by JIM ALGIE
Relatively high Canadian tariffs on imported food particularly on agricultural commodities which are supply-managed in Canada and less competition among Canadian manufacturers explain part of this country’s higher retail prices when compared with the United States, a C. D. Howe Institute commentary says.
To reduce retail price differentials between the two countries, the federal government should “eliminate existing tariffs and supply management policies that are responsible for the largest price gaps,” University of Toronto economics assistant professor Nicholas Li says. He’s the author of an article, Sticker Shock: The Cause of the Canadian-U.S. Price Differential, published May 2 by the Toronto-based public policy research group.
However, veteran economist Al Mussell of the Guelph-based George Morris Centre criticized Li’s conclusions about supply management as “trite” during an interview today. Mussell cast doubt on Li’s calculations about comparative food expenditures between the United States and Canada.
“The challenge here is we can come up with such simplistic policy prescriptions,” Mussell said.
Li’s paper comes atop recent criticism of Canada’s supply management system for dairy and poultry production from the Conference Board of Canada. In March, economists for the Ottawa-based Conference Board recommended scrapping dairy supply management in favour of seeking stronger export markets for milk.
In effect for almost 50 years, the supply management system for milk and most poultry commodities limits production while guaranteeing farm costs and imports by tariff. Li’s commentary argues those tariffs on supply-managed, food products account for some of the difference between relatively high Canadian retail food prices and lower U.S. prices.
Li cites particularly a study he did comparing retail and wholesale prices between 2004 and 2007 for 600 identical goods sold in 25 stores in British Columbia and 39 stores in nearby Washington state. He tracked everything from dish detergent to batteries to olive oil. Regarding dairy products, however, where identical products aren’t available across the border, he was forced to calculate product indices.
“Food products in supply-managed industries tend to feature the highest Canadian-U.S. price gaps and the greatest increase in Canadian-U.S. price gaps between 2005 and 2011,” Li’s paper says.
Mussell cites data from the report showing alarming price differences totalling 57 per cent. The study fails to take account of retailing practices such as featured and loss leader sales, Mussell said.
“What really stuck with me is the idea that somebody thinks food is 57 per cent more expensive in Canada than in the U.S.; that isn’t right,” Mussell said. “And if it were right, it would beg some very deep questions,” he said.
Li agrees that the 57 per cent differential seems high. It relies on Organization for Economic Cooperation and Development (OECD) data for 2011 for food cost comparisons among nations. It’s the most recent OECD study on the subject and coincided with a relatively high value Canadian dollar, Li said today. The same study conducted today may show comparatively lower costs because of Canada’s comparatively weaker dollar, he said, estimating a difference of between 10 to 15 per cent. However, he defended the general thrust of his argument.
As well, in Li’s Washington-British Columbia comparisons for 2004-07, state and provincial taxes roughly balance. There are some U.S. states without sales tax and Li estimated roughly that higher Canadian taxes might explain as much as seven per cent of the price gap.
The Howe Institute commentary comes at a time of active public debate about the future of supply management at least partly because of pending trade agreements with Europe and the Trans-Pacific Partnership. Mussell, a senior researcher with the Morris Centre said the subject needs “thoughtful, careful analysis.”
“Some authors that write on this would like to make it seem that there’s a lot of fat cat, dairy and poultry farmers that got together and found a way to bilk consumers,” Mussell said. “I see this issue very differently and particularly being much more complicated and rich than that,” he said.
Li’s paper addresses specifically federal government concerns for cross-border differences in North American retail prices as expressed in its most recent budget. It refers directly to the government’s stated objective that Canadian consumers should not pay more “except for legitimate higher costs.”
In response to the question “What can it do to reach that goal?” Li says “reduce costs for consumer goods by lowering or removing tariffs and by relaxing the supply management restrictions on products such as cheese, chicken, eggs, milk and yogurt.” The paper also recommends Canada “raise the maximum volume of goods that Canadians can bring into the country without paying duty.”
Mussell says Li’s paper lacks sufficient context to explain some of its findings. As well, he cited U.S. Department of Agriculture data comparing average household expenditures which show food represents about 6.6 per cent of household expenses in the United States and 9.9 per cent in Canada.
That works out to a difference of about $400 annually, Mussell said. “With all due respect for low income people . . . for a lot of us $400 is no big frigging deal,” he said.
Li said today he agrees that Canadian governments may be justified in making policy decisions about protecting parts of the domestic economy. The point of his paper is to point out that at least some price differential between Canada and the United States “is enabled by government policies.” BF
Comments
You won't see the supply management supporters here, at least not until some of us with names have commented.
They only come out for what they see as sunny day stories.
Raube Beuerman
400 bucks is a lot of money to most of your customers
That is the difference - Wow. It must have been even closer before the dollar plunged in the past year.
The federal Government in its 2013 spring budget removed the tariffs on Sporting and baby goods to even up price differences with our US counterparts.It meant an almost 80 million in savings for Canadian businesses.
The CBC did a followup a year later and found despite those tariff eliminations the costs for goods such as ice skates had generally stayed the same or in some cases gone up.
The catch is consumers only see savings if retailers pass them on and there seems to be no stipulation for them to do so.Eliminating tariffs in this country only means more profits to the big corporations
I wonder if Mr. Li factored in the use of artificial hormones used in US milk production, but not Canada? Obviously, giving dairy cows a hormone would boost production and lower costs. I prefer no artificial hormones in my dairy.
