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Saturday, May 25, 2013

Draft Plan for Ending Canada's Supply Management, Revision #2


In a previous posting, I proposed 4 Principles for ensuring that we can get out of our current SM frying pan, without falling into the fires of hell.

For those who don't fully understand how SM (Supply Management) quota system works (I include myself in that category), there are two sides to every quota.  There is a Producer Quota for the farmer to produce the commodity (ie. milk, eggs, hatchery chicks, turkeys, and chicken), and a separate Processing Quota for those interested in buying the commodities produced (ie. the processors, distributors, and retail sellers of those commodities).  The farmers, who produce under the Production Quota, need steady customers, and to get enough for their production to earn a fair living.  The buyers, who buy the produced commodities under their Processing Quota of the commodities need a steady supply of quality products at a reasonable price. 

I'm not totally satisfied with my rough outline of an idea, but I wanted to share it now, so we can get other ideas to further improve it.  Assuming that those 4 Principles previously proposed (see link above) are correct and sufficient, here is my 14 step plan for removing SM from Canada:

*** Start of Draft Plan ***
  1. Legislation is passed, both federally and provincially, or on a stand-alone basis by one or more sane and brave provinces willing to go it alone.  The date that the legislation passes is called "D-Day".  The SM production and processing quotas as they existed on D-Day will be defined as "Base Quota".
  2. From D-Day to D-Day plus 1 year, the new systems described below will be built and tested, to ensure they are ready for their launch as of D-Day plus 1 year.

    Some vertically integrated supply chains exist (ie. same or related companies own the hatchery, the grower, the slaughter plant, and may have a long term contract with a major grocery chain).  There may also be some producers and processors who are best of buds, know exactly what the other one wants and consistently delivers it at a fair price.  All of these should be able to opt-out of the supply management system as of D-Day + 1 year, except for the maximum quota production that they are authorized to produce.  As the SM system slowly disappears and the new system come into play, they will have to deal on the new system to retain, add, or subtract the amount of chicken they will produce, same as all other quota holders, as quota becomes extinct. 
  3. As of D-Day plus 1 year, there will be no more supplemental quota given to the current SM producers and processors.  If there is a contraction of SM market needs after D-Day, those holding Base Quota will all be reduced on a shared-pain basis, reducing their Base Quota for production and/or processing levels similar to the mechanism in the current SM system.
     
  4. As of D-Day plus 1 year, any supplemental production and processing quantities needed to serve domestic markets beyond the Base Quota will be auctioned off to the highest bidder. This new supplemental quota will be limited in quantity, but has no minimum Cost of Production ("COP") associated with it, and a sub-set of current SM rules (the minimum rules necessary to achieve fairness and stability), and the resulting SM products (ie. milk, eggs, hatchery, chicken, turkey) are sold on the open market to those who choose to buy it, or sold through the Canada Commodity Auction system.
     
