Canada cowThe signing of the Trans-Pacific Partnership trade agreement has brought attention to one of the most overlooked facets of the Canadian economy – that is, the system of supply-management in dairy. It must have come as a surprise when the world was told that this mysterious system, as well as the few thousand Canadian farmers behind it, nearly held back one of the largest trade agreements of the 21st century. Now more than ever Canadians must be wondering what this system is, how it affects them, and why it has drawn the ire of foreign governments. What exactly is happening in the Canadian dairy industry? And what do Marxists propose to do about it?

800,000 litres of milk dumped

In order to answer these questions we first have to travel back a few months to when Canadian dairy farmers first re-emerged in the media. According to the Dairy Farmers of Ontario (DFO), a marketing group representing farmers in the dairy sector, 800,000 litres of skim milk were dumped into manure pits from late-May to mid-June. This is only a fraction of the 5.4 million litres of unsellable surplus milk produced in the same span of time. This was perfectly good milk that would have otherwise been sold to consumers or processed into things like cheese and yogurt. It was dumped, not because it was contaminated, but as a result of the economic forces at play in the Canadian dairy market. 

Dairy Farmers in Ontario were then experiencing the phenomenon of “oversupply”, where more is produced than can be absorbed by the demand in the market. Of course, "demand" in the bourgeois sense does not mean that people don’t need the product, but simply means that they cannot pay for it at the price proscribed by the seller. In essence, the milk is dumped because it is more in the interest of the seller to do that than to provide it to those in need. It is the logic of a fundamentally illogical system. 

The sheer scale of this wastefulness would be humorous, if it were not for the fact that oversupply is a chronic problem in the dairy industry, and that milk is being tossed away while human beings are suffering from malnutrition. Nothing so graphically expresses the insanity of the capitalist system.

What produced this supply crisis in the dairy market? DFO officials point to a number of factors, including the "unprecedented" demand for butter and cream, as well as the flat demand for fluid milk. These are all valid explanations. Skim milk is produced when the butter fat content of milk is removed, meaning that a high demand for butter would result in an excess of skim milk being produced. But this is not enough to explain why the skim milk was not sold, as there are clearly people in need of it. The DFO is able to cite the most immediate causes of the oversupply, but they conveniently overlook its most glaring cause: supply-management.

Under a hypothetical system of free trade, a glut in the supply of milk would be dealt with by lowering the price charged to consumers and processors. The reason for this is a lesson in Economics 101: when supply outweighs demand in the market, prices are reduced by means of competition between sellers to meet demand. This is what bourgeois economists would refer to as "equilibrium". The competitive reduction of prices thus ensure sales and the movement of inventory and stock.

The problem is that, under supply-management, prices are fixed and cannot be reduced to meet demand. This is because supply-management is a form of market control, and therefore not subject to the same laws of supply and demand. That means that when there is a periodic oversupply, farmers are left with no choice but to dump their remaining product. Despite its endemic wastefulness, most dairy farmers argue for keeping supply-management, if only because their livelihood depends on it. In the words of the Dairy Farmers of Canada (DFC), the system ensures that "dairy farmers get a fair return from the market, allowing farm families to make a living that is similar to average Canadian working families". 

With that in mind, it is not enough to simply decry supply-management and put blame on dairy farmers for defending it. It is necessary to consider the arguments in favor of the system, how it functions, and the alternatives being put forward to replace it.

Supply-Management and its Effects

Supply-management, in its current form, was introduced in the early 1970's to shelter dairy farmers from the volatility of the market, as well as to provide them with a fair income. It was this well-meaning system of protectionism that was to evolve into the one we find mired in controversy today. Over the years, the system grew to include egg and poultry farmers for similar reasons. As the name implies, the system is used to regulate Canada’s supply of dairy, as well as to shelter farmers from foreign competitors. This is achieved through a list of tariffs, quotas and fixed prices. Unsurprisingly, few people know that this regime of market control even exists, as it covers barely 6% of the Canadian farming population. Despite this, the system has immense implications for Canadian workers.

