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

LTF
11/12/2014 3:15:14 PM

QLander has it well summed up. The elephant in the room that David has done nothing about and apparently does not care about, is input and supply chain costs. They are all well above global market rates in an environment where producers are forced to carry the welfare component of the inflated, regulated Industrial Awards system within Australia, but yet forced to cut incomes to the totally unregulated and corrupted global market level. Sort that issue out David and you might just start to earn the millions your 6 year subsidized term in the Senate is costing taxpayers.
Rational Ag Policy
11/12/2014 8:55:31 PM

Given rural Australia clearly despises paying a market rate for labour and skilled farm managers (if it wasn't market rate we would have high unemployment, but we don't), perhaps rural Australia should split from the rest of Australia becoming a different country run solely for the benefit of land holders. The rest of Australia could then buy their food of who ever they want (we pretty much do this already thought). Rural Australia could also remove rates and taxes, form massive cooperatives, fund their own research and pay it's labourers $5/hr. Good luck with that rural Australia ;-)
Bushie Bill
12/12/2014 9:30:25 AM

The midget minds demanding the labour market be totally deregulated are the same clowns arguing for a single desk, protection from imports and Colesworth, guaranteed income, mortgage protection, constant government support, free truck loads of money, better and better everything and cheaper costs, and have no concept of shame or hypocrisy, but really, given RARAs woeful levels of educational achievement, what more could we expect? In the land of the blind, the one-eyed man is king.
angry australian
12/12/2014 11:26:26 AM

RAG rural Aus doesn't despise paying a market rate for labour. We despise carrying people who believe we owe them a living. We currently are forced to spend $billions annually propping up government mandated research from which we get a negative return, so that won't be missed. Buy your food from wherever you like but seeing as you don't produce anything that's of any value to another nation, how are you going to pay for it? Mining's hurting, manufacturing is stuffed and your service economy is a fraud. Few foreigners are buying our services except education which is heavily subsidised.
LTF
12/12/2014 11:27:54 AM

If we are going to have free markets, and if free markets are the answer to prosperity and progress, then how can you have half the participants unregulated and the other half regulated with guaranteed incomes and restricted output or contributions? Only a half whit or a shonk would try and defend such a nonsense.
Kanzi
12/12/2014 11:51:46 AM

The reality is Bushie, that ag has carried the rest of you for far too long and now that mining is in trouble, you sit like stunned mullets, with an uncompetitive economy, other than building houses for more migrants. You have loaded up ag with unrealistic costs and now wonder why it is in trouble. Nobody else in the world is paid the bells and whistles as in Aus, from long service leave, holiday leave loading, double time and a half, reduancy pay and all the rest. No wonder why they rush offshore. Liiving in denial is not going to solve it for you.
FFS
12/12/2014 2:07:50 PM

The hypocrisy of the "you owe me a living because I am a union hack" selective socialists gets sicker and sicker every day.
Peter
12/12/2014 9:06:48 PM

Well we shall start and only work through coops run buy farmers and that would control the market prices
argis
14/12/2014 12:57:55 PM

So you are talking about yourself again Bushie. You are the one eyed man.
Bushie Bill
15/12/2014 3:28:41 AM

Would that be a half-wit or a half whit or maybe something else entirely different, LTF?
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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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