A few weeks ago, I posted a link on Facebook to an article criticizing supply management schemes in the agriculture industry in Canada. Supply management raises prices to consumers by restricting the supply of farm products such as milk, eggs, and chickens. It does this by limiting the amount of quota (licenses to produce given amounts). And when supply is restricted, prices are driven up by the forces of supply and demand. The article focused on the role of marketing boards (who enforce supply management) in restricting the choices of consumers, limiting our ability to buy farm-fresh, less-"manufactured" produce. But it also nicely summarized the criticisms from most economists concerning supply management:
The Canadian food cartel goes by its own special name: “supply management.” Critics have charged that supply management makes food disproportionately expensive (especially for the poor), cripples our agricultural sector and is holding us back from entering lucrative trade deals with Asia.
In response to this article, a former student wrote,
Yes, quota is expensive - but what it does do is allow organizations (like farm credit canada) to lend out money to farmers because of a 'guaranteed' price.
and in a later comment he wrote,
[B]esides farm credit canada - I am not sure that any financial institution uses quota as collateral. In fact - sure about that.
These two comments about supply management require some careful consideration.
His first comment suggests that there is some over-riding social justification for providing a non-market mechanism to reduce price variability and risk for farmers. I don't see it. Farmers (especially now, but perhaps less so 50 years ago) are in touch with markets all over the world and can readily deal in commodity futures to hedge their risks. Providing high, stable prices is not the only way to reduce the risks that farmers face.
Essentially, the student is arguing that consumers should be forced by marketing boards to pay higher prices as a way of buying insurance for farmers to protect the farmers from price variability. This argument never held much sway for me even before farmers could trade futures on the internet. If farmers (or any businesses, for that matter) are concerned about price variability, they can save more during the good years to see them through the lean years. If doing so is costly to the farmers then, to be blunt, perhaps some farmers (likely the least capable ones) would exit the industry, and prices will rise (or stop falling as much) enough to cover all the costs and risks of all those remaining in the industry.
Both the market solution and the marketing board solution for dealing with risk lead to higher prices. However, the market solution lets the market determine what risks should be compensated and by how much. Furthermore, it is abundantly clear that marketing boards set supply restrictions that are too tight and force prices higher than they would otherwise be. The evidence: farmers are willing to pay millions of dollars for quota. The only reason they do so is that they expect returns that are sufficiently high to cover the opportunity costs of buying the quota. And they only reason they can expect such high returns is that they receive higher revenues from higher prices.
The student raises an interesting question in his second comment. If quota reduce risk, why won't financial institutions allow farmers to declare that quota are assets that can be pledged as collateral for loans? One possibility is that there is high political risk attached to the quota --- at any time a more libertarian gubmnt could be elected that would abolish supply management schemes. I doubt this argument should carry much weight. More likely, the quota cannot be pledged as collateral because of some legal fiction that they still belong to the gubmnt (as is the case with taxi licenses in some jurisdictions) even though they can effectively be bought and sold.
As a result, we have double gubmnt intervention in the markets for commodities: (1) marketing boards restrict supply and force up prices. But then farmers are unable to use the quota as collateral, and hence (2) we have the farm credit intervention as well.
What a mess! And because the quota have value, untangling the mess to move toward more nearly market-oriented solutions will be politically difficult, if even possible.
---
Before readers get the wrong idea, I am quite sure there are many marketing boards like the various vegetable marketing boards in Ontario that do far less harm because they do not have the authority/ability to practice supply management. These boards do pretty much the same things that are done by trade association-type groups in many jurisdictions in the US. My only question about these groups in Ontario is why the gubmnt provides them if private trade co-operatives can accomplish the same things.