Price takers not 'rulemakers'

Being a price taker should not be an excuse for claiming victim status

IT IS common to hear it said that farmers are price takers, with no capacity to control the prices they receive. This leads to claims that they are unique, or at least unusual, and therefore warrant special consideration.

I suggest many farmers have at least some ability to determine the prices they receive and, to the extent they cannot, that does not make them particularly unusual.

As everyone knows, markets are made up of buyers and sellers in price-based equilibrium. In aggregate terms, when demand exceeds supply, prices rise. When supply exceeds demand, prices fall. Unless manipulated or distorted by governments, all markets operate this way.

A business is considered to be a price taker if the price it sets and quantity of goods it produces have no effect on the market price, and it is therefore forced to go with the market price if it wants to sell its goods.

An individual consumer is also considered to be a price taker, because the purchases of one consumer do not affect the price a business sets for its products.

“To the extent that farmers are price takers, they are nowhere near unique”

The farmers with the least capacity to influence the prices they receive are those who produce limited quantities of undifferentiated commodities that must be sold at a particular point in time. Milk and vegetables that become unsaleable if not sold soon after they are produced or picked are examples.

But not all milk and vegetables are undifferentiated, and not all commodities must be sold immediately.

With milk, for example, there is the well differentiated A2 version, for which there is scope to vary the price.

Within certain limits many commodities, including potatoes, beef, lamb, wheat and wool, can be withheld from the market until prices are more attractive. Indeed, withholding them from the market can have the effect of raising prices.

While many who sell bulk, undifferentiated commodities cannot afford to wait for their money, this does not make them unique. There are hundreds of thousands of businesses that need cash flow more than they need inventory.

Underpinning many complaints about price taking is the fact that commodities are globally traded, with prices determined according to international supply and demand.

When Brazil has a good year, Australian sugar prices fall; when Russia blocks wheat exports to support its domestic market, global wheat prices rise; and when Chinese food processors are caught doing something disgusting, like picking up stale food from the floor and adding it to fresh food, prices in Australia rise due to increased demand for imported food.

Discomfort at the link to global factors is not dissimilar to concerns about foreigners buying our farms or agribusiness firms. Some people would love to shut out the world and make Australia entirely self-sufficient. The notion that imports are bad and foreigners sinister is not confined to North Korea.

To the extent that farmers are price takers, they are nowhere near unique. Indeed, most businesses supplying large markets are in the same position.

Coal, gas, iron ore and gold producers, for example, are subject to market prices driven by international competitors and global demand.

In agriculture, seed suppliers, fertiliser manufacturers and tractor makers are all selling into large markets subject to the laws of supply and demand in which they are essentially price takers.

Being a price taker should not be an excuse for claiming victim status and seeking to hide behind the government’s skirts. Rather, it should serve as a reminder that the solution, if one is required, lies in differentiation.

Those who can make acceptable profits at market prices have nothing to complain about, but higher margins require a valuable point of difference. If neither is possible, it might be time to quit.

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FarmOnline
David Leyonhjelm

David Leyonhjelm

has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
Date: Newest first | Oldest first

READER COMMENTS

JL
30/07/2014 5:27:13 PM

DL it is a shame that you seem to be bias against farmers or is it just a way to get a reaction? As a farmer I would be happy to get an honest days pay for an honest days work but more often than not farmers work day in day out and half of the night to make ends meet. We don't want handouts. That is why the vast majority of farmers don't Quit. The dole is just another handout!!!!!
BB
30/07/2014 7:25:05 PM

So tell me where this free market exists DL ??? Not USA, Not EU , Not Japan Not China and not my regulated costs here in Australia. Perhaps it only in the minds of fools.
wtf
31/07/2014 4:38:11 AM

as long as they produce food they are SPECIAL. The bubbles created by central bank monetary policy has given us a lifestyle (at the cost of those in less fortunate parts of the world) beyond our means. When the inevitable reset happens, food will be king again. Cotton country will prob go back to food production. Depending on the reset (war, global asset burst/depression or gradual shift to the east), the east will have the means for greater food sourcing (how the world meets this I do not know), however I expect a rebalance to AFFORDABLE food production as the emphasis of farming activities.
wtf
31/07/2014 4:46:13 AM

The economic rationalization u seek for food producers made sense in stable economic/political times, we have exited that point. Look around, have we just had a Arch Duke Ferd moment?, perhaps, either way, food and energy security will be crucial. We should resort to PROTECTIONIST measures, otherwise we will risk our own civil stability. People will not be talking bonuses, they will be wondering where they can find work. Surely, u can read the signs. Had we conservative (eg your Austrian) monetary policy we would not here, the system is designed to collapse, prep and prosper, ignore and wither
GFA
31/07/2014 6:30:14 AM

Are you getting the message, David? Get off the farmers' back and put your priorities in line with your stated philosophies. Attack the regulations put in place by the Government, to benefit the non business sector which are paid for by business. Start with the ridiculously inflated and suffocating Industrial Awards regulations. Nothing is strangling our ability to compete globally more than those regulations. Earn your pay and get on with the highest plank of your election campaign, instead of playing games.
Bushie Bill
31/07/2014 10:48:35 AM

No you're not, wtf. You are simplely a business operator, and the sooner RARA learns this, the sooner they will be come successful business operators. They will then be able to let their cargo cult mentalities die in peace, but a downside for farmers will be they will have to give up their whingeing. This will be hard for them, as it is deeply ingrained in their DNA.
argis
31/07/2014 11:24:55 AM

Have we now seen the height of hypocrisy trumped by bushie bill? Here is the biggest supporter our protectionist Unionised, inflated, Industrial Award system, which is the biggest cargo cult in the globe, preaching to the unprotected, entrepreneurial farm sector, on a cargo cult mentality. WHAT A JOKE.
Hydatid
31/07/2014 12:20:13 PM

Well there we are......WTF says all you wool and cotton cockies are not special.....only the one that produce food....how about Hop growers in Tas ?...are Hops food ?
wtf
31/07/2014 1:29:13 PM

trying to divide an industry are u David? I'm not the one who decides what people see as essential in desperate times, I'm guessing if Putin turns the gas off, warm clothing will be very Important to the Europeans (however, I suspect they have already cut a deal with the Germans), as for beer, when times get tough, I know blokes who will forgo a feed for a beer, so its up to them to decide there requirements not me. Personally food, water and energy are essential, people cant replace them with 3d tvs.
Shazza
31/07/2014 1:29:51 PM

Speaking of regulations, the tragedy at Croppa Creek highlights the insidious dilemma farmers have found themselves in, with regard to the Native Vegetation Act. It is reasonable to assume carbon sequestration has enormous value, hence the regulation. When will farmers wake up to the fact this maneuovre has stolen our rights to compensation for the carbon sequestration values of native vegetation on our land. Carbon sequestration is a commodity/service that farmers should be given special consideration for. Instead we find ourselves subsidising very profitable extractive industries.
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Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

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