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
15/12/2014 3:33:55 AM

If you who promote total deregulation of labour markets are too stupid to see the outcome of getting your way, you actually deserve to go through the chaos and pay the penalties resulting from achieving what you seek. Remember, stupidity does not justify outcomes.Thank god there are smarter people in the community than our dirt scratchers!
LTF
15/12/2014 7:41:41 AM

Who said we should deregulate labour markets. While it is about time they faced up to market reality it is not what is being suggested. The suggestion is to remove the welfare component of regulated, inflated, non market labour costs and conditions from the expense account of individual businesses and put it on the budget of all taxpayers via the State & Federal Governments' Welfare Budgets. If taxpayers so badly want us to continue to have the highest & least productive labour force in the world, then they should be happy to pay for such madness.
Chris
15/12/2014 12:44:06 PM

Take heart, it is possible for Australian wool growers to not just influence the retail prices of products made exclusively from their fibre, but as importantly, to return a fully sustainable price right back to the farm by retaining ownership right through the processing chain to retail partnerships, where their very own branded products sit alongside the very best in the world. The commercial reality of this is demonstrated daily through the grower owned Escorial Co Ltd and its very own, internationally respected brands; Escorial & SaxXon, on a wide range of high end global products.
Bushie Bill
15/12/2014 2:14:20 PM

Don't talk crap, LTF. You are talking deregulation but do not have the moral courage to say so.
Kirstenfromgermany
16/12/2014 7:36:46 AM

This is what we farmers are being told all over the world. The interesting Thing is that there is often no Money earned WITHIN farming but WITH farmers or their products. Have a look at the Rabo bank studies, they will tell you where in the chain the Money/return is made and where not. This risk is always passed through to the prime Producers. We are said to cut costs - all over the world. On the other Hand Society asks us for a sustainable production. This can not be done in a System farmers get the tiny bits while others make the big Profit. I hope farmers and consumers are waking up soon.
LTF
16/12/2014 10:33:40 AM

No Bushie you are wrong. If you want labour market deregulation bushie, then that is your call. All farmers and small business people ask for is equitable treatment. If you and your ilk, are so passionate about inflated costs linked with regulated labour, then you should be prepared to accept having to pay extra taxes so that all in the community share the burden of your demands. Maybe then you will see the light. The same principle applies to the ABC. Let those who want it, pay for it. Most of us don't want it.
mark2
17/12/2014 8:37:22 AM

you really are a hypocrite BB, if deregulation is goodnuff for those of us competing in export markets, why shouldn't the labour market face the same "efficiencies"?
mark2
17/12/2014 8:51:10 AM

Jason, I don't know much about the coal industry or why the "Griner(Greiner,actually) govt "scraped"(?) it". I do remember that the coal industry got a hiding right through the 60's and the 70's from the Japanese who were the biggest customer for pacific rim nations at the time, they played all their suppliers off against each other. good luck to them. I do remember the NSW Grains board and its predecessor , yep , they made some mistakes , but don't kid yourself about how good the malt job is now, I'd love to know how much malt grade barley is going out of the country as "feed".
mark2
17/12/2014 9:08:06 AM

sorry to be a nuisance, but to your question Jason, no not ever, but I don't think that it should be counted against anyone for actively participating in the politics of their industry. I do think the NSWFarmers Assoc has lost its way through lack of process. I've just located a book I could recommend called "Australia and the Asia game" by Michael Byrnes published in 2006. It goes through a few of the ways we have sold ourselves short over the last few decades. enlightenment through knowledge...
FFS
17/12/2014 10:02:55 AM

Because the "you owe me a living because I am a union hack" selective socialists can't compete in the real world, Mark, that's why they need such heavy protection and handouts.
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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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