New increase in the price of milk – Canada should follow the example of Australia and reform its supply management system

Montreal, January 27, 2006 – Even though the WTO talks in December gave Canada’s dairy supply management system a respite, the system will have to be reformed sooner or later and the Montreal Economic Institute (MEI) is urging the government to follow the Australian example, eliminating milk support prices and production quotas.

“With the milk price rise taking effect on February 1, the price calculation method used by the Canadian Dairy Commission expires and will have to be modified,” the MEI’s January Economic Note states. “The time is ripe to consider a more fundamental reform of supply management in the dairy industry, similar to what Australia did in 2000.”

MEI research director Valentin Petkantchin, the author of the study, has anticipated – and is challenging – the objections to this type of reform in Canada.

“The argument heard most often from defenders of supply management is that, even if prices go down at the farm gate, this reduction would penalize dairy producers without benefiting consumers because processors and retailers would increase their margins. This fear is unfounded.”

Following the Australian reform, retail prices for fluid milk dropped considerably. Taking account of inflation and not counting a new 11-cent-a-litre tax, the decrease was 18% for brand-name milk and 29% for “no-name” milk. According to estimates from the Australian Competition and Consumer Commission, savings to Australian consumers on milk purchased in supermarkets are Aus$118 million annually.

The impact on dairy producers

Milk production did not vanish from Australia following the supply management reform, and Valentin Petkantchin is not very anxious about the fate of Canadian dairy producers who would be affected by an eventual reform in Canada.

“Australian dairy producers acted quickly to make up for the loss of income resulting from the elimination of support prices. For example, 45% of producers expanded their herds and 27% boosted their non-agricultural revenues, while others enlarged their farms, modernized their equipment or developed other areas of agricultural production.”

If the Australian reform were to serve as an example for Canada, producers here could benefit from transition assistance programs. In Australia, the programs established when support prices were eliminated came to more than Aus$1.75 billion and are financed by a temporary tax on retail sales of fluid milk.

This Economic Note, titled Reforming dairy supply management in Canada: The Australian example, is available on the Institute Website.

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Information and interview requests: Patrick Leblanc, Director of communications, Montreal Economic Institute, Tel.: (514) 273-0969 / E-mail: pleblanc@iedm.org