When the price is right

Most farmers will never be able to influence the price of their product

SOME farmers yearn for the power to set the price of their products. It’s a yearning that leads to calls for subsidies and forced collectivism. And by distracting farmers from the task of cutting costs, it can become a paralysing addiction.

So taking a cue from the 12 Step Program of Alcoholics Anonymous, let us recite the words: "God, grant us the serenity to accept the things we cannot change, the courage to change the things we can, and the wisdom to know the difference".

Most farmers will never be able to influence the price of their product. Their product is produced by their neighbours, by strangers in distant states, and by foreign producers. Any attempt to independently raise their prices will see their sales evaporate, to be readily replaced by these neighbours, strangers and foreigners.

“Australia’s lack of long term price-making power in agriculture and mining is not something to lament”

Some farmers dream of colluding with their neighbours on pricing. Some also dream of persuading governments to enforce such collusion, perhaps even on a national scale. But even then, there would remain competition from foreign producers.

A quick look at the imperfect data from the Australian Bureau of Agricultural and Resource Economics and Sciences indicates why Australia lacks the potential to set the prices of its products.

Australia’s share of global production is around 5 per cent for skim milk powder, 3pc for wheat and sugar, and less than 2pc for cotton, meat, butter and rice.

And while Australia accounts for around a third of global wool production, fierce competition from other fibres means that any attempt to raise wool prices, even if successful in the short term, would falter over the longer term. The collapse of the reserve price scheme provided compelling evidence of that.

Given this foreign competition, there is scant evidence that Australia’s history of single export desks has ever succeeded in capturing price premiums in world markets by exploiting market power.

Our miners face similar foreign competition as, contrary to what many think, Australia does not dominate global mineral production. Geoscience Australia data suggests that while Australia produces most of the world’s mineral sands and much of the world’s lithium and bauxite, we play a more minor role in iron ore (although we do enjoy freight advantages into China), and we are just bit players when it comes to coal.

Australia’s lack of long term price-making power in agriculture and mining is not something to lament. It is a reality for countries across the globe. Even the OPEC countries are aware that they only influence oil production and prices within a narrow range and over the short term, and that their influence is undermined by poor coordination amongst member countries and significant oil production by non-members.

“Instead, we are prosperous price-takers in a global market”

It is possible to have price making power if a product is not readily traded. Fortunately, most of our agricultural produce is tradeable. Were it not for the non-perishability of wool, the advent of refrigerated cargo ships and other developments in bulk transport over the last century-and-a-half, Australian agriculture would have price-making power in a tiny and stagnant domestic market. Instead, we are prosperous price-takers in a global market.

It is also possible to have price-making power if a product is unique and well branded. Some farmers are pursuing the option of such niche marketing, many in conjunction with willing partners. Government intervention is unnecessary here, as farmers will voluntarily collaborate in such marketing if they consider the prospects to be good.

“It is always possible to focus on driving down costs rather than wishing up prices”

But above all, it is always possible to focus on driving down costs rather than wishing up prices. Getting cheaper labour is within our power; we just need to rid ourselves of government regulations and immigration restrictions that hold back hiring. Getting cheaper capital is within our power, if we rid ourselves of government restrictions on foreign investment that belong in the era of 'White Australia' and the 'Yellow Peril'.

And getting cheaper land and other inputs is also within our power if we rid ourselves of government handouts to inefficient farmers who are tying up agricultural resources.

So a final thought: there are farmers who yearn for government intervention to somehow conjure up a sustained price-making power for their export commodities. But if, by some miracle, the government somehow generated such a power for one of our export commodities, then - as sure as night follows day - that same government would find a way to tax the hell out of it.

Perhaps the yearning farmers might find some solace in this.

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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

Richard Wilton
10/12/2014 3:45:29 AM

David, farmers in this country receive a very small amount in government handouts when compared to what we earn in export dollars. And to argue land values would be cheaper if we didn't receive handouts is also wrong because if we allow more foreign ownership as you say, that will only drive up land values as has been happening.
mark2
10/12/2014 4:21:45 AM

your last paragraph could apply to your own position in the Senate David, and how you got there. As for the rest of this article, sounds great in theory, as usual, but the reality is quite different. The wheat single desk was never an attempt to set prices, not ever, it was always only trying to gain an advantage in export markets for growers whether it was collectively marketing large amounts of grain or negotiating handling costs and making the same sort of savings that large food retailers extract from their contractors, thats how it works all over the world.
mark2
10/12/2014 4:25:38 AM

If we, as a nation, continue to flog off our wealth creating assets, what happens to our ability to maintain our living standards and the vast social welfare net we have created ? What happens is that we will become tenants in our own country
wtf
10/12/2014 4:38:09 AM

David U are dreaming if U think we can outlast protected farmers throughout the world. Yes our efficiency has to be maximised however the only hope I feel we have is product differentiation, so we are not competing with the HFT rigged traded markets. Assurances such as an independent food residue testing and preservative testing are one way I see we can differentiate ourselves from the homogenised bulk commodities. To me its simple, we need to understand consumers concerns and target these, food labelling (ie GMO and preservatives) are classic examples of where we can stand alone.
John Newton
10/12/2014 5:25:18 AM

We've just signed a free trade agreement with China. This of course is a two way street. What happens to our horticultural industry when Colesworth decides to buy Chinese Apples? Their labour costs are a fraction of ours. But as you say, our farmers could reduce their labour costs. The problem with that is our living costs are way higher. And what about food security? Chinese food production is notoriously contaminated (read the Scary Crabs chapter in Fuschia Dunlop's Book Shark's Fin and Sichuan Pepper) and as i understand we won't have any veto rights on environmental grounds.
Cronus
10/12/2014 6:49:15 AM

Voters can remove you. Producers remain powerless; cheapness rules. The next person internationally is equally adrift taking whatever price– yeh, right! Co-operation to mutual benefit builds societies and economies; vagaries of markets controlled by powerful and vested interests do not. The failure of collective marketing efforts is not in Leyonhjelm’s feared socialism but in producers who will sell out the collective effort for the sniff of a dollar. “Always back the horse named self-interest, son. It'll be the only one trying” - Jack Lang. The problem is found asking a different question.
Geronimo
10/12/2014 7:09:10 AM

New definition of insanity: choosing to be a primary producer whilst thinking that you're something else.
Bimjoyd
10/12/2014 7:17:23 AM

Davd, this ia a masterful commentary. We need to accept that in the most part with our bulk broadacre products we are in the commodity business and are price takers. Whilst accepting the primacy of focusing on low unit production costs there are pricing opportunities which chiefly relate to the timing of price fixing. This necessitates the separation of pricing from delivery, mainly on a forward basis. The Australian cotton pricing methodology is a great model.
Jude
10/12/2014 7:51:05 AM

What handouts? We wish! Our incomes have steadily reduced and costs steadily increased over the last 30 years including government costs, so what do we use to pay ANY employees? We employ family for very little remuneration. We cannot reduce costs any further, we are all "coursed" out, we have run out of ideas and money.Things are VERY, VERY bad in inland Aust and it is not all drought, it is mostly financial. We could handle the drought if we had an income prior to the drought but to go into the drought with a falling income for the last 30 years is a disaster.
Kanzi
10/12/2014 8:30:58 AM

You are confused on this one, David. There is no shortage of global consumers wanting to buy our beef, lamb etc, which if we benchmark our production price, is highly competitive. Tariffs and quotas, which are political problems, limit our sales. So what we really need is politicians intelligent enough to negotiate that they be removed. So far, politicians have failed dismally at this task, for the last 40 years or so.
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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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