Milked and Feathered The Regressive Welfare Effects of Canada’s Supply Management Regime † Faculty of Agricultural and Food Sciences Seminar University of Manitoba October 15, 2014 Ryan Cardwell, Department of Agribusiness and Agricultural Economics † based on work with Chad Lawley and Di Xiang
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 2/6/2020 2
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) $2,500,000 quota value per farm (MB, dairy average) D Q E Q SM Q 2. Cost-of-production pricing Producers receive administered wholesale price based on COP formula from provincial marketing boards Milked and Feathered 2/6/2020 3
1. Overview of Canadian Supply Management Three “pillars” 3. Import controls Import quotas → Tariff -rate quotas (TRQs) - Barichello, et al . (2009) Milked and Feathered 2/6/2020 4
1. Overview of Canadian Supply Management High and “stable” prices Retail Price (whole milk, C$/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 2/6/2020 5
2. Pressures on Supply Management 1. External – trading partners seeking access to Canadian dairy and poultry markets (CETA, CPTPP, WTO, USMCA) 2. Internal a. food manufacturers, restaurants b. constrained growth/missed export opportunities c. Hollywood! http://www.imdb.com/title/tt2670998/ Milked and Feathered 2/6/2020 6
2. Pressures on Supply Management 3. Distributional (regressive) effects 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 2/6/2020 7
2. Pressures on Supply Management 3. Distributional (regressive) effects 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 2/6/2020 8
3. Modelling Consumer Behaviour Demand functions slope down… P D Q …and consumers respond to price changes (particularly poor consumers) Estimate demand functions for all food products, controlling for prices of substitutes and household characteristics Statistics Canada Food Expenditure Survey • Observe consumer behaviour across households of different types (children/no children, income distribution, rural/urban, etc.) Censored EASI Demand system (Lewbel & Pendakur, 2009) • Estimate consumer responses to price changes ( elasticities ) by income quintile Milked and Feathered 2/6/2020 9
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 2/6/2020 10
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 Yogurt, $/500 grams 2.06 1.68 2.20 1.52 2.36 1.53 2.20 1.58 40 22 a 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 - 26 b Turkey (whole frozen), $/kg 3.29 2.99 3.46 2.81 3.33 2.97 3.36 2.92 15 Eggs (large), $/dozen 2.32 1.53 2.34 1.43 2.52 1.47 2.39 1.48 62 26 b Data sources: AAFC-CDIC, Statistics Canada, BLS; authors' calculations Milked and Feathered 2/6/2020 11
5. Results Measuring the distributional effects of supply management regime 1. Model consumer behaviour → elasticities (counterfactual of how consumers would behave at different prices) 2. Generate counterfactual (without SM) prices for SM products 3. Simulate consumer behaviour (consumption of SM products) at counterfactual prices 4. Calculate monetary compensation required to make consumers indifferent between market with SM and market without SM ( compensating variation ) → absolute burden (tax) imposed by SM 5. Divide absolute burden by household income → relative burden (tax rate) imposed by SM 6. Compare relative burden across income distribution to measure regressive effects of SM regime Milked and Feathered 2/6/2020 12
5. Results Own-Price Elasticities of Demand (SM products) Income Quintile Aggregate 1 2 3 4 5 Chicken -1.082 -1.127 -1.171 -1.117 -0.850 -0.886 Turkey -1.289 -1.337 -1.304 -1.285 -1.172 -1.146 Milk -0.737 -0.831 -0.812 -0.781 -0.686 -0.619 Yogurt -1.124 -1.449 -1.364 -1.402 -1.234 -0.908 Butter -0.903 -1.385 -1.294 -0.963 -0.881 -0.619 Cheese -0.750 -1.132 -0.822 -0.761 -0.731 -0.564 Ice Cream -0.984 -1.228 -1.065 -0.996 -0.888 -0.855 Eggs -0.490 -0.911 -0.587 -0.512 -0.448 -0.433 Milked and Feathered 2/6/2020 13
5. Results Burden on Canadian Households Imposed by Supply Management Regime Income Quintile Aggregate 1 2 3 4 5 Compensating Variation (tax) ($/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 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) Milked and Feathered 2/6/2020 14
6. Discussion 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 Milked and Feathered 2/6/2020 15
Milked and Feathered The Regressive Welfare Effects of Canada’s Supply Management Regime † Faculty of Agricultural and Food Sciences Seminar University of Manitoba October 15, 2014 Ryan Cardwell, Department of Agribusiness and Agricultural Economics † based on work with Chad Lawley and Di Xiang
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