Professor Danny Le Roy on Canada supply management issues
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Summary
In this episode, we discuss supply management in the dairy industry in Canada and the benefits it provides to farmers and consumers. We also discuss the benefits and drawbacks of supply management policies and whether or not they need to be changed.
Transcript
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Thank you very much, Doctor, for joining us today.
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Oh, you're welcome, Corey. I'm very glad to be here.
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So you kind of heard me starting out in there. Maybe if you could expand a little. I mean,
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what is Canada's supply management policy and maybe a little bit of why? Why was it brought
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in? I like to think the intention was good. Very good intentions. Supply management was
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first introduced in Canada in the dairy industry in the late 1960s, the early 1970s.
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And the aim of the program was to enhance and stabilize the returns to raw milk producers.
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At the time, there was a lot of price variability in raw milk and people who produced milk tended to
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be in parts of the country where alternatives weren't very good in terms of production of other
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commodities. So it was a way of providing assistance to individuals engaged in agricultural activities
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in challenging areas. The idea behind how it works is that prices for producers are determined based
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on cost of production formula so that producers, most of them have an opportunity to earn a living
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and a return on their enterprise. Like I said, this was first introduced in dairy in the late 1960s,
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early 70s. Eggs became supply managed in Canada in 1972, turkeys in 1974, chickens in 1978,
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and broiler hatching eggs in 1986. So there's five commodities in this country that are strictly
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controlled in terms of their production and the prices that producers receive.
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Okay. So, I mean, at this point though, do we need these policies? I mean, I have seen some papers put
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out and studies showing that we're paying quite a premium for those products in Canada when perhaps,
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you know, if those policies were lifted, we could see some reductions in some of our food costs.
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Well, it's an interesting way you phrase that. You use the royal we, do we need this?
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Right? Well, there are some producers that do, right? Over the course of the last 50 or more years,
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many intergenerational farms in the supply managed area, they've become quite dependent on the
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continuation of this program, right? It enables, supply management enables them to sell a product
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into a protected market, privileged market, at a price that they know that they're going to receive
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if they meet the specifications in terms of quality and quantity, right? There's a, so there's,
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they don't have to worry about some of the risks that other producers face in terms of marketing
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their commodity, right? They don't face the same price risk, for example, that raw milk producers or
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egg producers or poultry producers, they don't face the same price risks as a, as a producer of cattle or,
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or grains or oil seeds do in Canada. Now, there would be some advantages, right? If these policies were,
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were, were removed, or were changed. One of the things that is a pretty clear fact about economic science
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is that whenever there is free trade between individuals, each counterparty to the transaction
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wins, right? So if it were possible to remove the impediments between willing buyers and willing sellers,
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there could be more wealth created in markets for raw milk, eggs, turkey, chicken, and so on.
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So, I mean, if we moved away from it, I mean, it was a bit of a trend. A lot of nations brought in
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supply management policies during that time as well. New Zealand, Australia are examples we hear about
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a lot. I mean, you can't just flick a light switch and say, okay, we've stopped the policies. It would
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disrupt the producers terribly. I mean, quotas became a commodity, even an artificial one. So they would need
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to be bought out or eased out of the system. Well, that's also, that's also a political question,
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right? Yeah. So the choice of subsidizing somebody to, to help them exit the industry is, is also a
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form of a subsidy. But this was used, and you're correct, it was used in places like Australia,
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where the supply managed system that once existed was phased out over a period of time. And consumers
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helped to finance that. So in view of helping farmers transition to a more open market, there was a
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surcharge levied on consumers at retail level that helped finance the transition for primary producers
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of raw milk in Australia, right? So this enabled them to move with, I guess, less financial pain for the
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producers than would otherwise be the case. But it's a great example of Mansur Olson's, you know, the
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logic of collective action. In these circumstances, there's a small number of beneficiaries who have a
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very concentrated self interest in maintaining the status quo, where the costs are dispersed, on the other
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hand, over a large number of people. So you were mentioning in the introduction, you know, we pay higher
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prices, Canadians, depending on where you're located, pay higher prices for, for supply managed products
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in the grocery store, like butter, for example, that's one that's been in the headlines a lot and
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fluid milk, and, and so on. Yeah, we, we do, we do pay some higher prices for that. But most people
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are more concerned about their mortgage payments.
