Canada’s dairy system runs on supply management whereby each farm is only allowed to produce a certain quantity of milk depending on the amount of quota they have, even though milk producing productivity has increased drastically in the past half century. This economic policy does not allow the market to act freely and thus causes inflated prices for consumers as well as a deadweight social loss for society. The very high quota price, along with all other costs involved in starting a dairy farm, gives low incentive for someone to start a new dairy farm. For those lucky enough to have a share of the quota pool (especially farmers who were given free quota when the system was first implemented), they are unable to increase market share through marketing or innovation. Rather they have to save up to buy more quota on which they will only see a profit many years down the road. Larger milk producers have bought up quota from smaller producers resulting in only 16% of dairy farms accounting for a whopping 45% of farm gate sales in BC. These domestic policies affect all Canadian dairy farms.

The BC Dairy Marketing Board sets the milk price well above the world market price which acts as a tariff to protect the domestic market. This issue has been the source of much controversy regarding US-Canada trade relations. Since domestic producers reach the quota themselves, there is no need for more milk products in the Canadian market; any imports over and above the quota maximum are heavily tariffed as a means of inhibiting imports. The US argues that Canadian quota tariffs are overly extreme and that they in fact contradict NAFTA which specifies that tariffs on all US exports be reduced to zero. Canada went to the NAFTA Dispute Settlement Panel regarding the US’s complaint and claimed that GATT rulings, which allow a slower reduction in tariffs worldwide, override NAFTA.

Canada’s persistence on this matter arose due to the relative size of the US dairy market compared to theirs. Since production costs decrease as output rises, and the US has much higher output (and therefore sells their milk to consumers for considerably less), Canadian dairy farmers fear that domestic prices will fall to US levels if the tariff was not in place. Alas this tariff actually protects Canadian dairy farmers.