Leonard Waverman is the dean of the DeGroote School of Business, McMaster University.
How is a Canadian dairy cow like a Montreal taxi cab? Each operates under a system of supply management, meaning you need a government-mandated licence to produce a litre of milk or a cab ride from Place Ville Marie to the Plateau.
The supply of licences is tightly controlled, and they change hands in open markets, with taxi medallions and milk quotas being sold to new or expanding players. Historically, prices for both rose dramatically as demand outstripped supply.
Now both markets are under pressure, whether from ride-sharing services such as Uber and Lyft or, in the case of milk, from a free-trade agreement being renegotiated in Washington.
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Canadian dairy farmers have political clout and government is committed to compensating them if quotas disappear. The bill for ending the system will be high, but how high? Estimates vary all the way up to $35-billion, but in my view these amounts are vastly excessive.
We are not debating here the merits or failings of supply management, whether it has done a good job ensuring milk standards and market stability or caused exorbitantly higher food prices for consumers.
What we can agree on is that supply management is a bargaining chip in current and future trade talks. As quotas are phased out, governments need a fair compensation system that rewards those who are deserving – but not those who have already reaped vast benefits.
Like dairy farmers, taxi cabs need assets to operate – in the case of the driver, a car and a medallion. But the medallions, of which there are only 7,600 in all of Quebec, are a strange asset – non-productive but valuable. Their market values traditionally reflected the relative scarcity of cab rides.
Similarly, a milk quota in Ontario and Quebec – where most Canadian dairy farms operate – is another strange asset, giving a farmer the right to buy a cow and milk it at a cost of about $25,000 – or as much as $50,000 in British Columbia.
There are almost a million dairy cows in Canada, including about 650,000 in Ontario and Quebec together. Thus quotas are a huge investment by the country’s 10,000 dairy farms, accounting in many cases for half the value of their operations.
Data for Ontario show that in 2017, only about 8,000 cow quotas were sold and there are more than 300,000 dairy cows in the province. So it is clear that quotas don't trade frequently, and demand far outstrips supply.
The $35-billion question is: Should dairy farmers be compensated if supply management comes to an end and, if so, how? It’s the same issue for taxi medallion owners in Quebec, where the provincial government has earmarked $250-million for compensation as a result of ride-hailing competition. The government is offering an amount up to $46,500, no matter how long the medallion was owned. Is this fair and socially efficient?
A Montreal taxi cab medallion bought for $10,000 30 years ago has yielded its owner 30 years of cab rides without true competition. It has thus earned back the $10,000 investment; why then does the driver now get $46,500?
And what if all milk quotas were owned by the farmers who got them for free when the system started in the 1970s? If we decide to end milk quotas, do we owe those farmers anything? Absolutely not. They have earned much more than adequate returns over the years.
But imagine someone who bought a quota last year to operate a small 30-cow dairy farm in B.C. That quota cost her $1.5-million – the value over the future of the difference expected between the regulated price of milk and the lower costs of production (such as for actual cows, feed, labour, machinery and other inputs).
If dairy quotas evaporated, the ones truly hurt, and deserving payment, would be recent buyers who haven’t earned back, for example, the $50,000 quota per B.C. cow.
Certainly, the owners from 1975 will scream. But there is no sound public policy reason we should listen. They have received 43 years of returns far over and above the real cost of milk. Similarly, in Quebec, the taxi compensation should be only to those who recently purchased medallions, not to every medallion owner.
The way out should be simple – pay the remainder of the unearned quota value of any dairy farmer or taxi medallion owners who bought the right to operate in the past decade. Or use a sliding scale of compensation based on the time period in which the quota was acquired. Many farmers may receive blended payments because they acquired quota amounts through the decades.
The dairy quota challenge should not be a $35-billion problem, but more likely a $3-billion to $4-billion problem. Remember, too, that the cattle, land, machinery and other productive assets will remain in farmers’ hands.
But whatever the outcome of the supply-management debate – for cabs or milk – it may provide one lesson: The most valuable property is not a quota or medallion, but power in high places in bargaining trade-offs for eliminating these “strange assets.”