  5. From D-Day to D-Day plus 1 year, a Canada Commodity Auction system will be designed, tested, and made ready for launching on D-Day plus 1 year.  It will be a standardized commodity auction system for all of Canada, but each commodity in each province will be done separately (ie. 10 provinces times 5 commodities= 50 separate auctions done each quota period), plus the special auctions described herein.  If there are specialty grades within a commodity (eg. free range organic chicken vs. regular factory chicken), then this can be a separate auction as well.   So as to minimize the auction sale prices, the auction will use a truncated k-double auction (see here and here), similar to that proposed for the Quebec Egg Marketing Board quota.  Initially, just the holders of SM Base Quota will be allowed to participate in these commodity auctions.  For a commodity auction for producer and processors, the participants (both producers and processors) will submit their bid for the quantity of the commodity (eg. kg of chicken) they are interested in, and the price they are bidding at (eg. $/kg).  The maximum quantity that can be entered as a bid will be the "proven capacity" of that producer or processor, based on historical proven capabilities or recent changes to their processes; all which will have to be carefully defined and managed so as to minimize strategic bidding and other gamesmanship that would disrupt the auction.
  6. Everybody who submits a bid or ask will pay/receive the same price if cleared (ie. cleared is when a bid or ask is accepted by a counter-party, and it closes successfully).  With this same clearing price for every successful party in the auction, for somebody who was willing to pay a lot more than the strike  price, they end up getting it cheaper than they hoped for (Yea!).  If someone bid too low, their bid won't be accepted as it was below the strike price that everybody enjoys, so no deal, better luck next time.  If someone was asking for a low price, they may end up getting a lot more $ than what they had asked for (Yea!).  If they asked for too high a price, their asking may be above the strike price, and they won't be selling their commodity during this auction, so no deal, better luck next time.  This system minimizes the need for guessing what everybody else is bidding (ie. avoids strategic bidding).
  7. I suggest there will be multiple auctions for each quota period.  This enables producers and processors to make a recovery play if their bid was way off in the previous round.  There can be a problem with multiple auctions.  If everybody plays nicely, there won't be a problem, they just re-set their bids (if they so choose), and they can get their commodity bought or sold in the next round.  However, some people may think they have the other side over a barrel. For example, a producer might figure than he can leave his chicken barn empty if he has to, but thinks that the processing plant absolutely MUST have a supply of chicken, so the producer significantly jacks up his asking price for a second round of auctions, trying to price gouge the processor.  If this was allowed to occur, it would tend to polarize the remaining bids to the extremes of the pole (ie. all bid are too low, all asks are too high, no sales will occur, everybody gets upset), rather than bringing buyers and sellers together in a reasonable manner.

    I therefore suggest that the first auction is only for those producers and processors within their home district.  If you are not located in that District (buyer or seller alike), you cannot put in an offer for Auction #1.  For Chicken Farmers of Ontario, there are 9 Districts, and each producer and processor would submit their bid/ask to the auction for their home district.

    District Map for Chicken Farmers of Ontario
    If they were not totally successful in buying/selling all that they needed, they would have a second chance in the province-wide auction, Auction #2.  With more players who can participate in Auction #2, if they wish to play games with their bids, they will most likely be left sitting on the sidelines with no transactions in the next quota period.

    Auction #3 can be held for those who still want to sell/buy, adding in additional buyers/sellers from other province within Canada (ie. inter-provincial bids and asks).

    Auction #4, the final auction for each production period can be held for those who still want to buy/sell that would include local, provincial, inter-provincial as well as foreign bidders.

    For transportation purposes, all winning bids/asks will be matched as to which producer will ship to which processor, so as to minimize transportation costs.  It matters not that the strike prices of the one shipping and the one receiving that shipment do not match, as there is a match somewhere in the auction system.

    If someone failed in all 4 rounds of auctions, they weren't trying hard enough, or they need to find a new career.

    Automated by software on-line, each auction could be done in 15 minutes.  Time would be allowed between auctions for people to reconsider their positions, seek advice, and to type in their chosen bids.

    This auction system will give preference to domestic production, if the buyers & sellers so choose.  If the local suppliers or producers become arrogant, and become bad actors, the other side will skip that auction and go to the next.  If somebody delivers sub-standard product, there will be a complaint mechanism, the shipment will be inspected, and if the defect is verified, damages and fines will be assessed.  In the end, the customer gets what they want.
  8. Some commodities are done in batches (eg. broilers, turkeys).  Other SM-commodities have a semi-continuous flow (eg. milk, table eggs) for 1 to 3 years which is the animals natural lifecycle, which cannot be easily shut off and re-started.  This could cause a market bargaining power imbalance between producers and processors (ie. producers MUST sell, as the product keeps coming, whether or not a willing buyer and an affordable price can be negotiated).  As compared to a dairy farmer, a milk plant can more easily clean out the plant, lay everybody off, and wait for better milk prices, or better auction results.  The farmer isn't so lucky.

