Food Subsidies and Canada

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Food Subsidies and Canada
By Oleg Nekrassovski
The present paper will strive to show that food subsidies in Canada, as well as in other
industrialized countries, subvert the free market economy for agricultural produce, and
consequently harm consumers through greatly increased prices; while greatly harming the
producers of the same products in the developing world, and negatively influencing Canada’s
relationship with other countries. In the course of this exposition, Canadian dairy industry will be
used as a case study, which will show that Canadian food subsidies are a result of provincial and
federal attempts to control food production in response to the selfish lobbying by Canadian food
producers.
This paper will start with an introduction to food subsidies through a discussion of their
global consequences. It will then give a rigorous definition of the ‘subsidy’ concept. The main
part of the paper, however, will consist of a detailed description of subsidies in the Canadian
agriculture (especially the dairy industry), focusing especially on how these subsidies came to
be. Finally, the paper will conclude with a look at agricultural (especially dairy) trade relations
between Canada and the United States.
Even though the developed countries appear to be very concerned about the welfare of
people in the developing countries, some of their economic policies achieve the exact opposite.
The provision of subsidies to farmers of the developed countries, especially Canada, Japan, the
US, and the EU, is particularly noteworthy in this respect.
Unlike in the developed world, agriculture is the main part of the economy for many
developing counties, with agricultural exports being the main generators of their export revenues.

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In sub-Saharan Africa, for example, about 70% of the labour force works in the agricultural
sector (Mshomba, 2002).
However, while developing countries tax their farmers, like members of all other
occupations, developed countries subsidize their domestic farmers. Such farming subsidies
greatly increase the amount of produce that the farmers of the developed countries are willing to
export (Mshomba, 2002). Increase in agricultural exports from the developed world, increases
the supply of agricultural produce on the world market, causing its equilibrium price to drop. A
decrease in the world prices of agricultural products decreases the incomes of farmers in the
developing world (Mshomba, 2002).
World Bank, for example, has found that West Africa’s revenue from cotton exports is
reduced by US subsidies by about $250 million a year (Mshomba, 2002). An even more
interesting example is that of the EU; because in order to maximize its profit, the EU (like
everyone else with the same goal) should follow the principle of comparative advantage; which
in the case of agriculture would dictate that the EU become a net importer of many agricultural
products. Instead the EU forms the world’s second largest exporter of agricultural products
(Mshomba, 2002).
To add insult to injury, the total amount of money given annually to the farmers of the
developed world, as subsidies, is about $250 billion; and according to UN estimates only $10
billion is needed (but unavailable) annually to combat the worldwide HIV/AIDS epidemic
(Mshomba, 2002). While an overwhelming majority of HIV carriers and AIDS sufferers live in
the developing world.

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In general, any government policies that aid one or more industries, and tend to result in a
financial benefit to those industries, are known as subsidies. Thus, the spectrum of possible
definitions of the term ‘subsidy’ is fairly extensive, and ranges from those that focus on direct
government expenditures on a private firm, to those which consider pertinent governmental
policies and their effect on a firm’s anticipated profits (Schrank, 2003).
So when it comes to Canadian dairy industry, the subsidies take the form of what is
called supply management. Canadian supply management of the dairy industry primarily seeks to
achieve a target (high) price for Canadian dairy products. It does so through complex regulations
aimed primarily at restricting the supply of milk (Lippert, 2001). Industrial milk used for
processed products such as cheese and butter is governed by federal regulations. While fluid or
table milk is governed by provincial regulations (Lippert, 2001).
Canadian dairy supply management system consists of four parts, which are: (1) controls
of domestic production and marketing, (2) administration of pricing, (3) governmental payments
directly to producers, and (4) controls of import (Lippert, 2001). This supply management
system is a result of decades of provincial and federal attempts to control agricultural markets;
which in turn were a result of dairy producers putting pressure on the provincial and federal
governments. However, there is no reason to believe that the federal government always sided
with dairy producers, or that the demands of dairy producers did not meet any challenge from
other participants in the dairy industry (Lippert, 2001).
In 1927, the BC Produce Marketing Act, and in 1929, the Dairy Relief Act, were
successfully passed by the BC legislature. The purpose of these Acts was to set and equalize the
prices asked by different producers (Lippert, 2001). However, the federal government did not

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like these legislations, believing that they violated the constitution and would adversely affect the
economic welfare of the whole country. So it soon overturned them both in the Supreme Court
(Lippert, 2001).
In spite of that, the early 1930s saw the federal government sufficiently concerned about
the depression in agricultural markets to appoint a temporary Royal Commission on Price
Spreads in 1934. The Commission concluded that the contemporary depression in agricultural
markets was, strangely enough, not a result of the Great Depression, but of weak marketing
conditions and unfair business moves on the part of secondary processors who engaged in
monopolistic practices (Lippert, 2001). So the Commission recommended to milk producers to
counteract the processors’ monopoly by creating their own monopoly on milk production. The
federal government did not wait long to act on this suggestion and quickly passed the National
Products Marketing Act in 1934. This Act created the Dominion Marketing Board, which
quickly gave rise to provincial sub-boards (Lippert, 2001).
Owing to Canadian democracy, however, the Board, together with its sub-boards, lived
for only a year. In 1935, the food processors took the issue of federally created monopoly on
primary food production to the Supreme Court; which subsequently ruled that the federal
government could prevent restrictions to inter-provincial trade, but it had no right to regulate
such a trade. So the Dominion Marketing Board, together with its sub-boards, had to be
dismantled (Lippert, 2001).
In 1936, British Columbia’s legislature passed the Natural Products Act. This Act stated
that as long as the local producer boards did not restrict inter-provincial trade, they were free to
set and enforce provincial production levels and prices (Lippert, 2001). An attempt to overturn

