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Canada's tightly regulated dairy regime is exacerbating income inequality by rewarding wealthy farmers and shifting the burden to consumers, particularly the poor, the Conference Board of Canada says.

The supply management system can, and should be, dismantled or radically overhauled because it's bad public policy, the Ottawa-based think tank concludes in a stinging final report released Thursday.

"The policy effectively transfers resources from poorer Canadians to wealthier Canadians," according to the 134-page report, Reforming Dairy Supply Management: The Case For Growth. "This is especially pertinent, given concerns about food security, particularly among low-income Canadians."

Sustaining the system has cost Canadian consumers an extra $26-billion at the grocery store over the past decade – $276 a year for every family, the report says.

That's because prices are set to prop up even the smallest and most inefficient farms in the country.

Since the 1970s, a network of federal and provincial marketing boards has fixed milk prices and controlled production to generate steady and predictable returns for farmers and dairy processors. A steep tariff wall keeps most imported products out.

Chicken, egg and turkey production is similarly regulated. But the conference board focused mainly on dairy – the largest of the four. Nonetheless, it pointed out that the conclusions are "broadly applicable to the other commodities."

Getting rid of supply management wouldn't come cheaply or easily. But the report says the Canadian economy would be better off for it.

Milk has the potential to become "white gold" for Canada if the industry is allowed to compete in fast-growing global markets, Conference Board vice-president Michael Bloom said in an interview. "Embracing growth, particularly internationally, can lead to more farms and many more jobs in Canada," he said.

That's an assertion that doesn't sit well with the Dairy Farmers of Canada, the main lobbying organization for the country's 12,500 dairy farms. The group has long argued that Canada's cold climate and small farms mean the country will never be a major exporter.

The key to successful reform, the Conference Board argues, is to push Canadian dairy exports, which are now heavily restricted by international trade rules because of artificially high domestic prices.

The study suggests that deregulating the dairy industry could boost milk production to 20 billion litres a year from eight billion now over the next decade, creating annual efficiency gains of up to $1.3-billion.

Reforming the system would likely require compensating farmers for their production quota, which the report estimates has a total book value of $3.6-billion to $4.7-billion.

The report said the cost could be "easily funded" by putting a special levy on dairy products – the same method that Australia used when it deregulated more than a decade ago.

"The levy could be designed so that consumers would not see any short-term change in dairy prices," the report said. "In the long-term, however, consumer would realize significant and permanent dairy prices decreases."

The report was written by Conference Board research director Michael Grant, director of policy research Vijay Gill, University of British Columbia economist Richard Barichello and researcher Mark Liew. The research was funded by the Conference Board's Centre For Food In Canada, whose donors include Heinz Canada, Loblaw Cos. Ltd., Maple Leaf Foods, Nestlé Canada Inc., Parmalat Canada Limited, Saputo Inc., McCain Foods, Olymel L.P. and PepsiCo Canada.