Maclean's Magazine, in a three part article on supply-management, explains the system in the following way: "The system is determined by supply, not demand...The price for milk paid to the producers is based not on the market but on the costs of production (as determined by the producers themselves). High protective tariffs prevent competition from outside, and production is controlled through a regulated quota system". This simple system of regulation, unimposing and well-intentioned though it may seem, is however fraught with two major problems - one of which, as mentioned, is oversupply.

The other, and arguably more longstanding, issue with supply-management is that it overcharges Canadian consumers when they purchase dairy, eggs or poultry. This is not just a minor inconvenience – the OECD estimates that Canadians pay an average of $2.6 billion more per year for dairy than what they would pay at the world market rate. This stems from the fact that it is the Canadian Dairy Commission, a crown corporation, and not the market that sets prices for consumers based on their production costs and “appropriate” rate of profit. Cheaper, foreign dairy products, which would have the effect of lowering prices through competition, are artificially kept out of the Canadian market with tariffs that can run up to 299%. Perhaps the most unnerving aspect of price fixing is that it is disproportionately harms low-income Canadians. As noted in the Globe and Mail:

“[Researchers at the University of Manitoba] found that supply management imposes a burden of $554 a year for the richest 20 per cent of households, representing 0.47 per cent of their incomes. The burden for the poorest quintile of households is $339 a year, which is lower in absolute terms but represents 2.29 per cent of their incomes. In relative terms, these policies therefore hurt poor households almost five times as much as rich households, making them heavily regressive. As for families with children, they are hurt 55 per cent more than childless households in absolute terms and 21 per cent more in relative terms”

For the poorest of Canadians, these added financial burdens can mean the difference between a nutritious diet, and one that is cheaper and unhealthier. This is criminal, knowing that there is so much milk that it is literally being tossed away.

Is “Free Trade” a Solution?

Supply-management has in recent years drawn the ire of bourgeois commentators, who rightly decry the system as wasteful and harmful to consumers. Headlines such as “Supply management must die” (National Post, June 27) and “Do away with soviet-style farming” (Toronto Sun, June 21) adequately convey the right wing’s distaste of the system. The solution, so they say, is simple: dismantle supply-management and force dairy producers to compete in the open market. Outside of the industry itself, this has more or less become the status quo. Proponents of the "free-trade" solution are legion, including in their ranks most major newspapers, business associations and academics. They say that dismantling supply-management would not only benefit consumers and processors, but also dairy farmers, who would be spurred on by competition in the open market and grow. If it weren’t for the boundless greed of farmers, they say, the “free-market” could have long since swept away the inefficiencies and inequity under the current system. But in arguing this position, they often underplay one vital piece of information: that foreign dairy markets, far from being “free”, are also in fact heavily protectionist.

In an October article for The Globe and Mail, columnist Brian McKenna draws attention to this fact:

“This year’s massive U.S. Farm Bill has set the world’s leading agricultural exporter on a course of ever-larger farm subsidies. These subsidies, including various crop insurance and profit guarantees programs, are conservatively estimated to be worth $1-trillion (U.S.) to farmers over the next decade by the Congressional Budget Office. Experts warn this will distort global trade because many of these subsidies are targeted at key U.S. exports, such as dairy products. Insurance automatically kicks in when prices fall or production slumps”

U.S. dairy producers, at times only a few trucking hours away from the Canadian market, pose possibly the greatest existential threat to Canadian dairy farmers. The U.S. would only need to increase its dairy production by a mere 10% to supply the entire Canadian market. This terrifies not only Canada’s small farms, but even the mega-farms, which are more than willing to lean on the state to keep foreign competition out.

