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28 August 2012August 28, 2012

The Negative Consequences of Agricultural Marketing Boards

Research Paper on the economic impact of agricultural marketing boards

The Negative Consequences of Agricultural Marketing Boards

In order to promote a change of agricultural policy, we briefly review the cases of countries that have abolished or are in the process of abolishing quota systems: the buyback and abandonment of milk quotas in Australia, of tobacco and peanut quotas in the United States, the elimination of milk quotas in Switzerland and the beginnings of a process of abandonment of milk quotas in Europe. Canada could follow these examples by abandoning mandatory membership in marketing boards and by imposing a temporary tax to buy back farming quotas. These are necessary conditions to realizing the competitive potential of our agri-food sector, fostering agricultural entrepreneurship and thereby allowing it to contribute to the prosperity of the country.

Media release :: Agricultural marketing boards and supply management are costly... for producers

 

Links of interest

   
Les agriculteurs pénalisés par la gestion de l'offre, affirme l'Institut économique de Montréal (LesAffaires.com, August 29, 2012)

Marketing boards failing farmers, study argues (The Globe and Mail, August 28, 2012)

Group says farmers and consumers 'shackled' by agricultural marketing boards (The Canadian Press, August, 28 2012)
      Interview with Mario Dumais (Sun TV, August 28, 2012)

 



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A marketing board is an organization that holds a monopoly on the marketing of agricultural products, which means that producers must sell their production to the appropriate board or must follow the rules imposed by the board when selling it. Some marketing boards also have the responsability of supply management, fixing in advance how much of the agricultural commodity under its jurisdiction will be produced, in effect constraining supply and raising prices.

The objectives of the agricultural policies that are widely considered to have given rise to the marketing boards are:
 to create the conditions for farm families to have income levels comparable to those of other families;
 to increase farm income;
 to stabilize farm income;
 to preserve family farms.

Regarding the first objective, the average income for farm families who own non-incorporated farms was $100,053 in 2009 compared to $72,400 for all families. But if their incomes are higher, it is because of off-farm income, which represents 77% of their total revenues and not the result of marketing boards.

As for the second objective, to increase farm income, the marketing boards that do not have supply management powers have not managed to raise prices significantly higher than those that prevail in other markets, despite their monopoly. In the case of marketing boards equipped with the responsibility of managing supply, the objective of raising and stabilizing the prices received by farmers seems at first glance to have been achieved. Yet, high farm prices are not synonymous with high farm incomes. In any new production under supply management, higher income stemming from higher prices can only be obtained through buying production quotas. In practice, there is a capitalization of these benefits in the price of quotas, their high prices reflecting what producers expect to earn as extra profits.

Higher farm incomes are therefore misleading since they do not take into account the value of the quotas. Higher farm incomes have not been achieved, but is it even a relevant objective? The goal of increasing farm income also suffers from a measurement problem. The current profitability of farming activities is not the only relevant factor. Farmers also take into consideration the growth of the value of the assets in their possession. The rising value of assets is a result of either appreciation or reinvestment by farmers. Both asset appreciation and reinvestment have caused the average net worth of agricultural businesses to grow by more than $635,000 over 16 years, or about $40,000 per year. In other words, marketing boards didn't achieve their stated objective of increasing farm income, even with supply management. But the objective appears even less relevant in view of the rising value of assets.

With respect to the third objective, stabilizing farm income, marketing boards with supply management powers have succeeded in this regard better than the others, but only by forcing consumers of agricultural products to bear the cost of this stability. Also, when governments themselves take on the responsibility of stabilizing the incomes of agricultural producers, farmers no longer feel responsible for adopting measures by themselves, such as diversifying their production, purchasing financial derivatives to partially guarantee future market prices, or forming contractual partnerships with processors or suppliers. Moreover, other industries such as newsprint paper, mining or tourism are also risky but do not enjoy comparable policy protection.

As for the fourth and last objective, since the introduction of supply management, 91% of dairy farms have disappeared and so did 93% of poultry farms. The same kind of observation can also be made in sectors with marketing boards that are not responsible for supply management. For example, a reduction of 94% is found in the number of hog farms. The decline in the number of farms is happening in all developed countries.

Measuring "transfers from consumers to producers" created by current agricultural policy in Canada, the OECD calculated an average of $3.9 billion per year from 2008 to 2010. In addition to this cost for the consumers, other costs are borne by other links in the agricultural sector. Notably, marketing boards generates complexities that hinder adaptation and innovation.

If an agricultural policy does not produce the results it was designed to produce, and furthermore costs taxpayers and consumers billions of dollars, one should expect that it would be abandoned and replaced.

In order to promote a change of agricultural policy, we briefly review the cases of countries that have abolished or are in the process of abolishing quota systems: the buyback and abandonment of milk quotas in Australia, of tobacco and peanut quotas in the United States, the elimination of milk quotas in Switzerland and the beginnings of a process of abandonment of milk quotas in Europe. Canada could follow these examples by abandoning mandatory membership in marketing boards and by imposing a temporary tax to buy back farming quotas. These are necessary conditions to realizing the competitive potential of our agri-food sector, fostering agricultural entrepreneurship and thereby allowing it to contribute to the prosperity of the country.

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