Determining factors of Canadian milk quota prices

• Main Author: Ulheim, Jørn
• Language: English
• Published: 2009
• Subjects: Milk trade - Canada; Marketing boards - Canada
• Online Access: http://hdl.handle.net/2429/5732

Issues regarding the effects of supply management systems, seem to attract special attention from the industry, policy makers, and academic environments. The Canadian dairy industry is no exception. In addition to higher milk product prices for the consumer, the milk marketing quota is perhaps the most debated side of the dairy supply management regime. The milk quotas were initially allocated to each farmer, and are now traded openly in most provinces through a milk quota exchange. Substantial variation in milk quota prices can be observed in the last 15 years as compared to the TSE 300 Stock Price Index. The objective of this research is to analyze and explore why the large variation in observed milk quota prices in the 1980's and 1990's occurred, and to reveal the factors that are important for the formation of milk quota prices. Two factors are the focus of this thesis, one is the uncertainty regarding the future of the supply management system, especially during the two major trade negotiations, GATT and CUSTA, that took place in the late 1980's and early 1990's. The second is the expectations of future returns from holding milk production quotas that were formed in the presence of this uncertainty. Based on a standard capitalization model, three price functions are derived. Using an adaptive expectation framework, and one of the most complete data sets collected for the purpose of analyzing quota prices and quota issues in Ontario, Quebec, and Alberta, the estimated results suggest that, in general, unit changes in the net profit variable are important in MSQ pricing, more so for Used MSQ prices and fluid milk quota prices, than Unused MSQ prices. This supports the impression that fluctuations in Unused MSQ prices are partly driven by short-run considerations to avoid over-quota and maintenance penalties. The adaptive expectation model provides better results when explaining the formation of MSQ prices than fluid milk quota prices. This analysis also concludes that the milk quota auction is not a perfectly understood marketplace, and that several puzzles remain to be explained in future work.