ONE of the remaining remnants of agricultural socialism in NSW is currently under review. While socialism lives on in WA if you grow potatoes (as I have written previously), in NSW it’s all about rice.
Under NSW legislation, all rice grown in the state is vested in the Rice Marketing Board. Growers face prosecution if they attempt to sell it to anyone not licensed by the Board. Across the border in free market Victoria, they can sell their rice to whoever they like.
Until 2006 the only organisation authorised to buy NSW rice was Ricegrowers Ltd (trading as Sunrice), originally a grower-owned co-operative but now a company listed on the National Stock Exchange (not to be confused with the much larger ASX). A number of companies are now authorised to trade rice within the domestic market, but Ricegrowers still has a monopoly on exports. Up to 80 per cent of the crop is normally exported.
Ricegrowers nonetheless retains key aspects of its co-operative origins, with separate shares representing voting and economic interests. A-class shares are voting but holders are limited to a maximum of 5 and just one vote no matter how many they own. The shares do not attract dividends and cannot be traded.
B class shares are non-voting but can be traded (to active and former growers only) and pay dividends. There is no specific board representation for B class shareholders.
Reports suggest a large majority of NSW ricegrowers oppose either an end to vesting or relinquishing control of Ricegrowers. Apparently they cling to the belief that they will be deprived of their rightful profits if they don’t retain collective control over the marketing of their rice. Or as Marx would have put it, they prefer social ownership of the means of distribution.
In reality, they are probably only depriving themselves. Just as there has never been a rich socialist country, the rice industry can never fully realise its potential so long as it clings to a socialist marketing system.
There are at least three ways in which rice growers lose as a result of the current arrangements.
First, they fund the Rice Marketing Board and its operating costs, now approaching $1 million a year. If it was abolished along with vesting, those costs would not be incurred.
Second, with just the domestic traders and Ricegrowers in the market, there is not much competition to buy rice from NSW growers. In a competitive market there would be multiple buyers vying to buy and export the rice, allowing growers to negotiate the best price and payment terms. As it stands, they are essentially stuck with a take-it or leave-it situation.
In fact, growers bear all the market risk. Ricegrowers operates a pool payment system in which the price growers receive is only known after the rice has been sold and the company has deducted its costs.
The widely quoted Bell Potter report suggests NSW growers received on average 19% less than their Californian counterparts, when both price and volume are factored in, over the period 1994-2009. Ricegrowers disagrees with that but hasn’t countered it. In any case, it’s pretty obvious that growers are receiving less than optimum returns.
The benefits of a competitive market are now being seen by wheat growers, notwithstanding the denials of a few obsessed individuals. It might similarly take up to three years for the same benefits to emerge with rice, but the end result would be no different – higher prices and more marketing options.
The third way in which growers miss out is by having their capital locked up in Ricegrowers. The opportunity cost is substantial as there are plenty of ways the money could be used to greater benefit than what they receive now.
The Bell Potter report argues that the value of Ricegrowers shares is considerably reduced because of its share structure. Holders of B class shares cannot be sure the directors will always act in their best interests, as would be expected of a normal company, due to their statutory obligation to act in the interests of growers. The report suggests the shares could be 35 per cent higher if listed on a major exchange without such constraints.
In a deregulated rice market, with Ricegrowers listed on the ASX, current shareholders would be free to sell down their shareholding at a premium price. Those who preferred to retain their shares would have an insider’s perspective on how well their company was performing based on whether it was competitive in seeking to market their crop.
But there is a fourth way in which growers lose, which is that they are deprived of choice. Whether they like it or not, and undoubtedly at least some would not like it, they have no choice when it comes to marketing their own crop.
Co-operatives in which membership is voluntary are fine, and Ricegrowers would do well without compulsory vesting or an export monopoly even if it remained a co-operative. But they are not fine when they are backed by the coercive power of legislation. There is nothing co-operative about compulsion.
NSW rice growers who object to being forced to sell their rice into a collective system should be free to choose their own marketing route, including, as some wheat growers are now doing, finding their own end-user customers.
And as is always the case when markets are allowed to operate freely, prosperity would increase.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at email@example.com