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So yeah, maybe I'm paying 50 cents, 75 cents more for a gallon of milk at the grocery store,
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I'm not going to get too much in a twist about that. Whereas a dairy producer, a raw milk producer
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would if, if supply management was terminated, right? There's a big impact on, on the, on their
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enterprise compared to a few dollars a week for a family of four consuming groceries.
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Yeah, well, it's always though that case gets made. Oh, it's just a cup of coffee a day. It's
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just a little bit here and a little bit there. But that, that sort of suddenly we find that we're
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But, but that adds up, it adds up, right? And it also adds up for the, for producers themselves,
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right? So when you're insulated from, from international competition, you don't fit,
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you don't have the same incentives in terms of changing your business. And in terms of
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processors in Canada, producing the products that consumers want, right? If you're selling into
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a protected market, you don't face the same incentives as others who, who have to, who, who
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compete not with just their next door neighbors and other processors or producers domestically,
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but it's international competition. So I, one takeaway is that while people often say, well, supply
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management has been put in place to, to help support and protect the, the, the, the farmer
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in Canada against foreign competition. In fact, these barriers to trade protect farmers in Canada
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from their fellow Canadians and the, and the decisions that they would make in terms of the
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goods that they would produce if they were left free to do so, if there weren't impediments to
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international trade. Well, we're right back to the, the beginning statements you said,
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you know, in a true free market, both the buyer and the seller are going to benefit if they're just
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allowed to, to deal directly with each other. I think of back an example with the wheat board,
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there was a group in Saskatchewan when we still had the wheat board going and they wanted to
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start actually a pasta company in their small little town. They were going to use their own wheat.
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They were going to manufacture the pasta. If we bypass all these middlemen, we can come up with a
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really good product and employ some local people and, you know, diversify what we do. But it turns
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out they would have had to sell their wheat to the wheat board, buy it back to the wheat, from the
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wheat board at an inflated price, and they would have lost all advantage. So they threw the plan out
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the window. But I mean, talking about with, I guess, supply managed industries, it stifles
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creativity. I mean, there's a lot of producers probably have some good ideas or areas where they can
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broaden what they do, but they're pretty constrained with where they're sitting.
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They are. In fact, raw milk is the most stringent of all of them, all of these supply managed
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commodities. The only legal buyer of raw milk in every province is the Provincial Milk Marketing
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Board. While a farmer can consume raw milk that he or she has produced on their own enterprise,
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they're precluded legally from selling that raw milk to anybody else other than the Provincial Milk
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Milk Marketing Board. And that's not true for the other supply managed commodities, which is why
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when you go to a farmer's market, or you might see some very small producers that have small
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flocks of chicken that can sell directly to consumers or eggs, right? You can have a roadside
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stand, sell farm fresh eggs, as long as you're not of commercial scale. And every province specifies
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what that threshold is. In some provinces, it's actually quite a big number. In other places, it's small.
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But raw milk is the only one where that opportunity for a primary producer doesn't exist,
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to sell something that they have produced themselves, that they cannot legally sell that
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to anybody else except a government agency. Well, and that's led to cases of dumping. I've talked on this
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show about before my wife grew up on a small dairy farm, but her father only had a quota for cream.
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And so he would skim the cream, he would sell that the household would drink as much milk as they
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could feed some to the pigs, but the rest would get dumped because it was illegal to sell the milk.
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And that was well, it's illegal to sell the milk, but we want to be careful, right? So with respect to
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that high profile case that fell in Ontario, who is video recorded himself of dumping milk,
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there probably isn't a single producer in Canada that hasn't done that at one time or another,
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right? There's a quality issue where the milk has to be dumped, or it's the less expensive alternative,
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right? If producers supply more than their quota allotment, they're penalized. And sometimes that
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penalty is quite expensive. So the best course of action is to dump a little bit. Now,
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in this particular case, the timing I suppose was very bad because, you know, just coming through
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the pandemic and prices for commodities or prices for groceries were quite high. And this poor fellow
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has to dump his milk because he's produced too much of it. So it was the optics weren't very good,
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Certainly. And I mean, you know, social media gives a new way to make a point rather than
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than just say, or transferring the oral stories like I did with my wife, for example. So I mean,
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getting a little into the political side, though, and you know, that's the dairy cartels, if you want
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to call them such a very, very effective political lobbyists, they influence parties of all stripes.
