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

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Milked and Feathered

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

Ryan Cardwell, Department of Agribusiness and Agricultural Economics

† based on work with Chad Lawley and Di Xiang

Faculty of Agricultural and Food Sciences Seminar University of Manitoba October 15, 2014

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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

Milked and Feathered

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

Milked and Feathered

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

Milked and Feathered

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/

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2. Pressures on Supply Management

Milked and Feathered

3. Distributional (regressive) effects

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

Milked and Feathered

3. Distributional (regressive) effects

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. Modelling Consumer Behaviour

Milked and Feathered

Demand functions slope down… …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

D P Q

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4. The Market Without SM

Milked and Feathered

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

Milked and Feathered

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 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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5. Results

Milked and Feathered

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

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5. Results

Milked and Feathered

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

Milked and Feathered

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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6. Discussion

Milked and Feathered

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

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Milked and Feathered

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

Ryan Cardwell, Department of Agribusiness and Agricultural Economics

† based on work with Chad Lawley and Di Xiang