In a recent column by Ian Cummings in Ontario Farmer magazine, he mentions how the US manufacturer of BST delivered the Canadian supply to a farm in the US, I assume close to the US-Canada border. The Canadian farmer would then come to the US farm, pick up the Canadian supply, and personally import it to Canada. I assume that this Canadian farmer then sold the BST to his fellow Canadian farmers.
While that was a historic comment by Ian Cummings, is it still going on today?
In the real world of supply and demand you would have a choice to purchase milk free of hormone additives......
Please stop using petty excuses to defend an obsolete system that is only servicing a very small minority of millionaires.
I can't get over the fact that many Canadian dairy farms still only average 20 cows per family........and they can still afford robots to do the milking. Unreal.
Average herd size about 70 cows versus US national average herd size of 115.
Robots handle 50 cows each, no one has one for 20 cows!
US dairy farms use mainly Mexican labor-much cheaper than robots!
Less than 5% of farms as small as 20 cows.
Glad I could help!
Well we have been saying this for years ,even when we were dairy farmer here in Ontario we did not agree with price increases ! When I started our milk export business ,JUST ABOUT ALL DAIRY FARMERS WERE CONTRACTING MILK FOR 25.00 A HL AND MAKING MONEY so the ONTARIO GOVERNMENT HAD TO SHUT THAT DOWN FAST ! HOW CAN YOU JUSTIFY CHARGING TWICE THE PRICE ,BUT THAT IS SO YOU CAN HAVE QUOTA WORTH MILLIONS OF DOLLARS PAID FOR BY THE CANADIAN PEOPLE .THE FACT IS THAT ALOT OF CANADIANS SHOP IN THE U.S.A FOR THERE MILK AND CHICKEN NEEDS,THIS HAS CAUSED A REAL PROBLEM FOR THE HARPER GOV. I think the gov. knows it time to get rid of supply management and it's days are numbered ! BILL DENBY
1. Getting rid of supply management does not mean lower prices for the consumer. Look at the evidence from Australia & New Zealand.
2. Supply Management protects animal welfare.
3. Americans pay in taxes to support their farmers through their "farm bill".
4. Supply Management guarantees a safe quality and steady supply of food/milk for consumers.
5. People who scream about animal welfare and the "evils" of factory farms, then go looking for the cheapest milk and chicken they can find are the worst kind of hypocrites.
Look at all the facts. There's a reason for the $1.10 a day and its not just to enrich "fatcat millionaire" farmers.
No supply management would also mean an increase in herd size and total number of animals as per U.S. ! This would stimulate the demand for feed ingredients which would most likely increase the income of those farmers supplying those feed ingredients. One more reason why we are not all in this S.M. game together.
Without the SM bureaucracy there would be more smaller herds that would form co-operative cheese plants...maybe specialty milk products. Maybe the bottling plant in Wingham would re-open. There are lots of opportunities and entrepreneurs that are being smothered by SM.
You state 5 conclusions and offer only one anecdote to support these conclusions. Is that adequate "proof" for most people? For me, I would like more substantial, objective, unbiased evidence before I am prepared to accept your conclusions.
I will comment on your first assumption, that SM doesn't affect commodity prices. Others can comment on your other points.
I agree that doing away with, or modifying SM will not necessarily lower the price of those commodities in Canada. The world is complex, many factors interact to create the outcome. Not all economists agree why there are "sticky prices" (also called nominal rigidity, market inertia, or market friction).
Flexible pricing is the opposite of sticky prices. The most flexible pricing occurs when every trading opportunity is priced on a 1-off basis, without regard to any previous trades made.
As I understand it, to get price reductions, there has to be a free market, effective price discovery, without collusion by the major players, it has to be a competitive marketplace, and there needs to be an adequate slope on the price-volume supply curve. Without all of these and more factors, prices tend not to change.
One of the biggest drivers are competitors. If a competitor raises or lowers prices, other suppliers tend to follow the lead. Witness the wave of retail gas price changes that often occur once one gas station bites the bullet.
The second biggest factor is the slope of a supplier's price-volume curve. This means that there must be a significant difference to the total profits of the supplier if they are to go to the work and hassle of optimizing their price vs. volume factors (usually means low overhead cost suppliers are more motivated to change first in a competitive market).
There also must be low thresholds for new people to enter the marketplace. Without this, the veterans get sloppy and complacent over time, become less and less efficient over time, and don't take care of their customer's best interests.
Economists have found that price changes can occur second by second (ie. Chicago Board of Trade commodities), to as long as a 4 year cycle, but the median is around 1 year between price changes. For more info, see http://en.wikipedia.org/wiki/Nominal_rigidity and
To reach equilibrium, it usually take between 3 to 7 time constants to get over 90% of the resulting effect to have occurred.
We must therefore hold off in jumping to conclusions about price effects until 3 to 7 years have passed.
Someone who understands how the world works won't check the status every day on an acorn that they planted by digging it up, and giving up in seven days because nothing seems to have occurred as assumed. It takes longer, you must have patience.
Glenn Black
Small Flock Poultry Farmers of Canada
With all due respect to Al $400 is $400. Low income or not, better in my pocket than someone else's. Ask your self, how may supply management guys are driving around the back roads on expensive trucks and SUVs. LOTS. Let them compete like everyone else and have them get their hand out of my pocket!
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