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Supply management and determining the price of chicken

Most Canadians are probably aware that prices for milk, chicken and eggs are fixed in this country.

That's how it works in a closed and tightly regulated system.

Under supply management, farmers are told how much to produce, where, and at what price.

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Unfortunately, the regime's price-setting mechanism is about as easy to get your head around as the Higgs boson particle.

Take a recent decision on chicken by the Ontario Farm Products Marketing Commission (OFPMC), a provincial agency that oversees agricultural marketing boards.

With chicken, at least, here's how it works. The price of live chickens at the farm gate is determined by tallying the cost of a baby chick, the amount of feed needed to raise a bird, and the farmer's profit margin.

In mid-August, the commission issued an innocuous "pricing formula amendment" which adjusted the feed component of the formula. The upshot is that it's now going to take a larger upward move in the price of feed – typically corn – before farmers see more money for their chickens.

Hardly headline news. But it could prove to be a very big deal for farmers, processors, and ultimately, consumers.

That's because Ontario is the chicken price-setter for the entire country. Other provinces follow Ontario's lead, using the same formula to set their own prices.

Glenn Black, a chicken farmer on Ontario's Manitoulin Island who, because of his flock's small scale, operates outside the supply management system, did a little back-of-the-envelope calculation. He figures the old formula was inflating the retail price of chicken by nearly $1-billion a year. And since the feed calculation has been roughly the same for a decade, Mr. Black reckons Canadian consumers paid $10-billion more than they should for chicken over that period.

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Chicken farmers, he argues, should pay the money back.

Asked to comment on the provocative $1-billion-a-year estimate, the Chicken Farmers of Ontario – a farmer-run organization that operates the chicken supply management regime in the province – was tight-lipped. "We don't comment directly on farm-gate pricing matters," spokesman Michael Edmonds said in a terse e-mailed response.

Officials of the Chicken Farmers of Canada – a national lobby organization for farmers – were more expansive. Executive director Mike Dungate disputed the figure, rejecting the notion that farmers have been grossly overcharging for a decade.

"This won't drive the price of chicken," he said of the August decision by Ontario regulators. "It won't have an impact on consumer prices."

What's more, he said, if farmers have been overcompensated for their feed costs, they've likely been underpaid for energy and labour costs. So it's probably a wash.

The net impact, he suggested, would be "cents" per kilogram at the grocery store.

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Besides, feed costs appear to be headed lower again, along with the price of corn, according to Mr. Dungate. And that will have a far greater impact on chicken prices in the coming months.

Maybe so. But what's telling about all this is how far the consumer interest is from the way prices are set in Canada.

The back-story is that farmers have been in a long battle with meat processors, such as Maple Leaf Foods Inc., for years over how to determine a fair price for chicken.

There's supposed to be a negotiation between the two groups. But they seldom agree. So provincial arbitrators have had to step in, and by convention they have applied a rough formula to calculate input costs and margins.

The two sides are now working on a newer, and apparently more accurate formula.

But how would a typical Canadian ever know whether they're being treated fairly, particularly when the organization that runs the system won't talk publicly about how prices are determined?

If more Canadians knew about the behind-the-scenes machinations, they might be less tolerant of the entire supply management system.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More


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