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

Invey
10/12/2014 8:33:30 AM

We can all look at reducing costs but in reality you cannot reduce them any further. Unless you have a 5 million dollar farm, you are running it into the ground to stay afloat. Running down infrastructure and your soils just to pay Govt costs. There is no future in ag when the local land rates we pay are more than we pay ourselves. If we had anyone in Govt with intelligence and guts they would be trying to reduce wages, so Au could compete in all sectors with the rest of the world. Reduce wages, living costs will reduce in time.
dunart
10/12/2014 11:12:57 AM

totally agree Invey. at the moment the gap between the world market price and what us farmers in Australia have to pay for the same thing, personal and business, is a direct subsidy to the urban sector from agriculture.
Qlander
10/12/2014 1:07:33 PM

Invey - Trust me even $5 million farms are being run into the ground. Ironically smaller properties can weather the storm better because they can be subsidised by off farm work. When an industry is profitable, bigger operations produce bigger profits. But the opposite is also true when the losses start, the bigger the operation the bigger the losses. What you need to do is be like David, and con your way into a situation (at least temporarily) where your no longer subject to economic reality. Then you can give free reign to your fantasies.
Hydatid
10/12/2014 1:58:59 PM

mark2.....the dirt I own is mine, not yours or anybody else's.....you can do what you like with yours (keep it, sell it, eat it - I don't care) but don't tell me how or where or with whom I should do business including, if I choose, selling that dirt to who I want !!
pepper
10/12/2014 8:46:03 PM

The hoary old chestnut :'Cutting costs' has been relegated to the partner 'downsizing', and buried . The phoenix that arose was 'rightsizing'! It would be helpful if sometimes an explanation of 'cutting costs' was tabled. It's a meaningless throw away cliché that ignorant experts use when they have no clue of what to say. When people are being sold up by unsympathetic creditors who charge for taking a risk then don't take the risk by such actions, there are no costs to cut. In fact there is nothing for those farmers ( or their families )......but the creditors and processors grow fat.
Bigpen
11/12/2014 3:44:28 AM

The concept of us being price takers is quite correct, the ways we can achieve better returns relate to improved efficiency of production particularly wrt subsidised competitors and product differentiation ie cleaner, greener etc
mark2
11/12/2014 6:26:41 AM

do whatever you like hydatid, still doesn't alter the problem we've got of intergenerational serfdom if we don't find a way of creating future wealth without transferring everything offshore, hope you get a good price, you'll need it.
Samg
11/12/2014 6:47:24 AM

Let the boats in = cheaper labour. Deregulate the labour market, works really well in Sth America and Asia? Get ready for a crime increase and a section of the population in utter poverty. If you can live with that for more profit !! We have a good set up in Australia clean efficient and reliable. What we don't have is consistent supply hence the price fluctuation. Take control of your own distribution and see a steady increase in income as you gain more and more control. A good first step is buy a truck!!! Start making your own price.
Byron Wood - Clear Grain Exchange
11/12/2014 8:39:38 AM

Technology allows for re-distribution of market power. e.g Grain Growers are currently price setting on 135,000 tonnes of grain stored at bulk handlers around Australia on Clear Grain Exchange.
Jason
11/12/2014 9:44:52 AM

Mark2 ( NSW FA Ex Councillor ?), remember when NSW, had a Joint Coal Board as the single desk for NSW coal exports - set up by the Unions, to stop NSW coal miners from competing against each other for coal exports. Since the Griner Government scraped it, coal exports have boomed in NSW. Remember the single desk for eggs in NSW - since it was removed has egg production become uneconomical? Remember the NSW Barley Marketing Board - has malt barley growing collapsed without the single desk? The wheat single desk, was the remanent, of polices, due to lack of export shipping at the start WW
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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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