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.

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


31/07/2014 3:06:54 PM

wtf...don't have to try, already hopelessly divided... and names not david...but thanks for the compliment
Love the country
31/07/2014 7:38:52 PM

How does DAvid earn his living ? Charging farmers I suppose. Cut him back to $20 day, and see if he squeals. Remember, the man with the cheque book, sings the tune.
Catriona Thoolen
3/08/2014 11:50:01 AM

dogsbody I agree totally. More arable land turned into housing estates. No rail freight infrastructure planned to improve costs of getting farmers' products to market. Abattoirs owned by huge producers, controlling the price paid for livestock at markets. Farmers have virtually no control over their income..and regularly sell below cost of production to just try and keep going for a bit longer. There is no 'free market' in Australia for primary produce, except farmers markets that charge exorbitant fees for stall space.
Ted O'Brien.
3/08/2014 2:38:27 PM

Straight from the textbook. And the textbook is wrong, David. That's not how it works. e.g. "Underpinning many complaints .... is the fact that commodities are globally traded, with prices determined according to international supply and demand." This isn’t even half true, David. Tell us now: What sets the international price for, say, wheat? Or sugar? S&D are only half the story. Cost of production ? price. Cost of production = price + subsidies applied to production. Now, David, where are these subsidies?
Ted O'Brien.
3/08/2014 2:40:44 PM

David, just how far below the cost of production do you believe Australia's farmers should sell their produce? The prices are corrupt, inflicted on us by foreign governments. That corruption warrants government protection where necessary. And, David, this price corruption does not apply only to the produce. You surely understand that it applies also to the land which produces that produce.
Ted O'Brien.
4/08/2014 6:04:55 PM

There is a question mark in my post above which has been mistranslated by the computers. The sign that I typed was a "does not equal" sign, not a question mark. i.e. cost of production does not equal price for subsidised produce. This is something that seems to have completely escaped the bookworms.
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Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at


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