Wednesday, November 27, 2013

U.S. dairy farms out-compete Ontario

Dairy farmers in New York State are 11 per cent more efficient than Ontario dairy farmers, says University-of-Guelph economist Peter Slade.

Writing in the fall issue of the university’s online magazine for the economics and business department, Slade says the supply-management quota system “appears to induce poorer managerial decision making.

“This inefficiency is passed along to consumers through the pricing formula used by the Dairy Farmers of Ontario which bases 40 per cent of price changes on changes in the cost of production,” Slade writes.

He says Ontario farmers are less competitive because they are shielded by supply management and tariffs.

Together with associate professor Dr. Getu Hailu, Slade studied production costs between 2006 and 2008 in New York State and Ontario and concluded that the Americans were 11 per cent more cost efficient.

They got less support from governments.

They finger two reasons for poorer efficiency in Ontario – money invested in quota and using more home-grown feed.

While economies of scale were not found to be very important to efficiency, they did find that the U.S. farms were about 75 per cent larger.

In another article in the magazine, student Alex Cairns and Dr. Karl Meilke found that quota prices tripled between 2004 and 2006 because interest rates were low, because lenders such as banks and Farm Credit Canada gained greater assurance that loans would be repaid when the marketing board agreed to make deductions from milk cheques and because worries about the survival of supply management faded.

But the marketing board, blaming speculation, imposed a ceiling on quota prices that has dried up quota transfers.

That, according to a third article by doctoral student Rebecca Elskamp, is holding back industry-wide efficiency gains because the most efficient and profitable farms are not buying quota from the least efficient and profitable farmers.

She found in her study that the quota exchange was working fine until the price cap was imposed and she recommends the board make a policy U turn by scrapping the price cap.