Milked and Feathered The Regressive Welfare Effects of Canadas Supply - - PowerPoint PPT Presentation

Milked and Feathered

The Regressive Welfare Effects of Canada’s Supply Management Regime†

Ryan Cardwell, Chad Lawley, and Di Xiang

3/10/2020 12

Outline

Milked and Feathered

1. Overview of Canadian supply management (SM) 2. Pressures on SM 3. Modelling consumer behaviour 4. The market without SM 5. Results 6. Discussion

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• 1. Overview of Canadian Supply Management

Milked and Feathered

Dairy, poultry (chicken, turkey, eggs) Three “pillars” 1. Production controls (quotas) $25,000 kg/b.f./day (MB, January 2017) $2,500,000 quota value per farm (MB, dairy average) 2. Cost-of-production pricing Producers receive administered wholesale price based on COP formula from provincial marketing boards

S Q P PE QE D PSM QSM

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• 1. Overview of Canadian Supply Management

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Three “pillars”

• 3. Import controls

Import quotas → Tariff-rate quotas (TRQs)

• Barichello, et al. (2009)

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• 1. Overview of Canadian Supply Management

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High and “stable” prices

• SM producers don’t typically receive Government subsidies provided to other agricultural producers

* though this does not mean that SM does not “cost” anything

• Statistics Canada, Bureau of Labor Statistics

0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40

Retail Price (whole milk, C$/litre)

Canada US

𝜏 = 0.38 𝜏 = 0.10

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• 2. Pressures on Supply Management

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1. External – trading partners seeking access to Canadian dairy and poultry markets (CETA, CPTPP, WTO) 2. Internal

• a. food manufacturers, restaurants
• b. constrained growth/missed export opportunities
• c. Hollywood!

http://www.imdb.com/title/tt2670998/

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• 2. Pressures on Supply Management

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3. Distributional (regressive) effects on consumers

• a. regressive income transfer from large group of low-income households to small group of high-income

households, on average

• Statistics Canada

20,000 40,000 60,000 80,000 100,000 120,000

Average annual income ($), 2013

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000

Average net worth ($)

13,000,000 households 7,000 dairy farms 1,600 poultry farms Canada average Dairy Farms Poultry Farms Canada average Dairy Farms Poultry Farms

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• 2. Pressures on Supply Management

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3. Distributional (regressive) effects on consumers

• b. Engel’s Law

A government policy that increases the price of food imposes a relatively larger burden on households at the bottom of the income distribution SM is therefore a regressive policy – but how regressive?

Income Quintile (Mean Income)

• FES, authors’ calculations

5 10 15 20 25 30 1 ($14,788) 2 ($33,707) 3 ($44,219) 4 ($59,952) 5 ($118,189)

Food Expenditure Share (%)

children no children

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• 3. Data & Model

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Statistics Canada Food Expenditure Survey

• food expenditure diaries (home and away*) with submitted receipts
• 5,643 households
• Regional variation, urban/rural, demographic variation
• Income, demographics, consumption volumes & expenditures
• 247 food categories
• Aggregated into 19 separable food groups

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• 3. Data & Model

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Food Expenditure Survey

Summary Statistics of households with nonzero dairy consumption Aggregate Income Quintile Variable 1 2 3 4 5 (obs=4718) (obs=973) (obs=997) (obs=998) (obs=833) (obs=917) Mean Mean Mean Mean Mean Mean (s.d) (s.d) (s.d) (s.d) (s.d) (s.d) Prices ($/kg): Cheese 10.926 10.418 10.743 10.859 10.952 11.714 (3.516) (3.104) (3.702) (3.159) (3.508) (3.943) Fresh Yogurt 4.232 4.269 4.25 4.156 4.246 4.242 (1.12) (1.007) (1.09) (1.009) (1.284) (1.215) Fluid Milk 1.158 1.174 1.151 1.168 1.126 1.166 (0.321) (0.303) (0.284) (0.291) (0.354) (0.369) Butter 6.835 6.751 6.739 6.852 6.869 6.977 (0.885) (0.833) (0.829) (0.823) (0.804) (1.088) Ice Cream & Frozen Yogurt 5.497 5.276 5.373 5.441 5.618 5.817 (3.111) (2.6) (2.699) (3.071) (3.872) (3.268) Budget shares: Cheese 0.348 0.298 0.325 0.355 0.377 0.39 (0.285) (0.301) (0.277) (0.286) (0.263) (0.284) Fresh Yogurt 0.085 0.071 0.082 0.087 0.086 0.099 (0.156) (0.152) (0.16) (0.163) (0.141) (0.159) Fluid Milk 0 .421 0.489 0.438 0.41 0.391 0.37 (0.305) (0.343) (0.295) (0.307) (0.271) (0.285) Butter 0.065 0.058 0.075 0.066 0.062 0.063 (0.146) (0.141) (0.165) (0.152) (0.136) (0.132) Ice Cream & Frozen Yogurt 0.081 0.084 0.08 0.082 0.084 0.078 (0.163) (0.178) (0.167) (0.169) (0.15) (0.149) Household Income($) 40,232.12 10,348.93 24,144.43 36,552.61 61,710.18 73,925.35 26,764.83 6,063.04 8,272.00 14,434.95 18,872.59 14,973.30 Households with children 0.328 0.375 0.304 0.319 0.418 0.232 (0.469) (0.484) (0.46) (0.466) (0.494) (0.423)

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• 3. Data & Model

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Demand Model Censored data (Shonkwiler & Yen, 1999) 𝑒 = 1 if g

𝜐 + 𝑤 > 0

0 if g

𝜐 + 𝑤 ≤ 0

EASI demand system: latent share equations (Lewbel and Pendakur, 2009) 𝑥

∗ = 𝛽ln𝑞

• + 𝛾𝑧
• + 𝛿𝑨
• + 𝑓

𝑧 = 𝑚𝑜𝑦 − 𝑥

• ln(𝑞)
• Allows arbitrary Engel curves, errors terms capture unobserved consumer heterogeneity

Estimation of censored system for each food category

• 1. Estimate probit
• 2. Bootstrap errors to obtain estimated PDF (𝜚

) and CDF (Φ ) of g

𝜐

• 3. Estimate observed share equations via SUR:

𝑥 = Φ 𝑕

𝜐

• 𝛽ln𝑞
• + 𝛾𝑧
• + 𝛿𝑨
• + 𝑓

+ 𝜔𝜚 𝑕

𝜐

+ 𝜃 Φ g

𝜐

, ϕ g

𝜐

• for i=1,…,N products in a singular system

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• 4. The Market Without SM

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We don’t observe prices for SM products in the absence of the SM regime

• generate a counterfactual set of prices for SM products
• a. Simulation models to estimate the effects of trade agreements on domestic prices

b. Open market and the “small country” assumption

• Canadian consumers would face similar prices to US consumers
• US prices “distorted” by government policies

Winnipeg Montreal Vancouver

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• 4. The Market Without SM

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Counterfactual prices for SM products Conservative price premiums (low-priced Canadian cities, high prices in Midwest US)

• Measures of regressivity robust to size of premiums

Canada US retail price comparisons Border Price Comparison Alternate Scenario 2009 2010 2011 Average Canada US Canada US Canada US Canada US Premium (%) Premium (%) Milk (whole), $/4 litres 5.02 3.87 5.14 3.80 5.48 4.01 5.21 3.89 34 47a Butter, $/kg 4.34 3.24 4.25 3.22 4.34 3.56 4.31 3.34 29 62a Yogurt, $/500 grams 2.06 1.68 2.20 1.52 2.36 1.53 2.20 1.58 40 22a Cheese (processed), $/250 grams 2.85 1.95 2.74 1.90 2.80 2.11 2.80 1.99 41 47a Ice Cream, $/2 litres 5.13 4.70 5.29 4.46 5.38 4.74 5.27 4.63 14 22a Chicken (weighted aggregate), $/kg 7.35 5.47 7.49 4.83 7.58 4.72 7.47 5.01 49 26b Chicken (leg), $/kg 3.52 3.44 3.50 3.10 3.65 3.12 3.55 3.22 10