    To make each side have more equal bargaining power, it is suggested that long term "take-or-pay" contracts could be auctioned for each commodity and grade, for example a 1 to 5 year production quantity, auctioned well in advance of the start of the start of delivery.  Upon winning a reasonable auction for his milk, the farmer knows his budget and cash flow, and has time to grow his own or buy a good producer for his herd, and move one or more of his cull cows to the Hamburger Department.  When that long term contract is close to expiry, the farmer can decide to retire that cow, or continue milking her and sell her milk on the more lucrative spot market (ie. month by month).
     
  9. This auction system used to sell the commodities (ie. eggs, milk, chicken, turkey, pullets), can be similar for selling the remaining quota for those commodities (ie. farmer retiring & wants to sell his quota).  Beginning on D-Day plus 1 year, Canada Quota Auctions will be held on a regular basis via Internet system with maximum openness, transparency, disclosure, and accountability.  The strike price will be determined by the bids and asks from SM quota holders and from non-SM quota holders (if any are in the auction).  Once each auction is completed, the holders of SM Base Quota who participated in the auction will be offered to purchase this supplemental quota on a right of first refusal basis at the price of the winning auction bid, starting at the person who bid the lowest amount but still above the strike price, continuing up the list of bidders until all the supplemental quota has been sold (ie. the truncated basis of quota assignment).  Once non-SM Base Quota holders are allowed to enter the auctions (see Step #13 below), then if the holders of SM Base Quota don't buy all of the supplemental quota at the auction's winning bid price, then non-SM Base Quota holders are allowed to purchase the remaining supplemental quota, starting at the person with the lowest auction bid that was still above the strike price, going up the list until all the supplemental quota has been taken up.
  10. For the period from D-Day plus 2 years to D-Day plus 10 years, Canada Commodity Auctions will hold a special auction where 10% per year of the then-current SM Base Quota and non-SM supplemental quota can be removed from the Canada Commodity Auctions monopoly for trading on alternative systems (ie. competing auctions, private deals, vertical integrations, etc.).  All producer and processor SM Base Quota and supplemental non-SM quota must trade through Canada Commodity Auctions unless it has been removed from this mandatory system through the auction method described here.  This special auction will continue each year until the Canada Commodity Auction is defunct from lack of customers who wish to use their service, or they have proven their worth to the industry (ie. less and less monopoly, more and more voluntary participants assuming the Canada Commodity Auction remains a better system than the alternative systems that have sprouted up, if any).  This step helps ensure stability during the transition period, minimizing the damage to Canada and consumers caused by half-baked ideas by the various SM participants.
  11. Starting from D-Day plus 5 years, the SM Base Quota for each commodity (ie. milk, eggs, chicken, turkey, hatchery) will be reduced by 1% on a Canada-wide basis, and that 1% will be added to the Canada Quota Auction system for sale to the highest bidder.  On D-Day plus 6 years, an additional 5% of SM Base Quota will be removed from total outstanding SM Base Quota, and transferred to the Canada Quota Auction system.  Similarly, between D-Day plus 7 years and D-Day plus 10 years, each year thereafter 10%, 20%, 30%, and 34% will be extinguished from SM Base Quota and transferred to the Canada Quota Auction system, until all SM Base Quota is fully extinguished by D-Day plus 10 years.

    As Base Quota is reduced, there may be dynamic surging or fluctuations due to multiple players simultaneously adjusting their business response to the publicly viewed stimulus seen by all.  In this case, a mechanism is required to dampen or eliminate these oscillations.  It is suggested we need a mechanism to efficiently allocate the available demand to those who value it the most.  Ausubel's Efficient Ascending Bid for Multiple Objects is recommended for consideration.
     
