An economic analysis of inter-regional trade in the Canadian dairy industry

The objective of this research is to assess the effect of inter-regional trade liberalization in the Canadian dairy industry. Inter-regional trade facilitates specialization which enables a wide variety of dairy products to be produced and the benefits of comparative advantage to be widely enjoyed by producers and consumers.; To realize its objective, this research formulates an analytical framework in which a raw material is used to produce many final products. The output of the raw material is limited by production quota and trade is limited to final products only. Final products are manufactured using the raw material and other inputs in fixed proportions. The processing technology therefore links the market for the raw material to the final products markets. This analytical framework is applied to the Canadian dairy sector and it is sufficiently flexible so that it can be applied to other industries also.; The analytical framework is expressed as a math programming problem. The problem is solved by choosing the level of activities that maximize an objective function subject to a series of policy and processing constraints. The activities can be considered variables whereas the constraints are equations inter-relating these variables. The model has approximately 450 variables and 750 equations.; The decision variables in this model are the quantities of raw product supplied, the quantities of retail products demanded and the quantities traded between regions. The model defines the Maritimes, Québec, Ontario, Manitoba, Saskatchewan, Alberta, and British Columbia as separate production/processing/consumption regions. Each region produces a raw product, raw milk. The raw product is transformed in each region into seven retail products: fluid milks, butter, cheddar, other cheeses, soft products, powder and other manufactured products (condensed and evaporated milk). Regional production decisions include the quantity supplied of the raw product and of each retail product. Final consumers determine the regional quantity demanded of each retail product and processors decide how much of the raw product to process into each retail product. It is assumed that final consumers are indifferent to the regional source of supply.; The model was calibrated to reproduce the consumption, production and trade which occurred in 1995. The model provides an accurate depiction of both the retail and raw product market levels. The solution of the math programming problem generates primal and dual solutions at both market levels that reflect the quantities demanded and supplied and prices that existed in 1995. The model was used to assess the inter-regional effects of four alternative policy reforms: (1) allowing inter-regional trade in fluid milk, (2) the removal of raw milk supply constraints and (3) the impact of allowing inter-regional trade in fluid milk and removing raw milk supply constraints together, and (4) domestic market liberalization plus the removal of trade barriers with the United States.; The results suggest that as markets are liberalized, producer and retail prices change, and these price changes vary by region. In response to price changes provinces specialize in the production of a few dairy products while local demand for other dairy products is met exclusively through imports. Industry stakeholders would realize welfare gains if raw milk markets were allocated on the basis of economic, rather than political, criteria. Producers and processors would further exploit their comparative advantage to lower per unit costs of production. Moreover, consumers would respond to lower prices by increasing their quantity demanded of dairy products.