New study dismisses dairy subsidy argument

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Published: January 31, 2002

The internationally recognized measurement of farm subsidy levels is an

inappropriate and inaccurate way to judge how much support Canadian

dairy farmers receive, according to a study prepared for Dairy Farmers

of Canada.

Three Université Laval economists argue that the producer subsidy

equivalent, or PSE, developed by the Paris-based Organization for

Economic Co-operation and Development overestimates how much Canadian

consumers are overcharged for their dairy products by world standards.

The PSE calculation regularly show Canada’s supply management-protected

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dairy farmers to be among the world’s most subsidized by their

consumers. The OECD says Canada’s dairy farmers received 58 percent of

their revenue from government and consumer subsidies in 1999, compared

to 0.4 percent in New Zealand and 1.2 percent in Australia.

Canadian grain and livestock exporters typically complain that Canada

should not waste energy defending highly subsidized dairy farmers when

it may erode their arguments for better foreign access.

In their 70-page report, economists Maurice Doyon, Nicolas Paillat and

Daniel-M. Gouin argued that the PSE used by supply management’s critics

is flawed in two major ways:

n* It uses low and unsubsidized New Zealand dairy prices as the

benchmark against which Canadian farmgate prices are judged. It also

assumes New Zealand prices are at levels that would exist in an

unsubsidized market.

The economists argue that New Zealand is not a true reflection of

unsubsidized prices. It is a small player and must sell its

unsubsidized milk at low prices set by the heavily subsidized European

Union dairy industry.

n* It assumes that a higher farmgate price for milk means higher

consumer prices for dairy products.

In fact, the Laval economists suggest the PSE does not recognize that

some domestic dairy pricing systems gain more of a share of the

consumer dollar for farmers at the expense of processors and retailers,

without hurting consumers.

“The method of calculating PSE from the price of milk in New Zealand

implies that the gap between the reference and domestic prices is a

transfer from taxpayers and consumers to the producer,” the study said.

“However, such is not the case.”

The DFC consistently produces studies that indicate dairy products cost

Canadian consumers less than American consumers.

D’Arce McMillan’s Market Watch column is unavailable this week.

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