As though this was not harrowing enough for Canadian farmers, they have other markets aside from the U.S. to worry about. The European Union and Japan, which with the U.S. comprise an overwhelming majority of trade with Canada, are also notorious for their heavily protectionist agricultural sectors. In fact, these three markets alone account for more than 80 per cent of the $300 billion spent annually on farm subsidies within the OECD (Globe and Mail, October 19, 2014). Needless to say, it would be naïve to neglect the role these competing markets play in sustaining supply-management in Canada. The system is in reality little more than a tit for tat response to protectionism in the global agricultural market. When one country erects trade barriers, it is a normal response under capitalism for other countries to follow suit and thus remain competitive and protect the home market. Without a guaranteed price, there can be no certainty that Canadian dairy farms wouldn’t face ruin in the open market. This is especially true for the smallest farms, which do not possess the economies of scale or are given as favorable loans as the corporate farms. Bourgeois farm bosses may fear their profits being cut into with the loss supply-management, but small farmers see their very livelihood at stake. They do not believe they could compete in an open market awash with foreign subsidies. In Australia, where supply-management was dismantled at the start of the century, many small farmers, as a result of competition and the process of monopolization, were forced out of the market and were in effect given no choice but to abandon their livelihoods indefinitely. More than 2,200 farms left the industry in just a three year span following deregulation there - a decline of 17% (Dairy Australia). The average farmer is well aware that what happened in Australia can happen in Canada - and they are not prepared to let that happen. For the small farmer, it is not so much a question of profit as it is a question of survival.

Dairy: A “Rich Closed Club”?

These are the repercussions of dismantlement that free-trade pundits choose to ignore. In fact, it is not all too uncommon for them to neglect small farmers altogether. The dairy industry is written off as a “rich closed club” (The Globe and Mail), and farmers are lumped together as a “wealthy” clique not worth defending at the expense of free trade (The National Post). How convenient! But do these accusations hold water under closer observation?

In all fairness, the number of dairy producers has dropped an incredible 91 percent in the past 40 years, from about 145,000 in 1971 to barely more than 12,000 today. Farms have likewise grown larger in size, with farmers growing wealthier in lockstep. Here we see the same process of monopolization that brought ruin to small Australian farmers occurring in Canada, albeit at a slower pace due to supply-management. The pundits often cite these facts to “prove” that the family farm has become obsolete – but there is more to the story than they would have us believe. According to Statistics Canada, the average income for a dairy farm operator stood at $94,460 in 2013. This figure drops dramatically to $61,253 when capital costs, such as land and machinery, are factored in to the equation. At $61,253 the income for a dairy farm operator is actually below the median income for Canadian families, which sat at $76,550 in 2013. Needless to say, no yachts are afforded on a dairy farmer’s salary. One farmer writing in The Globe and Mail had this to say:  “One guy once told me that your range [salary] should always be the price of a Corvette, which usually runs in the $50,000 to $60,000 range, which is where we try to find ourselves to cover the food on our table and the roof on our heads”. The figure of $61,253 is also only the average figure for income. The dairy industry is made up of farms both big and small, with operations running from a handful of cows to over 3000. This implies that while there are farmers that earn significantly more than the average income, there are also many more who earn the average or far less. A small farmer’s working hours do not necessarily afford leisure, either. It is not uncommon for one to work 10 hours a day or more, seven days a week, performing chores that are both physically and mentally demanding. If this is what a “rich club” looked like, all of Canada would be Beverly Hills. Clearly this is not the case.

The picture that emerges, therefore, is far from fitting into the label of a “rich closed club”. Supply-management does indeed feed the profits of wealthy dairy farmers at the expense of consumers, but it also sustains family farms which would languish without it. Ironically, it would likely be the same “wealthy farmers” the pundits decry who benefit from an open market policy. While it is true that monopolization continues even under supply-management, the process is significantly delayed and can at least give small farmers the prospect that they will keep their farms. An open-market policy, as with Australia, leaves no question of their rapid eradication. As Marxists, our sympathy is held by the thousands of laborers employed on large farms, as well as the small farmer who is under constant threat of ruin by forces beyond their control. Any real solution must provide not only for consumers, but for these working men and women of the dairy industry as well.

The Quota Conundrum

The free-trade pundits go on to say that “free-trade” need not be so disastrous for farmers, provided that they are fairly compensated. This would almost certainly require the Canadian government to buy back the entire quota purchased by farmers since the system's inception in the early 1970's. But what does it mean to buy back quota? And why would this be necessary? 