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They protect that supply management system very jealously. Do you think there's ever going to be a
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political will to start easing out of it? I interviewed all of the conservative leadership
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candidates back when they're running for the leadership. And only one of them said he would
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challenge the supply management system, not another, the others were all terrified as soon
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as it came up, they'd rather not know one of the one of the things that we do know in this country is
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that to their credit, they have one of the most effective lobbying organizations around.
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Right. And this is manifest itself in some of the subsidies that the producers are now receiving
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because of trade agreements, the federal government has signed with the European Union with the Trans
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Pacific Partnership Partnership, and more recently, the Canadian US Free Trade Agreement, NAFTA 2.0.
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Right. Producers of supply managed commodities are receiving subsidies for lost market share
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as a consequence of signing these agreements, when in fact, there's very little evidence to suggest that
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that there has been market share that they've lost. New Zealand and the US are currently, they've got a case
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that the amount of access that's, that has been set aside, isn't being filled. Right. So raw milk production
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this past May was set record level. So that, you know, we're producing as much as, as we have ever have in this
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country of supply managed commodities. There's never been fewer primary producers of supply managed
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commodities. There's fewer than 10,000 raw milk producers now in this country. There's fewer than 500
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dairy farms in the province of Alberta. And there's about a, you know, a couple of thousand primary
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producers of the other supply managed commodities. So in terms of the politics, getting back to your point,
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there's, there's maybe a 12,000, 13,000 producers of, of supply managed commodities that wield enormous
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political influence. Well, and, and that's another aspect. I mean, some people, uh, defenders of the
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supply management policy said it helps protect the family farm. Now I wouldn't necessarily blame supply
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management, but at least evolution and economies of scale. I mean, it used to be over a hundred thousand
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producers, I believe a couple of decades ago, and now it's contracted down to, as you said,
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about 12,000. So they are becoming just a, of necessity, larger corporate enterprises.
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The romanticized family farms is long gone. Yeah. I agree with you.
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Well, we'll, we'll see if we can start solving these. Like I said, a lot of people, when you,
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you talk about supply management, though, they, the eyes glaze and then they tire. And then as
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there's not a lot of will on the ground necessarily from the public, but it is something that's costing.
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It is. And I think it's important to remember all the people involved, right? Uh, there, there are
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beneficiaries of the continuation of this policy, and there are people that do stand to lose, at least
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in the short term. Uh, so, um, one of the things that's really important in economics is that there
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isn't this royal, we there's you and I, and each of us make our own decisions with respect to what we
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produce, what we consume and whom we, we interact with. Well, I have to avoid triggering you with
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that, uh, we term. I appreciate the correction and it's a good, very valid point. So, uh, before I let
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you go, where can people find your stuff? I know you've done some work with the Fraser Institute and
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you're at the University of Lethbridge. Uh, do you write further publications or anything like that?
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I do on occasion. If you do, uh, uh, if you want to find me online,
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go to the University of Lethbridge Department of Economics. Um, I coordinate the agricultural
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studies program here. And, uh, as you mentioned at the outset, one of the, my areas of interest is, uh,
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agricultural production, uh, marketing and trade. And, uh, that's certainly, uh, has, it's very
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important in Canada with, uh, supply managed commodities. And of course in Southern Alberta,
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where we are, it's, it's a particularly important for, uh, beef and for grains and oil
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seeds and crops grown under irrigation, lots of issues in agriculture and agri-food and lots of
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opportunity. Absolutely. No, there's a much more than we could cover in 15 minutes. That's for sure.
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I hope we can have you on again to talk about these kinds of things down the road then.
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That would be my pleasure. I look forward to it, Corey. Enjoy the rest of your day.
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Excellent. Thanks for taking some time with us, Danny. You're welcome.