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this Act through the courts, failed, and it became a model for empowering similar producer
boards that did not exist in 1936 but were already in place before the start of WWII (Lippert,
2001).
WWII, it seems, gave the federal government a good pretext to intervene in agricultural
markets, yet again. The federal government claimed that in order to assist the war effort, it is
necessary to bring stability to farm production. To this end, it made various efforts to limit
imports, support prices, and export surplus products (Lippert, 2001).
The end of the war did not bring an end to federal government’s interference with
agricultural markets. On the contrary, 1949 saw the passing of the Agricultural Products Act,
which allowed the import and export of agricultural products to be restricted by the provincial
marketing boards; hence allowing for inter-provincial trade to be restricted for the first time
(Lippert, 2001).
The resultant independent, uncoordinated actions on the part of provincial marketing
boards caused Ottawa to interfere again. So it set up the Agricultural Stabilization Board (ASB)
in 1958. This however was not sufficient to satisfy the provincial milk boards and their producer
members, who were concerned about the increasing competition between provinces and between
dairy producers inside each province (Lippert, 2001). They argued that in order to produce an
“orderly” national market, ASB needs to have the power to influence provincial policies and to
control inter-provincial trade and national milk production (Lippert, 2001).
The federal government soon started to work on accommodating these demands; an effort
which culminated in the establishment of the Canadian Dairy Commission (CDC) in 1965. The
administration of the federal subsidy and price support programs, which were already in

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existence, for cream, cheese, skim milk powder, butter, and industrial milk, fell to the CDC; as
did the dairy export program. In particular, milk powder and cheese were sold to CDC by the
provincial boards. The CDC, in turn, then sold these products to other countries (Lippert, 2001).
The establishment of CDC, however, did not accomplish much of what was desired by
the milk marketing boards and their producer members. The provincial boards had limited
influence on milk supply and prices; an influence which could only be increased through a
substantial enforcement at the federal level (Lippert, 2001). For example, the provincial milk
boards set production quotas in their provinces. The producers, however, could still produce
above these quotas by forfeiting federal subsidies on any over-quota milk that they produced.
And apparently it was worth it, as over-quota production remained common and led to milk
surpluses. Consequently, the plans of a milk board in one province were frequently upset by the
milk boards of other provinces who disposed of milk surpluses in their provinces by selling them
to milk processors in other provinces (Lippert, 2001).
Hence, the provinces wanted to control inter-provincial milk sales and needed federal
assistance to achieve it. Consequently, after lengthy negotiations with Ontario and Quebec, the
federal government set up the Canadian Milk Supply Management Committee (CMSMC) in
1970. Ontario and Quebec became CMSMC’s first members, with nearly all the other provinces
joining by 1975 (Lippert, 2001). The exception was Newfoundland, which finally joined in 2001.
At its inception, CMSMC had a specific plan for a federal milk supply management system,
which has changed little since, and is what we have in operation today (Lippert, 2001).
Even though NAFTA was supposed to eliminate barriers to free trade across the North
American continent, it was actually structured in such a way as to give international legal force

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to many protectionist practices. Thus, by NAFTA, Canada has the right (which it never fails to
exercise) to maintain permanent restrictions on imports of dairy, eggs, and poultry from the US.
In turn, NAFTA allows the United States to maintain restrictions on imports of dairy, among
other products, from Canada (Burfisher et al., 1998).
Also, Canada wasn’t going to stop its dairy export subsidies, despite giving an implied
agreement to do so by signing NAFTA. Such behavior on the part of Canada greatly irritated the
United States, which as a result, in 1997, complained about it to the WTO, and in 1998 asked the
WTO to investigate Canada’s dairy support program (Burfisher et al., 1998).

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References
Burfisher, M. E., Robinson, S., & Thierfelder, K. (1998). Farm policy reforms and
harmonization in the NAFTA. In M. E. Burfisher, & E. A. Jones (Eds.), Regional trade
agreements and U.S. agriculture (pp. 66-74). Agricultural Economics Report No. 771.
Washington, DC: Market and Trade Economics Division, Economic Research Service,
U.S. Department of Agriculture. Retrieved from
http://www.ers.usda.gov/publications/aer771/
Lippert, O. (2001). The perfect food in a perfect mess: The cost of milk in Canada. Public Policy
Sources. No. 52. Vancouver: The Fraser Institute. Retrieved from
http://oldfraser.lexi.net/publications/pps/53/PPS52-milk.pdf
Mshomba, R. (2002). How Northern subsidies hurt Africa. Africa Recovery, 16(2-3), 29.
Retrieved from http://www.un.org/ecosocdev/geninfo/afrec/vol16no2/162agric.htm
Schrank, W.E. (2003). Introducing fisheries subsidies. FAO Fisheries Technical Paper. No. 437.
Rome: FAO. Retrieved from ftp://ftp.fao.org/docrep/fao/006/y4647e/Y4647e00.pdf

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