Before getting into this, I want to make one thing clear: I am absolutely not opposed to supply management. It is a useful system that supports a major pillar of Canadian agriculture, with effects that extend beyond dairy alone. I will not get into poultry or eggs because those are not sectors I know well.
That does not prevent me from taking a critical look at the system. At its core, supply management helps preserve the dairy sector by ensuring that production within allocated limits has a market. But it also has major flaws that, in my view, need to be named.
Three important problems
I have identified three issues that deserve serious attention:
- the $24,000 quota price ceiling;
- the right not to produce quota that is held;
- the lack of, and opposition to, a quota-rental mechanism.
I will explain why I think each of these creates problems and suggest ways they could be addressed. I am not going to change the system by myself. Dairy Farmers of Quebec and the Canadian dairy organizations function democratically. By throwing this small stone into the pond, I hope to contribute to the discussion.
The $24,000 price ceiling
The ceiling on the price of one kilogram of quota was set at $25,000 jointly by Quebec and Ontario in 2010. The goal was to limit price increases in an asset that was, and still is, a barrier to entering dairy production. A few years later, in 2016, the price was lowered to $24,000 per kilogram following changes that transferred non-saleable quota into saleable quota and diluted its value.
Although a price cap may sound reasonable, it produces unwanted side effects.
Basic economic principles tell us that a price ceiling increases demand in a market where supply is limited. Leaving that ceiling unindexed over time makes the problem even worse. If the price had merely tracked inflation since 2016, it would now be around $31,000 per kilogram. Had it been indexed from the start in 2010, it would be above $35,000.
That is one reason why farms can now buy only tiny fractions of a kilogram of quota in many monthly exchanges. Supply remains structurally below demand. Which leads to the second problem.
The right not to produce
Many dairy farms want to expand. New barns are built, old ones are renovated and better production methods are adopted. Even with the same number of cows, milk output can increase, and with it the need for quota that allows that additional production to be marketed.
While Quebec dairy producers collectively have an obligation to fill the production target allocated to the province, an individual farm can accumulate quota without producing it.
The explanation is straightforward. Because farms can often buy only fractions of a kilogram each month, a business planning an expansion starts accumulating production rights years in advance. Over time, a farm can build up 10, 20 kilograms or more before the project is ready.
Across Quebec, hundreds of kilograms can therefore sit in reserve without being produced. I do not blame the farms that make that choice. Who is going to invest millions in a new building that could sit partly empty for months because quota is unavailable?
There is also a certain amount of quota that remains unproduced for other reasons. Consecutive increases in production rights have followed growth in overall Canadian demand for milk and dairy products. Some farms keep those rights in anticipation of future projects, while others simply leave them unused.
The lack of a rental mechanism
There is essentially one way to trade dairy quota: buying and selling. Most provinces participating in the system do not allow ordinary rental, although some temporary transfers are possible.
A farm that accumulates quota for a future expansion can therefore end up holding a significant amount of dormant production rights in its asset portfolio. One unintended consequence is that extra quota may need to be issued collectively to make sure Quebec reaches its production target.
Large sums of money are frozen in the system. Ten kilograms of quota represent $240,000 tied up in an asset that produces no milk revenue and no interest income. Worse, inflation slowly erodes the real value of that capital.
There are several arguments against rental. Some are valid, while others strike me as more self-interested. Two of the most common are:
- the fear that farms would buy quota solely to rent it out;
- the concern that rental would financially reward poor producers.
Rental rules could be designed to prevent quota from being purchased purely as a rental investment. It could be limited to a percentage of quota owned, or permitted only for a defined period when a producer is accumulating quota for a major expansion.
I do not find the second objection convincing. If a producer, good or bad, can rent out part of an unused production right, that can benefit the system as a whole. Dormant quota is finally put back into production.
My proposals
The price ceiling
It is long past time to start indexing the price of dairy quota more aggressively. Every year we fail to do so makes the imbalance worse. If the ceiling increased modestly each year, slightly above the previous year’s inflation rate, the system could begin catching up. Accumulating quota far in advance would gradually become less attractive, and the quantities allocated in each monthly exchange could increase. Buying years ahead would lose some of its appeal, and more quota purchased would actually be produced.
The right not to produce
Not producing quota should become a temporary situation, not a structural outcome. We collectively have an obligation to fill our production target, and that should ultimately be reflected at the farm level.
Above a certain percentage of unproduced quota, that production right could be temporarily redistributed across farms. Not confiscated, not forcibly sold, simply redistributed until the owner is ready to use it.
Or we eventually move to the final option.
Allow rental
I understand why many farms hold dormant quota. As explained above, they are preparing expansions. The other cases likely represent a smaller share of the unproduced total.
A farm preparing an expansion and buying quota in advance should be able, for a limited period, to rent out that production right. Not partially, not for a few days here and there. Rent it out fully, then take it back when the farm is ready.
There are farms ready to produce but constrained by the system. There are quotas sitting idle for months or years that could be used immediately. Leaving production rights dormant because of ideological rigidity is harmful to everyone.
Naming the blind spots
The dairy quota system is neither absurd nor something that should be discarded. It has delivered remarkable stability in a sector that, elsewhere, has often been sacrificed to market volatility. But that very strength makes its rigidities harder to correct.
The frozen price ceiling, the right not to produce and the inability to rent are not isolated anomalies. Together, they protect quota value while restricting its circulation and use. Until those blind spots are named clearly, the same debates will keep coming back without ever being resolved.
Thinking about these issues is not an attack on supply management. It is a way of taking its long-term future seriously. A durable system must be able to adapt, not only under pressure from crises, but through a clear-eyed look at its own limits.
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