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Canada's dairy industry insists it's as innovative as any in the world.

The message often comes with a subtle warning: unwind supply management at the peril of losing all the good things we have in this country.

It's a good system, its defenders argue. Tightly controlling production and shielding producers from volatile world markets provides good and predictable incomes for farmers.

Consumers, in turn, get stable prices and a safe supply of eggs, chicken, milk and cheese.

But there is an economic price, beyond the premium paid by Canadians at the grocery store, according to a new study by the Organization for Economic Co-operation and Development, which is leading a multi-year project to analyze and compare agricultural innovation across key member countries.

The research suggests that Canada's supply management regime is leaving a more significant mark on the economy.

Canada's beef, sheep and field crop farmers do pretty well, roughly matching the performance of eight other countries investigated, according to the report, Cross Country Analysis of Farm Economic Performance.

Dairy farmers, not so much. The OECD concludes that the industry's performance is "particularly low" after accounting for the subsidy paid by Canadians at the grocery store. The report faults "program design" for directing too much taxpayer and consumer support to the lowest performing farms.

The language is dry and understated. But the message is potent.

Supply management is not efficient, and it's costing the economy. Canada is rewarding its poorest performers, instead of fostering farms that generate more economic value from the land, labour and cash they soak up. That "retards structural adjustment," hurting the sector's economic performance, according to the OECD.

The Dairy Farmers of Canada, which speaks for the country's roughly 12,700 dairy farms, rejects the notion that supply management is to blame for the industry's inefficiency. Instead, it argues that Canada is saddled with a small population base and much higher costs because it must house and feed cows over long winters.

Dairy farmers also reject OECD's methodology, which equates the premium consumers pay for milk and cheese to a subsidy, while under-counting European subsidies.

More difficult to explain away is the relative performance of Canadian dairy farms versus other types of Canadian farms.

The federal government talks a good line about innovation being crucial to the country's future.

But the innovation agenda apparently doesn't apply to the supply managed sectors, where historic provincial market shares lead to chronic squabbles and make it tough for new processors to get adequate supply from farmers.

Ottawa has given no indication it's prepared to fundamentally rethink the way milk, chicken and eggs are produced and sold as it aggressively pursues free trade deals with all comers. That will, inevitably, limit what Canada can expect to gain in upcoming agreements, such as the Trans-Pacific Partnership, now being negotiated with 10 other countries.

The Dairy Farmers of Canada says the gains to be made for the dairy industry in these agreements are "virtually nil" anyway, according to recent testimony by Dairy Farmers executive director Richard Doyle to the House of Commons international trade committee. The result, he said, is that any market opening for Canadian agriculture would come out of the pockets of his members, with no upside.

But many experts counter that Canada has all the competitive advantages to be a food-export colossus – if only it would overhaul supply management. Economist Colin Carter, director of agricultural economics at the University of California-Davis and an expert on global commodities markets, has made the case that Canada is missing out on exploding demand for milk and chicken in emerging countries.

The result: chicken and dairy production is growing rapidly in countries that don't manage supply, such as the U.S., Australia and New Zealand. In Canada, output is completely stagnant.

It's up to Canadians to determine if Ottawa is protecting a thriving economic force, or as the OECD suggests, propping up an economic dead-weight.