• Chicken (breast), $/kg

11.63 8.35 11.84 7.45 11.75 7.18 11.74 7.66 53

• Chicken (whole fresh), $/kg

5.05 3.48 5.21 2.93 5.51 2.92 5.26 3.11 69

• Turkey (whole frozen), $/kg

3.29 2.99 3.46 2.81 3.33 2.97 3.36 2.92 15 26b Eggs (large), $/dozen 2.32 1.53 2.34 1.43 2.52 1.47 2.39 1.48 62 26b Data sources: AAFC-CDIC, Statistics Canada, BLS; authors' calculations

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• 4. The Market Without SM

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Counterfactual prices for SM products

• Hall Findlay (2012)
• Kenney (2014)

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• 5. Results

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Measuring the distributional effects of supply management regime 1. Model consumer behaviour → elascies (counterfactual of how consumers would behave at different prices) 2. Generate counterfactual (without SM) prices for SM products 3. Simulate consumer behaviour (consumption of SM products) at counterfactual prices 4. Calculate monetary compensation required to make consumers indifferent between market with SM and market without SM (compensating variation) → absolute burden (tax) imposed by SM 5. Divide absolute burden by household income → relave burden (tax rate) imposed by SM 6. Compare relative burden across income distribution to measure regressive effects of SM regime

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• 5. Results

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Income Quintile Aggregate 1 2 3 4 5 Chicken

• 1.082
• 1.127
• 1.171
• 1.117
• 0.850
• 0.886

Turkey

• 1.289
• 1.337
• 1.304
• 1.285
• 1.172
• 1.146

Milk

• 0.737
• 0.831
• 0.812
• 0.781
• 0.686
• 0.619

Yogurt

• 1.124
• 1.449
• 1.364
• 1.402
• 1.234
• 0.908

Butter

• 0.903
• 1.385
• 1.294
• 0.963
• 0.881
• 0.619

Cheese

• 0.750
• 1.132
• 0.822
• 0.761
• 0.731
• 0.564

Ice Cream

• 0.984
• 1.228
• 1.065
• 0.996
• 0.888
• 0.855

Eggs

• 0.490
• 0.911
• 0.587
• 0.512
• 0.448
• 0.433

Own-Price Elasticities of Demand (SM products)

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• 5. Results

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Burden on Canadian Households Imposed by Supply Management Regime Effects of supply management are regressive, but how regressive? Relative burden (tax rate) on poorest households is approximately 5 times as large as on richest households → very regressive compared to effects of other government policies (income tax, carbon tax)

Income Quintile Aggregate 1 2 3 4 5 Compensating Variation (tax) ($/year) 444 339 468 419 450 554 children 585 466 592 571 602 712 no children 378 280 376 361 393 487 Average Household Income ($/year) 52,499 14,788 33,707 44,219 59,952 118,189 children 62,067 19,448 41,423 59,520 74,464 140,637 no children 48,630 12,844 28,842 38,697 55,555 110,065 Burden (CV as % of income) 0.84 2.29 1.39 0.95 0.75 0.47 children 0.94 2.40 1.43 0.96 0.81 0.51 no children 0.78 2.18 1.30 0.93 0.71 0.44

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• 5. Results

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Chicken Turkey Eggs Milk Cheese Yogurt Butter Ice cream & frozen yogurt Compensating Variation ($/year) 134 5 51 91 128 28 14 8 children 175 6 63 135 163 38 16 10 no children 115 4 46 71 112 23 13 7

Burden by Commodity

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• 6. Discussion

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Low-end bounds for welfare effects (conservative price premiums, food at home, CVs, partial D system) Continued external pressure (TPP, WTO) Balance of lobbying power has not shifted Policy support across the political spectrum “[House of Commons Standing Committee on International Trade]…affirm its unequivocal support of, and commitment to defend, Canada’s supply management system.”

• House of Commons, 2009

“Our government strongly supports...our supply managed system.”

• Lawrence MacAuley, 2017