types of quotas to milk processors. One quota pool is based on historical allocation of milk for the dairy year, prior to the signing of the new agreement. The quota holder captures rents associated with the historic base, and farmers have an incentive to join cooperatives to obtain any excess profits associated with historic base quotas held by cooperatives. The other quota pools are designed to increase the flexibility of the system and the access to milk for new firms. To the extent that these markets are profitable, cooperatives give farmers access to associated rents through vertical integration.
Another factor that increases incentives for Québec farmers to join cooperatives is that, similar to British Columbia, the original shipper of milk retains financial ownership of milk delivered by farmers. Milk is then transferred to the processor that holds the output quota. Different from British Columbia, milk transfers from cooperatives to private firms are observed and vice versa. Transfers from private firms to cooperatives are not explained by our model and indicate a need for further research.
As a whole, supply management regulations appear to be favorable to dairy cooperatives. However, individual aspects of regulations can have either positive or negative effects on the incentives for farmers to form cooperatives. If public policymakers believe that cooperatives provide positive benefits to the dairy sector, then they should be careful not to remove regulations that favor cooperatives while leaving in place other regulations that decrease the incentives to form cooperatives.