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.
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READER COMMENTS

BJ
30/07/2014 5:46:54 AM

So much for David Leyonhjelm's claim to be a fighter for market freedom. Nowhere in this article does he, show any interest in fighting for market freedom. Instead he chooses to blame farmers for fighting for a truly open market. He chooses to make farmers the villains by accusing them of playing victims. The truth is that, farmers are workers who labor without the benefit of market intervention to artificially inflate and regulate income for their labor. Yet all of their net income is reduced by regulated labor affecting their input and supply chain costs. 2 out of 10 David for cheap shots.
LTF
30/07/2014 5:53:06 AM

David, when will we see an article by you attacking the worst example of Government regulation in Australia? I refer to the worlds most regulated and costly labor market. After all you claim to be a fighter for small government. Yet the biggest target for you is the one you never attack! Don't waste our time with the sort of useless debate herein, until you prove your sincerity, by attacking very the regulations, you sailed into government campaigning against.
GFA
30/07/2014 6:07:02 AM

What a disappointment you have turned out to be DL.Tell us something we don't know. When will you do something to lift Australia? Our competing nations in farming, like EU and USA, both recognise their Government's market intervention by compensating their farmers in many ways with taxpayers money. Our farmers have learnt to survive without such compensation and would rather not seek that form of Govt intervention. However, it is imperative that Govt regulations burdening farmers are removed, and if not farmers ( & other businesses) are fully entitled to compensation until they are.
Jock Munro
30/07/2014 9:33:54 AM

Why argue with a zealot?
Dalby
30/07/2014 11:26:41 AM

My answer to you Jock, is that the worst thing a good man can do, is remain silent when wrongful or misleading actions or claims are made. I support those presenting contrary or counter points of view.
Don
30/07/2014 12:10:23 PM

Outside agriculture, there are plenty of examples where businesses are price takers. The dominant players in the business set the price and the rest just have to follow suit and compete as hard as they can for their share of the pie. They are essentially price takers and have to adjust their business accordingly to make a profit.
Percy
30/07/2014 12:20:57 PM

No mention of collaboration between buyer? The losing bidder sets the price in an open cry auction so take away the buyer competition and you end up with something like the supermarket monopoly. If producers try the same (like the egg industry is supposed to have done) the CCC steps in.
wtf
30/07/2014 1:20:14 PM

I cant think of an item other than water and possibly energy, that people will steal, break windows, walk in front of crazed dogs for after 3 days of going without. To me the word commodity has somewhat devalued the significance of food. Farmers ARE special David, I thought I read u were European in ancestry, surely u have heard of the Holodomor and how food can be used as genocide. Lets hope society don't have to learn the hard way, that farmers are special.
Hydatid
30/07/2014 3:45:28 PM

Well WTF if that's the criteria then only some farmers are special.....People won't riot over lack of cotton shirts and woollen socks so sheep and cotton cockys are out! ....oh and how about those folks who produce lovely little truss tomatoes ? - no civil action over stockouts there......wouldn't imagine you'd get people onto the streets over Custard Apples or Truffles either......don't even consider wine grape growers (actually you might !). So what farmers are special according to your criteria ?
dogsbody
30/07/2014 4:29:11 PM

Go and have a look at the collusion that goes on at the saleyards, the almost closed shop that abbatoirs are evolving into on the east coast and especially in Qld and one thing you have never mentioned the urbanisation of the fertile coastal regions causing farming further away from its markets and adding to the costs of getting our product to market, and of course theres coal mining and CSG fracking degrading millions of acres of formally arable land. But keep rambling David it obviously keeps you happy.
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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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