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

Very Woolly Thinking
18/12/2014 1:48:38 PM

Yes Frank, peace loving. Some facts. In the US, the rate of gun deaths is 10 people per 100k. In Australia it is 0.83. 0.3% of assaults in NSW used firearms. Homicide rates in Australia are only 1.2 per 100,000 people, with less than 15% of these resulting from firearms. Keep your stinkin' NRA and their stinkin' gun loving crap in the USA where it belongs. See http://theconversation.com/hard-e vidence-does-gun-control-work-183 74
Very Woolly Thinking
18/12/2014 1:54:37 PM

One final untruth of yours to correct, Frank. You are not safer outside of the cities. The rate of gun homicides is 60 per cent higher in rural areas than in urban areas. (source: Australian Institute of Criminology).
Frank Blunt
18/12/2014 2:16:36 PM

What ever you reckon Wooly, so western Sydney with daily drive-by shootings and armed house invasions is safer than the tranquil western blue mountains is it, Wooly? More Very Very Wooly Thinking, don't you think Wooly?
PayAttention
18/12/2014 4:44:16 PM

Wooly, woolly, woolly, if you do not like guns don't buy one. I like mine and use them responsibly, as do the majority of owners. We (rightfully) understand that the majority of Muslims are not terrorists - so why do you demonise guns because a very small minority use them for wrong? Sounds like a double standard
THE FARMER
18/12/2014 8:48:35 PM

Bill, most industries at their core are inherently the same as a 100 years ago. Banking is still about making money through the lending of capital. Politicians still lie, teachers still convey learning. Coppers still lock up the bad dudes. Soldiers still have to take the high ground & the same rifles are still in use around the world. Doctors still heal the sick. farmers feed the hungry, but if you think the huge articulated computer operating machines of today are the same as a horse team in 1914 you need to go back under your bridge.
Bushie Bill
19/12/2014 6:01:40 AM

FFS, are you bringing the dogs?
mark2
19/12/2014 6:26:25 AM

Content?.... thats a good one BB. Hows about you explain to us your theory of "slave labour" while tapping on your keyboard that was probably made in Asia somewhere in a large factory where everyone is on 18 hour shifts. That's the trouble with your ilk, you are too busy ruminating in your own muddy thinking to see the obvious.
Cam
19/12/2014 8:14:13 AM

Sorry, Bill, didn't mean to hit a nerve. You have posted before stating that you will buy overseas because it is cheaper. Why is it cheaper?
FFS
19/12/2014 10:02:34 AM

No, Bellevue Bill. Now, I'll ask you again, what's your address? You think you can answer a simple question like where you live without lying? Bet you can't.
greengrass
19/12/2014 4:26:43 PM

Gosh guys lay off Bushie Bill - don't you recognize him. He's famous. He's on TV. You too can see him - just turn on and watch the Housos and you too can see him. He's the one who can't hit anyone with a thong so he uses his computer to do the thong hitting. Address Sunnyvale. It does indeed have trees.
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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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