help me understand the (farming) concept of quota (supply management)December 31, 2014 10:12 AM   Subscribe

I've been trying to get my head around the concept of quota, as it relates to, for example, dairy or egg producers in Ontario. I'm starting to think that this is probably one of the worst explained concepts I've ever come across.

Based on reading these three pages, my current understanding is that it is a system that does two things:

1: It defines a limit on how much a producer can produce (to prevent a monopoly?)

2: It imposes a fee to produce a given amount (so that if you did want to buy more quota, it would cost you?).

However, I'm not sure I've got this right. And phrases like this make absolutely no sense to me:

Quota values have increased dramatically since the 1990s. For example, in February 1995, Manitoba’s clearing price for one kg of butterfat (about one dairy cow) was \$8,800. In November 2011, it topped \$31,000 a kilogram.

How on earth one kilogram of butterfat equal to one cow?

Then we have these two statements from the same link:

Supply management is a system that limits how much of a certain product a farmer can produce each year. You'll hear people refer to this number as quota. Farmers pay for the right to be able to produce and sell their product. Having quota is like having a license to produce a product, take chickens for example.
...

To be able to have quota, a farmer has to produce around 91,000 chickens a year. That means a start up cost of around 1.75 million dollars.

The first excerpt suggests that a quota is an upper limit, while the second suggests it's a lower limit. Does it mean that quota is only sold in units of 91,000 chickens? What happens if I buy quota for 91,000 chickens but only produce 80,000. Does that mean I don't "have quota"?

And how exactly does quota protect farmers? The page says that it helps ensure fair prices and protects against fluctuating prices. How does imposing a fee do that?

I'd be most grateful if someone could deconfuse me!
posted by spacediver to Law & Government (10 answers total) 2 users marked this as a favorite

And how exactly does quota protect farmers?

It limits the total number of eggs (milk, etc) produced per year, so there is no surplus and the price cannot drop too low.
posted by jeather at 10:40 AM on December 31, 2014 [2 favorites]

I'm not an expert on Canadian ag policy, but I can give you my (from US) understanding. Canada sets the "quota" for the total national supply of certain commodities. Based on this, they set the commodity price. In order to participate in the market, producers invest a fee to guarantee the price for their product up to their quota amount. To afford participation, the producer must be of a certain size, so the 91,000 chicken example would be a minimum (I'm not certain).

The point of all this is to a) guarantee a national supply of the commodities and b) reduce price fluctuations and therefore risk for the Canadian producer. Fees also prevent new entrants in the supply end of the market. The raised prices due to the restriction of national supply falls to the consumers, but in theory they also benefit from the steady market.
posted by zennie at 10:47 AM on December 31, 2014

Quota is price support. No producer can flood the market and depress prices. In your second example, your producer would not be buying quota for 91K chickens; they'd be buying for, e.g., 200K chickens. The sale of the first 91K chickens just goes to buy into the market--it's a deadweight cost. then, with your 91K chicken +1 you start to earn out your other costs. And maybe by chickie number 150K, you're making a profit. (These numbers are made up, of course.)

If you only produce 80K, you are having a very bad year indeed.

Farm commodity prices can have exceptionally dramatic and destructive swings because of the lag time between the price signal and the production response, combined with lack of production coordination. There's a milk shortage; milk prices shoot up; thousands of independent farmers all start breeding more dairy cows in response; a couple of years later, when those new dairy cows are old enough to start producing, there's a flood of milk on the market, prices crash, lots of farmers go bankrupt, and large numbers of now-valueless dairy cows are sent to slaughter. Then the cycle begins again.

This is prevented by not allowing the uncontrolled breeding of dairy cows (or chickens, or whatever) in response to a price signal. This could be done with monopolies or oligopolies, as is done in many manufacturing industries, or it could be done with government-imposed quotas.

There are two components to the quota system that I think you're getting confused.

First, there's the overall production number, set by the relevant governing body. It says that the total amount of milk which should be produced this year in Ontario is some big number. It's this big number which prevents the boom and bust cycle of prices and production.

