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Milk Wars

April 23, 2017

The US president and the Canadian prime minister are clashing over milk markets in their respective countries.  Are we at war, at least a trade war?  It certainly sounds like it.  It’s more likely just preliminary moves to subsequent negotiations.

There really is a problem, the same problem that plagues many agricultural products.  It’s a problem of too much competition that appears in any market where there are many small producers of identical products.  Economists call this situation perfect competition.

There are four possible solutions to this problem, none of them good solutions.  A free market is the ideal solution, but in that type of market, the producers can’t make a living because prices are too low.  Farmers cry out for help.  Governments answer with subsidies for the producers.  With subsidies, producers can make a living, but they tend to over-produce, flooding the market and driving prices down further.  Another solution is for governments to purchase the surplus product, thus keeping the prices up.  The trouble with that solution is that governments have to keep the surplus product permanently off the market, usually by destroying it.  Nobody likes to see good food being destroyed.  Supply management is yet another solution.  In this regime, producers restrict their production, thus keeping prices up.  Governments have to prevent imports that would otherwise drive the price down.  Producers can make a living, but consumers have to suffer because of higher prices.  As I said, none of these solutions are perfect.

The other factor is recent changes in the milk marketplace.  Large companies have entered the market, using their size to out-compete small dairy farms.  Some of the large companies are producers themselves, but others are processors or distributors.  The result is that small farms have been driven out of the market, especially when there is no restriction on competition from large companies.  In this article, small dairy farmers in Wisconsin are complaining about the condition of the milk market in their state.  The market has also shifted.  Consumers have been increasing their purchases of butter lately, leaving a surplus of skimmed milk that they don’t want.

Behind all the accusations that have been thrown about, there are some indications of what various groups really want.  US milk producers are plagued with an over-supply of milk, with consequent low prices.  They want to export their surplus product, so that prices can rise again.  Canada looks like an ideal place to sell this product.  Republican politicians, on the other hand, want to end the firm control that the Canadian government has over the milk market in Canada.  They also want to end Canadian protection of the milk producers.

Canada, of course, is a sovereign country.  We can have our own system of control over agricultural markets.  It doesn’t have to be the same as the American system.  We are not obliged to accept exports from the US.  We do, however, need to negotiate trade agreements with other countries, including our neighbor the United States.  With fair negotiations, both countries will benefit from from such agreements.

 

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