They called us Cheese-heads. It was not intended as a compliment.
A brick of the tasty protein solid could be picked up in the small US border town of Sumas for about five dollars, while in Canada it would set you back by more than twice that amount. We would slip down to the sleepy little village and buy eggs, cheese, fuel, and maybe some bread, and be back in our own kitchen an hour later having saved enough to call the trip a success.
Entire shopping malls sprouted up in the relatively small US border towns to take advantage of the Canadian price disparities. When we left the Lower Mainland for Prince Rupert, we stocked up, buying about a dozen massive bricks of cheese from the states. We were sad to see it run out a few months later, but there are only so many grilled cheese sandwiches a family can eat.
Why the price difference? As far as the cheese went, it was not market-driven.
Stung repeatedly by the challenging ups and downs of their business, dairy farmers lobbied for market interventions in Canada several decades ago and won them. Controls were imposed on producers restricting the amount of dairy each farmer was allowed to sell. Supply was strictly controlled using assigned quotas, while the demand side of the Canadian market stayed relatively inelastic. Thus, prices rose, and the business became more profitable and stable. Good news for farmers, less so for consumers.
Fast-forward thirty years or so. The original beneficiaries of the quota system were ready to retire. Anticipating this changeover, regulations allowed for the orderly sale of dairy quota to the next generation at prices negotiated to reflect the inherent value of this stable, proven stream of cash flow. The buyers, usually younger, often needed to borrow to enable the purchases of these successful businesses, and committed their families to the toil required to work down the debt over the next decade or more.
The first generation may have retired in reasonably good shape, but the newer generation had work ahead of them.
Pressured by consumer groups and foreign governments, the program was considered for dismantling by subsequent governments, but that would be a huge disadvantage to second and third generation farmers. The debt doesn't just go away if the system gets revised.
Canada is by no means alone in this. Since food is an essential commodity, governments around the world take measures to make farming a more viable enterprise. Attempts at international agreements to break down the subsidies are extremely challenging, and entangled with competing priorities. Try telling the young dairy farmer that the bundles of money he just spent on quota is no longer tradable.
In short, well-intentioned interventions always have unintended consequences. It's a matter of perspective whether the consequences are worse than the original problem. Regardless of one's point of view, any attempts to pull away from the subsidies must be done slowly and prudently to avoid yet another set of imperiled households.
The price of real estate in Vancouver and other areas is another interesting case in point. Artificially low interest rates, intended to boost the overall economy, benefit borrowers competing for homes on the market. If more borrowers qualify for a loan, the home prices get bid higher, and everyone is happy. The guy who bought our North Vancouver house in 1970 for $40,000 and still owns it is now living in a middle class home worth over $900,000. Nice.
I note a sense of contentment among some of the older Vancouver homeowners who have so benefitted from this sort of growth. The Wealth Effect refers to the sense of wellbeing we derive from rising real estate and stock market prices. This is by design. When we have that inherent feeling of confidence, we spend more and this feeds through to the general economy, benefitting everyone, and everyone's investment portfolio.
When housing prices or stock markets get ridiculous compared to incomes available to support them, or when interest rates are raised materially again, the weaker segment of borrowers and more speculative companies will come off their peak values.
The key to staying on the good side of these equations is to always measure debt or stock performance against sustainable cash flow. Avoid speculating on future price appreciation if it bears little or no relationship to income.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