An integral part of the supply-management system, quota was established to regulate the levels of production in the dairy industry. It does this by issuing licenses to farmers, giving them the right to sell a prescribed volume of milk in Canada. Initially distributed to farmers at no charge, today it costs around $30,000 just to make use of one cow and acquire a starting quota. Considering that the average dairy farm has 77 cows, the result has left a significant portion of farmers' assets becoming bound up in quota charges alone. Herein rests the problem: without supply-management, quota ceases to exist; and without quota these assets are rendered worthless. A recent article in the Globe and Mail notes that “once the tariffs are removed, the price received by our farmers will drop to U.S. price levels, and the value of quota will disappear – hence the need for immediate compensation and transition assistance”. Without compensation, it would be like walking into the bank one morning to discover that all of your life savings had vanished overnight. This is not only cruel towards small farmers, but disastrous for the industry at large. Farms of all sizes would be saddled by debt obligations they could no longer fulfill, driving a great deal of them into bankruptcy. Clearly, there would be no option but to buy out the quota – but this is easier said than done.

Firstly, there exists no consensus among bourgeois analysts as to the cost of buying out the quota from farmers. The earlier cited Globe and Mail article goes on to explain:

“The big question is how to value quota. Some suggest using full market value, currently about $23-billion for all of dairy, based on current average quota value of about $30,000 a cow. Yet many farmers were allocated quota for free or at little cost decades ago, whereas new entrants have paid dearly. The Conference Board of Canada has suggested using book value, which it estimates for dairy as being somewhere between $3.6-billion and $4.7-billion. The actual number would likely be somewhere in between, to address historical differences, interfamily transfers, use of quota as collateral for borrowing and other factors”

Secondly, even if we take the most conservative estimate of $3.6 billion, it is difficult to fathom how the government would conjure up this huge sum of money. The Conservatives have long since made clear that austerity is the order of the day, and the buying out of a multi-billion dollar quota would conflict with that agenda. The Conservatives may from time to time eke out financial support for large corporations, but that they would do the same for small farmers is slim to none. Most free-trade pundits have come to this same conclusion, meaning that they have been forced to get cleverer with their “solutions”. Bereft of any ideas of their own, a good number of them have taken to appropriating Australia’s model of deregulation.

As we have already mentioned, Australia dismantled its own supply-management system for dairy in the early 2000’s. Although thousands of small farmers were driven from the industry indefinitely, the quota there was bought out without the government raising taxes. How is this possible? Rather than collect new money through taxation, the Australian government imposed a $0.11 levy on milk for eight years, by which time enough was made to buy out the quota. The “free-trade” camp heralds this as the answer to all of our problems, when in reality it is not. As was explained earlier, overpriced dairy hurts working Canadians even more than taxation, due to its regressive nature. And under this proposal, consumers could very well be paying more for those eight years than they are now. In a scenario where the full market value of the quota - $23 billion – is used, consumers would be left on the hook for an additional $2.875 billion each year for the span of eight years. This is even higher than what the OECD estimates Canadians are paying for dairy now. While it is true that prices may decline after the eight years, it would come at the expense of short to medium term pain for consumers, and irreparable pain for small farmers. The chief beneficiary of this proposal would again be the wealthiest farms, as they would likely gobble up the smaller farms ruined by the open market.

In short, this “solution” does not prevent small farmers from being driven from the industry, does not provide them with “immediate compensation”, still overcharges consumers for a period lasting years, provides no certainty to Canadians in its outcome, and only really benefits the largest corporate farms. It is the substitution of one problem with another. In reality, it is no solution at all.

Supply-Management vs. TPP

With the conclusion of the TPP negotiations, the fate of supply-management is up in the air. Foreign dairy producers have now been granted access to 3.25% of the Canadian dairy market, which is a far cry from the zero per cent access that farmers were demanding. While the pillars of supply-management may remain intact, the dynamic of the market has now fundamentally shifted against small farmers. In the words of one Quebec dairy farmer quoted in The Globe and Mail: “we avoided disaster but this is going to hurt”. Eager to allay the fears of disaffected dairy farmers, the Conservatives soon after unveiled a financial package meant to compensate farmers’ coming losses. An Ottawa Citizen article explains:

“To compensate Canadian dairy and poultry farmers for potential financial losses from the deal, the government is promising to invest $4.3 billion over the next 15 years in new income- and quota guarantees, and other programs to keep dairy and poultry farmers ‘financially whole.’”

This however brings forward a whole series of questions, such as what will happen after the 15 years expires, and whether or not this will fully compensate farmers’ lost income. Bertrand Montel, an independent agricultural consultant also writing in The Globe and Mail, elaborates further:

“I can’t help but think [the compensation package] is a transition fund in disguise to phase out supply management in 10 or 15 years. I think the intention is to make a strong incentive for small inefficient dairy farms to exit. They will know they can exit with a guarantee on the quota value. I don’t think the income support will be enough to maintain a small farm, so at one point they will just do the math and say it is better to exit now. I would say in two to three years, we will see the exit rate of dairy farmers increasing, especially in Quebec.”

The Harper government would like dairy farmers to believe that he has their best interests at heart, but what reason do they have to trust him? From election fraud to senate expenses, this is a party with deceit flowing out of every one of its pores. Commitments are far easier made than fulfilled, particularly during an election period. We shouldn’t forget how these “friends” of dairy farmers were also the “friends” of wheat farmers; that is, until the Conservatives purged the Canadian Wheat Board of farmer-elected directors in 2011 and then proceeded to privatize it. As the old saying goes - with friends like these, who needs enemies?

Faced with the choice between the TPP and the status quo, we position ourselves against the former. As Marxists, we believe that the livelihoods of small farmers should be put ahead of the profits of the large capitalists. At the same time, we are not blind to the repercussions of supply-management, which overcharges Canadian consumers and produces wastefulness. How can we possibly balance the interests of small, hardworking Canadian farmers and the broader working class? It may seem to be a contradiction, but only because capitalism is a contradictory system. For this reason we require a socialist approach.

One Solution: Revolution

In reality, protectionism and free-trade are just two sides of the same coin. Neither are a solution. Retaining supply-management will mean retaining its wastefulness and adverse effect on consumers. Removing it is tantamount to decimating the family farm and relinquishing power to corporations. Wherever the dairy industry may be heading, it can give no solace to working people within the narrow confines of capitalism. What is required is no less than a break from the anarchy of the market system, and the establishment of a socialist plan of production in dairy, which would look as follows:

The large corporate farms would be nationalized, and put under the democratic control of the labourers who work them.  This would serve as a stepping stone towards co-ordination of the economy on a national level, run along the lines of a rational and collective plan. The wealth of the large dairy capitalists, as with other large capitalists, could then be invested to create jobs, fund social programs, strengthen pensions, and so on and so forth. This blanket approach, however, cannot be applied in the same way for small farmers. Marxists are not in the business of evicting small farm owners from their properties, some of which have been held by families for generations. Many small farmers would voluntarily enter into a planned economy, but there are others who would not. These farmers should be able to retain ownership of their property if they so choose. What we would do is explain the benefits to amalgamating agriculture, such as increasing the level of productivity to reduce the working day. When and if they do decide to make the transition, the state should supply the necessary resources to help facilitate it. In the meantime, a nationalized state bank would be used to provide low-interest loans to the small farmers, who would also continue to be guaranteed a stable income. It is an absolute necessity that the farmers’ associations play a role in determining these rates. Another requirement would be for labourers on small farms to be paid at a rate equal to that of the nationalized dairy sector, which should in turn resemble the prevailing union wage. These conditions not only benefit every working person – whether a small farm owner or labourer - but significantly improves the quality of life for each of them. Given this stability, dairy products could then be sold to consumers at a more affordable rate than is currently the case.

Small farmers have no trusted friend in Stephen Harper, but in the working class they find a natural ally. Each is slowly worn down by the capitalist crisis, and each has no hope for reprieve but under socialism. Only under a rationally planned economy will farmers and workers for the first time become the real masters of their house - free at last to democratically control forces which had hitherto controlled them. There is no road left to take under the market system, whether protectionist or free trade. We could say that rather than the absurdity of dumping milk, the only thing that should be destined for a pile of manure is capitalism.

[Photo by Axel Drainville]