Can supply management and innovation coexist The dairy industry offers a surprising

Canada has a rich history of innovation, but in the next few decades, powerful technological forces will transform the global economy. Large multinational companies have jumped out to a headstart in the race to succeed, and Canada runs the risk of falling behind. At stake is nothing less than our prosperity and economic well-being. The FP set out explore what is needed for businesses to flourish and grow. Over the next three months, we’ll talk to some of the innovators, visionaries and scientists on the cutting edge of the new cutthroat economy about a blueprint for Canadian success. You can find all of our coverage here.Agropur Cooperative, the maker of OKA cheese and Natrel milk, is what what a free-market economist might call an outlier. The Longueuil, Quebec-based co-op is owned by about 3,300 members of Canada’s “dairy cartel,” which is how many of the dismal scientists on Twitter describe the 13,000 farms responsible for almost all of the lactose in the Canadian diet. Providing the raw ingredient for cheese, ice cream and whey powder is an unusually tough business. However, Canada’s dairy farmers endure their daily dawn-to-dark rituals comforted by the knowledge that they will be spared the vagaries of supply and demand. Government-sanctioned production quotas ensure that fluid-milk prices exceed the cost of production and a massive tariff wall keeps all but a small percentage of imports at bay. Read our full Innovation Nation seriesTrade deals that lock up intellectual property rules could have dangerous consequences for CanadaIt will take much bigger thinking if Canada is to compete with giants in the ideas economyThe disciples of Economics 101 say that such cushiness dulls the desire to innovate. Money that could be spent on the newest farming techniques instead is used to lobby politicians to keep milk prices high. You might do the same if you were a dairy farmer. Their expenses ate up 77 cents of each dollar they made in 2015, according to Statistics Canada’s latest Census of Agriculture. The expenses-to-receipts ratio was better in 2010, when it was 0.73, but milking cows remains the easiest path to a decent income in primary agriculture, assuming you own a decent amount of that quota. Growers of grain and oilseeds do ok; their ratio was 0.79, compared with 0.76 five years earlier. The rest of Canada’s farmers struggle to earn a profit. Beef ranchers and sheep-and-goat herders barely cover their costs, according to the census. Back to Agropur. The co-op was angered by the new North American trade agreement, as the price of peace with the Trump administration was more duty-free dairy imports. Still, it’s hard to demonize Agropur’s owners as coddled rent seekers whose idea of innovation is finding new ways to elect sympathetic politicians. The 80-year-old co-op is remarkably ambitious for an outfit that could do fine by collecting inflated payments for its wares from a captive audience. It has developed all sorts of products beyond milk, and it operates 39 plants in eight provinces and six states, generating sales of more than $6 billion in 2017. Nor is it content to rest on its achievements. In October, Agropur started North America’s first accelerator for dairy startups, selecting five entrepreneurs, including the founders of a Montreal-based provider of do-it-yourself cheese kits and a San Francisco-based maker of high-fat, low-sugar yogurt. “We cannot be reactive to innovation,” Robert Coallier, Agropur’s chief executive, told me in an interview on Oct. 31, by which he meant the co-op intends to be a leader, not a follower. “We’re pretty unique,” he acknowledged.  Indeed. The economics textbooks aren’t wrong when it comes to assessing the effect of excessive coddling on a company’s entrepreneurial spirit. “Canada has generally not been a significant creator of new primary agriculture and food processing technologies,” officials at Agriculture Canada state in documents obtained recently by the Logic through the Access to Information Act. That assessment wasn’t directed at milk producers specifically, but there is reason to think that Agropur is the exception that proves the rule. Canadian dairy farmers feel little impulse to even achieve economies of scale: the average herd consisted of 79 cows in 2016, an increase from 62 a decade earlier, but still tiny compared with typical operations in Australia, New Zealand, and the U.S., where individual farms tend to manage hundreds of cows. The Canadian industry’s general contentment with staying small means those in the milk business who want to grow must go overseas. Saputo Inc., the big Montreal-based dairy processor, is spending hundreds of millions of dollars outside of North America in order to win a piece of the fast-growing Asian market.“We don’t see Saputo investing that kind of money in Canada,” Simon Somogyi, the Arrell chair in the business of food at the University of Guelph, told me in an interview on Nov. 20. “In my mind, a system that provides an incentive to produce without giving much thought to markets, that’s not good.” Prime Minister Justin Trudeau did two things to soften the blow from the new U.S.-Mexico trade agreement for Canadian dairy farmers: he said the federal government would compensate them for their losses from new import competition, and he promised to set up a working group that “will chart a path forward to help the dairy sector innovate and remain an important source of jobs and growth for future generations.” That path probably won’t lead to the dismantling of supply management because the U.S.’s heavily subsidized dairy farmers would flood the Canadian market. But we might end up with a system that favours the most efficient and innovative farmers, as the Trudeau government has identified agriculture and agri-food as an industry that should be generating more exports and wealth. Agropur’s recent history suggests innovation is possible within a supply managed system so long as its benefactors are a little uncomfortable. The co-op got truly serious about developing and commercializing new ideas a few years ago, according to Dominique Benoit, vice-president of institutional affairs. That would have about the same time it was becoming clear that trade agreements with Europe and Asia would open the door to more dairy imports. Now it’s sponsoring startups. There’s a reason the economists think competition is a good thing. • Email: [email protected] | Twitter: