price.  This is partially true; however, the reality of the dairy sector, for example, does not fit well into microeconomic theory.  For one thing, the input costs of a dairy farmer do not always conform to perfectly functioning markets.  But the bigger problem is the highly perishable nature of milk and milk products.  Unlike the notional widgets that economists are fond of, which can be stored indefinitely, milk must be delivered to the dairy within 48 hours and processed and sold within days or it is valueless.

Moreover, a dairy cow has to be fed and milked every day regardless of whether the milk is delivered to the dairy, dehydrated and put on the world market at depressed prices or dumped.  Whereas the widget manufacturer can slow production or warehouse the widget indefinitely, these options are clearly not available to the dairy farmer.  His input costs are constant and must ultimately be recovered in the price of consumed milk.  There is no advantage, to the either producer or the domestic consumer, in economic dumping; nor in actual dumping, which is just plain wasteful.

Accordingly, perhaps something other than the market should determine supply??  Perhaps a marketing authority should calculate anticipated demand and set supply accordingly??  If supply is set, obviously a quota system must be established to ensure that the determined supply but no more or no less is actually produced.

Moreover, it is by no means certain that deregulated and therefore lower supply prices will actually lead to lower consumer prices.  This is again due to imperfect markets in retailing and distributing.  Because of excessive concentration in both retailing and processing the result, similar to gasoline retailing, is “asymmetrical pricing”; ie retail prices rise quickly when producer costs rise but respond slowly when producer prices decline.  Since retailers are blissfully aware of what a consumer is prepared to pay for a 4 liter jug of 2%, the distribution/retail market will not necessarily adjust its price simply because of a lower supply price.

When I was an MLA, Alberta had just deregulated electricity generation.  Although it was a necessary decision, as Alberta was facing imminent supply shortages and brownouts, deregulation of electricity generation did not result in lower consumer prices.

In dairy, the industry is also to be recognized for its work in quality control assurance and in nutritional education (School Milk Programs).  Although the latter is somewhat self-serving in expanding its own market, the former is absolutely essential for consumer protection.  If  a deregulated industry abandoned quality assurance, that function would have to be assumed by government and the cost assumed either by taxpayers or passed back to consumers (not dissimilarly to the way it is currently in a supply managed system)!

I would like to sincerely thank Alberta Milk and the Nonay Family (Lakeside Dairy) for a very interesting and informative day at the Farm!  These are complicated but important economic and consumer issues.  We should not be reticent to discuss them simply because they are complex.  Perhaps over a glass of milk…………………


1 comment for “My Day at the Farm

  1. September 17, 2012 at 1:03 pm

    Sounds to me as if Mr. Rathgeber has discovered he has some dairy farmers or members of their families as voters in his riding after all…

    Here’s something from today’s Globe and Mail:

    MP’s dairy theories long past best-before date

    Special to The Globe and Mail
    Published Monday, Sep. 17 2012, 8:24 AM EDT
    Last updated Monday, Sep. 17 2012, 8:51 AM EDT
    In what has to be considered this year’s strongest contender for the most ill-informed comment on economics by a Canadian MP, Conservative Brent Rathgeber, in the context of Supply Management, wrote:

    “[T]he reality of the dairy sector, for example, does not fit well into microeconomic theory. For one thing, the input costs of a dairy farmer do not always conform to perfectly functioning markets. But the bigger problem is the highly perishable nature of milk and milk products, [which are u]nlike the notional widgets that economists are fond of.”

    The issue of perishability comes later in the curriculum, but it is quite compatible with microeconomic theory. There is an entire subfield of microeconomics, called yield management, which considers the issue of maximizing profits of a perishable product. Students in business oriented programs often take an entire course on the subject.

    Very few real-world markets contain both non-perishable products and have perfect competition in every portion of the supply chain. If microeconomics had nothing to say on these issues it would be of very little use.

    If Mr. Rathgeber wishes to know more about what is and is not included in microeconomic theory, all he needs to do is consult a microeconomist. As a microeconomist I would be happy to help, as my Ph.D. thesis is on the issue of pricing perishable products in imperfect markets.

    Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business.