Montreal, March 14, 2007 – The government should not increase public assistance to the pork sector but instead should encourage the industry to reorganize itself so as to raise productivity. In an Economic Note released today by the Montreal Economic Institute, associate researcher Éric Grenon states that “reform is made necessary by the high and recurrent costs to taxpayers of aid to pork producers and by the serious deficiencies in the aid models that are applied.”
An industry in crisis
In recent months, major problems in the Quebec pork industry have been making headlines. Many causes can explain this crisis, especially the higher Canadian dollar, industry cycles, increased rates of illness, a lack of competitiveness among slaughterhouses, environmental standards, and so on.
Against a background of greater worldwide competition and market integration in the North American pork industry, the production, slaughter and processing of pork products in Quebec is under threat, in particular by the U.S. industry that has made use of the last 20 years to consolidate and restructure.
A commission on the future of Quebec agriculture and agri-food, now starting a consultation tour, should be looking into the effectiveness of current public involvement in upholding and protecting farm income. The commission should ask if it is worth maintaining the Farm Income Stabilization Insurance program (known by the French acronym ASRA). With twice Ontario’s subsidy level, Quebec is among the provinces with the most heavily subsidized agriculture and agri-food sectors.
The Farm Income Stabilization Insurance program
ASRA seeks to guarantee a positive net annual income to Quebec farm businesses. Seen as a pillar of the Quebec model in agriculture, the program was established in 1978 as an insurance policy against market risks. The pork industry receives substantial financial support from governments. From 1978 to 2006, total compensation paid through ASRA to the pork sector reached $1.84 billion. In the last 10 years, subsidies came to an average of $96 million per year. In the 29 years the program has existed, there have been only eight years without subsidies to the pork industry.
The program’s weaknesses
The industry’s difficulties are due more to structural than to cyclical factors. ASRA also makes the pork sector more fragile by keeping it from adapting to market realities. Its insurance mechanism guarantees all pork producers that they will be compensated for the difference between the market price and production costs, calculated using a theoretical model. Producers thus have less incentive to cut costs, to observe market signals and to remain competitive on domestic and export markets.
ASRA impairs efforts to raise productivity and efficiency, helping maintain high production costs compared to competitors. It holds back industry consolidation by keeping unprofitable farms in business, with viability and business performance not among the eligibility criteria for the main programs.
Another weakness of ASRA is that it calculates total compensation based on a theoretical model of a specialized farm. Since the 1990s, the Quebec auditor general has questioned the effectiveness and performance of programs based on this sort of production cost estimate. It was shown that taxpayers are contributing millions of dollars too much to producers because of these models. The auditor general has also challenged the updating of these models of specialized farm and has cast doubt as to whether they are representative.
The challenges of the pork industry
The competitiveness of the Quebec pork industry is fragile and is threatened by growing worldwide competition, both from traditional commercial rivals such as the United States and from emerging countries such as Brazil. ASRA has major flaws that get in the way of building a pork industry that can run profitably on a stable basis and be truly competitive in the long term on foreign markets.
The Economic Note, titled The stabilization insurance program and the crisis in the pork industry, was prepared by economist Éric Grenon, M. Sc., MBA, an independent consultant and associate researcher with the Montreal Economic Institute. The Note is available on the Institute’s Website.
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