Second, there's the quota system which divvies up that big number among producers and says who exactly can produce how much of the total. There are many ways in which this could be done. All production could be granted to a single large monopolistic milk production company. It could be granted to anyone who pays a proportional amount - maybe the fee of a penny would grant you the right to produce one egg per year, say. Or, as is done in Ontario (for various historical political reasons), it could be granted to producers who are big enough to make the paperwork and inspection costs worthwhile but not so big as to be oligopolies or monopolies.

Once a producer has a slice of the total quota pie, they can sell that to other producers for whatever price the other producer is willing to pay. So if I want to get out of the butterfat business, I might sell all of my quota to you. Then I can't produce any more butterfat, and you can produce whatever you were producing before, plus the amount I sold to you. Or, if I just want to scale back my operations, I can sell part of my total quota to you.

One kilogram of butterfat quota - which is most likely the amount that an average cow can produce per day - might be worth \$30,000 to you given the total profit you expect to make from an average cow over the coming number of years.

I think that covers most of your questions.
posted by clawsoon at 10:53 AM on December 31, 2014 [3 favorites]

And a kilogram of butterfat equals a cow because that's about what modern dairy production processes get out of a cow per day.
posted by straw at 10:54 AM on December 31, 2014

thanks for the replies. I have a much better understanding of the rationale behind the system now.

Just so I understand the butterfat issue:

Say I'm a dairy producer and I want to buy quota for 1 kg of butterfat (daily). Does this mean I pay \$31,000 (or whatever price is), and now I can produce a maximum of 1 kg of butterfat a day, on average?
posted by spacediver at 10:58 AM on December 31, 2014

Does this wikipedia link help at all?
How on earth one kilogram of butterfat equal to one cow?
Milk produced by cows contains butterfat. Jerseys, which generally have the highest output of butterfat, produce about 6 gallons (24 quarts/22.7 liters) of 5% butterfat milk per day. The butterfat is skimmed off and then used to produce cheese, cream, butter, and is re-added to skimmed milk to create 1%, 2%, and "whole." I'm not motivated enough to do the math that would convert milk volume to butterfat mass, but I assume that this is where that statement comes from.
Just so I understand the butterfat issue...
In Manitoba, the dairy quota is issued to our farmers in kilograms of daily butterfat quota that a dairy farmer holds, allows him or her, the opportunity to market approximately 26 litres of milk each and every day. There is no limit to the number of daily kilograms of quota a farmer can hold, but every dairy farmer must have at least 1.0 kilograms of daily butterfat quota to be registered as a milk producer and market milk here in Manitoba. At the end of each month the total kilograms of quota are added together and compared to the total kilograms of daily quota that have been issued within the month. Farmers are paid a domestic price for all the kilograms of butterfat that have been produced in the month within their quota. Any production that is shipped in excess of the total quota for a month is deemed over quota production and a farmer receives no revenue for over quota milk. The production of over quota milk in Canada is strongly discouraged.

If a dairy farmer is unable to fill the total kilograms of quota that have been issued for a particular month, (under quota) the unfilled or unused kilograms of butterfat quota are set aside for the farmer in the form of “Quota Credits” that can be used in a future month. In Manitoba there is a number of quota credits that a farmer can accumulate as quota credits. The unused quota credit limit is set 20 times a farmer’s daily quota.
posted by xyzzy at 11:07 AM on December 31, 2014 [1 favorite]

Say I'm a dairy producer and I want to buy quota for 1 kg of butterfat (daily). Does this mean I pay \$31,000 (or whatever price is), and now I can produce a maximum of 1 kg of butterfat a day, on average?

Correct. (Normally, of course, you'd buy a much larger amount than that.)

Also: If you bought it from another farmer instead of directly from the government, the other farmer has to reduce his production by that amount.
posted by clawsoon at 11:08 AM on December 31, 2014

thanks all, makes a lot more sense now. A major part of the confusion was that I had no idea the butterfat figure was with reference to a daily amount.
posted by spacediver at 11:12 AM on December 31, 2014

If you want to see why Quota's are good take a look at the current battle between OPEC and US based oil companies. OPEC's trying really hard to crush the current producers by overproducing oil which is severely driving down prices in the US. It's literally threatening to bring down the economies of Russia, Iran and Venezuela in the cross-fire.

http://www.vox.com/2014/12/16/7401705/oil-prices-falling
posted by bitdamaged at 1:14 PM on December 31, 2014 [1 favorite]

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