Does Canada’s Supply Management of Agricultural Products Transfers Income from Poor to Rich Households?

“Milked and Feathered: The Regressive Welfare Effects of Canada’s Supply Management Regime.” That’s the title of a new article (gated, unfortunately) by the University of Manitoba’s Ryan Cardwell and coauthors in Canadian Public Policy/Analyse de politiques.

I recall first hearing about supply management policies in an international trade class I took as an undergraduate at the Université de Montréal. If you are not familiar with supply management, it consists broadly of three policy interventions:

1. Production controls, i.e., quotas on how much of a given commodity can be produced,
2. Import controls, i.e., tariffs or quotas imposed on how much of a given commodity is imported from other countries, and
3. Price controls, i.e., artificial prices based on production costs.

In Canada, both dairy and poultry products are subject to supply management. In their brilliant–and necessary–analysis, Ryan and his coauthors find that:

The production and trade of dairy and poultry products in Canada are controlled by a system of supply management (SM). Output is regulated with production quotas, and imports are restricted through a system of tariff-rate quotas. Many of Canada’s trading partners are seeking better access to Canadian dairy and poultry markets in negotiations over proposed preferential trade agreements. These pressures have renewed debate about the future of SM in Canada. We investigate one criticism of SM: that high prices for dairy and poultry products impose regressive distributional effects on Canadian consumers. We apply the Exact Affine Stone Index demand model to data from the Canadian Food Expenditure Survey to estimate consumer responses to price changes for dairy and poultry products. Parameters from the demand model are used to generate welfare comparisons between the current SM regime and a counterfactual liberalized market. Canada’s SM policies are highly regressive, imposing a burden of approximately 2.3 percent ($339) of income per year on the poores thouseholds, compared to 0.5 percent ($554) for the richest households. The burden is larger for households with children.

The emphasis is mine. This is not surprising to me: Because people spend a decreasing fraction of their income on food as their income increases (an empirical regularity known as Engel’s Law), it stands to reason that such a policy would hit the poor much more than it does the rich.

Worse: Canada’s supply management of dairy and poultry products indeed does appear to be a means of redistributing income from the poor to the rich, because:

Higher prices generated by SM policies transfer income from a large number of lower-income (on average) consumer households to a small number of higher-income producer households. As of 2009, the average Canadian household income was $68,000 compared to $110,000 for dairy-producing households and $119,000 for poultry- and egg-producing households (Statistics Canada, 2011). Hence, [supply-management] policies can be viewed as transferring income from lower-income households to higher-income households, on average.