  12. Between D-Day and D-Day plus 10 years, any holder of SM Base Quota can choose at any time to:   a) sell their SM Base Quota privately to others who already own SM Base Quota;   or   b) Sell their SM Base Quota to someone who currently doesn't own any SM Base Quota;   or   c) After D-Day plus 1 year, sell their SM Base Quota via a special auction using the Canada Quota Auction system.
  13. As of D-Day plus 5 years, new industry entrants who do not own SM Base Quota can begin to participate in the Canada Commodity Auction system, bidding for either Production quota or Producer quota, or both.  For the one year period after D-Day plus 5 years, the number of new entrants will be restricted to just 10% of the number of holders of SM Base Quota as of D-Day plus 5 years, calculated separately for both Producers and Processors SM Base quotas.  Note that they are buying something that is disappearing over the next 5 years, so bid accordingly.  Each subsequent year from D-Day plus 6 years to D-Day plus 10 years, the maximum number of new entrants will be increased by another 20% of the then current number of authorized participants in the Canada Commodity Auction.  This limitation on new entrants and their slow addition will continue until the stability of the then-current SM system and the then-current Canada Commodity Auction system is demonstrated, or 100% of all applying entrants are immediately accepted.  There may be more applications for being a new entrant than the spots currently permitted to participate, so this will be assigned by a separate auction to the winning bidders under the Canada Commodity Auction system.
  14. As of D-Day plus 10 years, the current Supply Management system in Canada will have been totally dismantled, replaced by a free market system.
  15. From D-Day to D-Day plus 10, all governments and industry groups will be encouraged to provide adequate training, loans, bridge financing, counseling, research, communication systems, forums, websites, disclosures, newsletters, user focus groups, reports, audits, and other facilitation, support, and management assistance to ensure a smooth transition.
     
  16. Canada's Competition Bureau will be ordered to be on high alert, watching for unfair trade practices. especially between the debate on the draft legislation (ie. prior to D-Day), up until D-Day plus 10 year transition period, and beyond.  It will probably help for the Competition Bureau to do a Canada-wide roadshow to all those within the current SM system, starting as of D-Day, focusing their communication efforts with the public, plus all suppliers to SM (ie. equipment, feed, drugs, services, etc.), plus all customers of SM producers and SM processors, so that the rules are made very clear, that there will be a zero tolerance for nasty behaviour in the marketplace, and swift punishment for those who wish to test the resolve of the Competition Bureau, and the Competition Tribunal.
  17. After D-Day plus 5 years, imports of commodities into Canada will start to be slowly lifted, and import tariffs reduced, so that at D-Day plus 10 years, they are fully removed and Canada has joined with the rest of the world in full free markets on these commodities.  After D-Day plus 5 years, foreign entities can apply to participate into the Canada Commodity Auctions.  Hopefully this will quickly help Canada to go from last place in OECD exporting on these commodities  (1.4% market share today) to first place (about 50% market share, the maximum sustainable share we could achieve).  This alone can increase Canada's SM-5 production capacity to 5 times or more, as compared to what is currently done domestically in Canada.  That could be a huge driving force for Canada's GDP.  Today, agri-foods in Canada are just 8% of our GDP and hire 2.1 million people.  If this plan truly works, these 5 SM commodities can grow by a factor of 5 or more, so Canada's GDP would increase by 32%, or 5.7% per year for 5 years.  Not even China gets that kind of growth.  What are we waiting for?
*** End of Draft Plan ***


So that's it, 17 "simple" steps to get us out of SM purgatory.

Now it's your turn.

Show me and the world through objective facts and reasoning why this proposal won't work, then propose a solution to the problem you identified.

If you want to get emotional about this draft proposal without facts, I'll listen, and I hope it makes you feel better, but that doesn't help find a solution.  If you wish to pontificate and make bald assertions, with neither facts nor explanations as to why and how this draft plan will work or won't work, that doesn't help much either.

Identify a risk that isn't adequately handled; that's helpful.  Discover how some idiot could screw everything up by doing "X", and find where a gaping hole in the draft system exists that won't prevent or protect us, that's also helpful.

I'll keep modifying this draft until everybody is happy.  Then we can start implementation.



Revision History

Current Version:   Rev. 2   Posted 2013/06/05  21:30 hrs.

Rev. #1    Posted on   2013/05/25   1:30 PM   superseded by Rev. #2

Original Version of Plan:   Rev. #0   Posted on 2013/05/25   11:24 AM,    superseded by Rev. #1

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