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

Bushie Bill
30/12/2014 6:03:12 AM

History, reality and basic facts prove you wrong, GFA, every time.
farmed
30/12/2014 8:15:23 AM

unfortunately oz farmers are not competing on a level playing field. prices of some goods are dictated by supermarkets. a supermarkets theory is that that if its cheaper in another country then it should be cheaper here. not the case. cost of production in oz is way more than most places. pricing should reflect that.
GFA
2/01/2015 6:29:43 AM

Relevant to what bushie bill? Nothing, as usual. But then we have come to expect that kind of hollow irrelevant and logic free nonsense from you. Why spoil your record now.
Bushie Bill
5/01/2015 12:37:55 PM

There are none so useless as those who refuse to recognise the truth and refuse to think, are there, GFA?
FFS
6/01/2015 11:18:34 AM

Really, Bellevue Bill? How's the view from your 15th floor penthouse apartment in Bellevue Hill today?
Bushie Bill
6/01/2015 11:51:45 AM

Pretty good, FFS. Thank you for asking. How is your view from the worn out seat of your clapped out 1960's tractor in the 40C+ heat? I bet I know where you would rather be, eh?
FFS
6/01/2015 2:02:43 PM

I'm not sitting in the seat of a clapped out 1960''s tractor, Bellevue Bill. Enough of your bald face lies, get some integrity and common decency. Tough ask for someone of your ilk I know, but there is always hope I suppose.
Bushie Bill
7/01/2015 8:12:04 AM

Be a good boy, then, FFS, and tell us all where you are. Is it the front bar at the bottom bloodhouse pub in Nowheresville, along the AlI-Is-Lost Track to the Never Never? Are the Boofhead Twins with you, enjoying the best of RARA's top resort, listening to all the local squattocracy with their stories about how they are the salt of the earth, much downtrodden by foreign ownership, lack of political smothering with endless goodies. hateful townies, low prices, high costs, no loving from the ungrateful who do not understand they owe everyone of you a living and who do not send money trucks?
FFS
7/01/2015 10:51:03 AM

In a place where there are no bald face liars and selective socialist shonks, Bellevue Bill. Thankfully, nowhere near you.
Bushie Bill
8/01/2015 6:58:06 AM

Something for which I am eternally grateful, FFS. May god continue to protect me from ignorance, agsocs and morons, particularly ignorant agsoc morons.
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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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