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Milked and Feathered The Regressive Welfare Effects of Canadas Supply Management Regime Ryan Cardwell, Chad Lawley, and Di Xiang Outline 1. Overview of Canadian supply management (SM) 2. Pressures on SM 3. Modelling consumer behaviour

  1. Milked and Feathered The Regressive Welfare Effects of Canada’s Supply Management Regime † Ryan Cardwell, Chad Lawley, and Di Xiang

  2. Outline 1. Overview of Canadian supply management (SM) 2. Pressures on SM 3. Modelling consumer behaviour 4. The market without SM 5. Results 6. Discussion Milked and Feathered 3/10/2020 12

  3. 1. Overview of Canadian Supply Management Dairy, poultry (chicken, turkey, eggs) P S Three “pillars” 1. Production controls (quotas) P SM P E $25,000 kg/b.f./day (MB, January 2017) $2,500,000 quota value per farm (MB, dairy average) D Q E Q SM Q 2. Cost-of-production pricing Producers receive administered wholesale price based on COP formula from provincial marketing boards Milked and Feathered 3/10/2020 13

  4. 1. Overview of Canadian Supply Management Three “pillars” 3. Import controls Import quotas → Tariff-rate quotas (TRQs) - Barichello, et al . (2009) Milked and Feathered 3/10/2020 14

  5. 1. Overview of Canadian Supply Management High and “stable” prices Retail Price (whole milk, C$/litre) 𝜏 = 0.38 2.40 2.20 2.00 1.80 Canada 1.60 US 1.40 1.20 𝜏 = 0.10 1.00 0.80 - Statistics Canada, Bureau of Labor Statistics • SM producers don’t typically receive Government subsidies provided to other agricultural producers * though this does not mean that SM does not “cost” anything Milked and Feathered 3/10/2020 15

  6. 2. Pressures on Supply Management 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/ Milked and Feathered 3/10/2020 16

  7. 2. Pressures on Supply Management 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 1,600 poultry 7,000 dairy farms 13,000,000 households farms Average annual income ($), 2013 Average net worth ($) 120,000 4,000,000 3,500,000 100,000 3,000,000 80,000 2,500,000 60,000 2,000,000 1,500,000 40,000 1,000,000 20,000 500,000 0 0 Canada Dairy Poultry Canada Dairy Poultry average Farms average Farms Farms Farms - Statistics Canada Milked and Feathered 3/10/2020 17

  8. 2. Pressures on Supply Management 3. Distributional (regressive) effects on consumers b. Engel’s Law Food Expenditure Share (%) 30 25 20 15 children no children 10 5 0 1 2 3 4 5 ($14,788) ($33,707) ($44,219) ($59,952) ($118,189) Income Quintile (Mean Income) - FES, authors’ calculations 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? Milked and Feathered 3/10/2020 18

  9. 3. Data & Model 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 Milked and Feathered 3/10/2020 19

  10. 3. Data & Model 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) Milked and Feathered 3/10/2020 20

  11. 3. Data & Model Demand Model Censored data (Shonkwiler & Yen, 1999 ) � 𝜐 � + 𝑤 �� > 0 � 𝜐 � � 𝜐 � � g �� � g �� 𝑒 �� = �1 if g �� Φ � , ϕ � � 𝜐 � + 𝑤 �� ≤ 0 0 if g �� EASI demand system: latent share equations (Lewbel and Pendakur, 2009) � � � for i=1,…,N products in a singular system ∗ = � 𝛽 �� ln 𝑞 �� � 𝑥 �� + � 𝛾 �� 𝑧 � + � 𝛿 �� 𝑨 �� + 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 � 𝜐 � � ) and CDF ( Φ � ) of g �� 2. Bootstrap errors to obtain estimated PDF ( 𝜚 � 3. Estimate observed share equations via SUR: � � � � 𝜐 � � 𝜐 � � 𝑕 �� � � 𝑕 �� 𝑥 �� = Φ � � 𝛽 �� ln 𝑞 �� + � 𝛾 �� 𝑧 � + � 𝛿 �� 𝑨 �� + 𝑓 �� + 𝜔 � 𝜚 � + 𝜃 �� ��� ��� ��� Milked and Feathered 3/10/2020 21

  12. 4. The Market Without SM 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 Vancouver Winnipeg Montreal • US prices “distorted” by government policies Milked and Feathered 3/10/2020 22

  13. 4. The Market Without SM Counterfactual prices for SM products 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 47 a Butter, $/kg 4.34 3.24 4.25 3.22 4.34 3.56 4.31 3.34 29 62 a 22 a Yogurt, $/500 grams 2.06 1.68 2.20 1.52 2.36 1.53 2.20 1.58 40 Cheese (processed), $/250 grams 2.85 1.95 2.74 1.90 2.80 2.11 2.80 1.99 41 47 a Ice Cream, $/2 litres 5.13 4.70 5.29 4.46 5.38 4.74 5.27 4.63 14 22 a - Chicken (weighted aggregate), $/kg 7.35 5.47 7.49 4.83 7.58 4.72 7.47 5.01 49 26 b 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 26 b Eggs (large), $/dozen 2.32 1.53 2.34 1.43 2.52 1.47 2.39 1.48 62 26 b Data sources: AAFC-CDIC, Statistics Canada, BLS; authors' calculations Conservative price premiums (low-priced Canadian cities, high prices in Midwest US) • Measures of regressivity robust to size of premiums Milked and Feathered 3/10/2020 23

  14. 4. The Market Without SM Counterfactual prices for SM products - Hall Findlay (2012) - Kenney (2014) Milked and Feathered 3/10/2020 24

  15. 5. Results Measuring the distributional effects of supply management regime 1. Model consumer behaviour → elas�ci�es (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 → rela�ve burden (tax rate) imposed by SM 6. Compare relative burden across income distribution to measure regressive effects of SM regime Milked and Feathered 3/10/2020 25

  16. 5. Results Own-Price Elasticities of Demand (SM products) 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 Milked and Feathered 3/10/2020 26

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