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

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.