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Dairy Product Prices

September 21, 2014

I read an article on the BBC web site a few days ago that explained why dairy product prices in the US were at a high point.  It stated that the US and Europe used to purchase surplus products when prices were low, but recently they had stopped doing this.  By subsidizing producers at the low points, the governments were able to keep the prices up, but they had to dispose of the product some time later.  I had heard of “mountains of butter” in some European countries years ago, but I didn’t realize that the US was doing the same thing.  According to this article, both the US and Europe were no longer intervening in the market for dairy products.  The result was that prices fluctuated over a wider range, and that they were now at a high point because of demand around the world.

The dairy product market is a textbook example of perfect competition, with many small producers of identical products.  I learned about this in high school.  Each dairy farmer’s milk is the same as every other farmer’s milk.  In that sort of a market, the price declines until each producer is making zero profit.  The low price benefits consumers, of course, but is a hardship on producers.

Canada has a system of supply management with marketing boards for dairy products.  These work by limiting the supply, in this case production and imports of the products.  They do this by setting quotas.  In this sort of market, the price rises as demand outstrips supply.  The higher price benefits producers, of course, but is a hardship on consumers.  Governments also benefit as they don’t have to purchase or sell surplus products.

The US and other countries are now negotiating a series of trade agreements that aim to eliminate tariffs and subsidies, providing a free market across the world.  They’re not entirely about freedom, though; they also seek to harmonize regulations in other countries with US regulations.  Certainly the US sees our supply managment system as a subsidy.  It is, of course.  Is it a sufficiently different or sufficiently necessary sort of subsidy that it must be retained?  I don’t know, although I do know that there’s pressure to eliminate it.  One of the arguments for a free market was that low prices in the US would benefit Canadian consumers.  That argument’s gone for the time being.  I suppose the decision to abandon marketing boards would ultimately depend on the political influence of the producers, because it’s them who are going to be put out of business by the change.


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