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Between a Cap and a Higher Price: The Dairy Quota Trilemma

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  • Chernoff, Alex W.

Abstract

The system of supply management in the Canadian dairy sector requires that farmers acquire quota to produce milk. In Canada's largest dairy producing province, Quebec, a ceiling on the price of quotas has been in effect since 2007. Previous research established that the use of quota price ceilings create a new source of inefficiency in the Canadian dairy sector. An alternative method for lowering quota prices is to lower the rent from quotas through lowering the farm price of milk. I determine the magnitude of the decrease in the farm price of milk that would be required to reduce the valuation of Quebec dairy quotas to the current price ceiling of $25,000 per unit. Accomplishing this task requires modeling the implicit valuation of quotas during the price ceiling era. Starting from a dynamic model of the demand for quotas, I develop an econometric model to estimate producers' discount factor. Using my econometric results and the modeled equilibrium price, I estimate the price of dairy quotas over the period 1993-2010. In 2010, I estimate that dairy quotas in Quebec would have traded at a price of $31,955 in the absence of the price ceiling. My results indicate that lowering the valuation of quotas to $25,000 per unit would have required an 11.83% reduction in the farm price of milk.
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  • Chernoff, Alex W., 2013. "Between a Cap and a Higher Price: The Dairy Quota Trilemma," Trade Policy Briefs 146977, Canadian Agricultural Trade Policy Research Network.
  • Handle: RePEc:ags:catptp:146977
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    References listed on IDEAS

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    1. Antonio Alvarez & Carlos Arias & Luis Orea, 2006. "Explaining Differences in Milk Quota Values: The Role of Economic Efficiency," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 182-193.
    2. Alfons Weersink & Calum G. Turvey & Abdulahi Godah, 1990. "Decomposition Measures of Technical Efficiency for Ontario Dairy Farms," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 38(3), pages 439-456, November.
    3. Alex Cairns & Karl Meilke, 2012. "Price Ceilings on Milk Production Quota Values: Future or Folly?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 60(1), pages 93-112, March.
    4. Alfons Weersink & Calum G. Turvey & Abdulahi Godah, 1990. "Decomposition Measures of Technical Efficiency for Ontario Dairy Farms," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 38(4), pages 1023-1023, December.
    5. Boots, Maroeska & Oude Lansink, Alfons & Peerlings, Jack, 1997. "Efficiency Loss Due to Distortions in Dutch Milk Quota Trade," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 24(1), pages 31-46.
    6. Richard Barichello & John Cranfield & Karl Meilke, 2009. "Options for the Reform of Supply Management in Canada with Trade Liberalization," Canadian Public Policy, University of Toronto Press, vol. 35(2), pages 203-217, June.
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    Keywords

    Canada; dairy; quota; Agribusiness; Agricultural and Food Policy; International Relations/Trade;

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