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

dalby
21/12/2014 7:21:10 AM

Australian exporters compete with the rest of the world when trying to sell their products. This means we are competing with countries with labour costs a fraction the cost of ours, our labour costs are driven up even more by penalty rates,payroll tax etc.We also have the highest power costs in the world. Many rural industries have to contend with the enormous purchasing power of Coles and Woolworths . Other countries have import tarrifs,restrictions to give some protection to their local industries, Australia does very little to protect local industries compared to all other countries.
Bushie Bill
22/12/2014 2:30:47 AM

Send me your phone number and email address, FFS. A little privacy is called for, don't you think? After all, we wouldn't want riff raff rednecks turning up in Bellevue Hill's swankiest apartment block, would we?
Bushie Bill
22/12/2014 2:38:23 AM

Suck it up, Dal and all you economic illiterates. Lower wage growth is a significant part of why Australia's economy is sagging right now. You lot are not even intelligent enough to work out what is good for you and what is bad for you. Lower wages is definitely bad for you. And all you wing nuts who believe the cost of labour is the main component in determining final cost of product are so demonstrably economically illiterate and mindless that it is hard to know how you survive. Perhaps your survival is due to the endless mollycoddling agrocs are given by tolerant consumers and taxpayers?
mark2
22/12/2014 8:08:54 AM

lower wage growth would be more of an indicator of the performance of the industries that provide the employment. If wages are not the most significant component of production costs why is all our manufacturing going offshore? I know this is a pointless argument but if you consider all the input costs for most farm production , there is a labour component built into every aspect . for example, fertiliser has a significant labour component at every stage from mining the rock , manufacture and processing to retail sales with freight involved at every level...it all involves labour.
argis
22/12/2014 9:41:50 AM

You are so wide of the mark and so lacking in logic, bushie, you would do better to stay out of this conversation.
FFS
22/12/2014 9:50:40 AM

You sent the invitation, Bellevue Bill, you send me your phone number and email address. Unless you are too scared to because you don't really live in Bellevue Hill, which just proves to everyone you are nothing but a bald face liar and a shonk and everything you say is pure made-up union crap.
Bushie Bill
22/12/2014 10:17:36 AM

Not only is it a pointless argument, m2, it is a mindless, fact-free and intellect-free argument. You ask "why is all our manufacturing going offshore". Well, m2, it doesn't take a lot of brains or a lot of effort to find out that NOT all our manufacturing is going offshore. Why don't you do a little IQ-challenging work to stop you making ridiculous self-incriminating statements? Do you like making a fool of yourself? Is that it? Any attention is good, eh? This is not a rhetorical question, m2.
newbroom
22/12/2014 1:48:20 PM

I hope Fairfax show this guy the door after his ridiculous comments about recent event in Sydney CBD. He needs to represent his donkey voters and should not be given any oxygen whatsover.
GFA
22/12/2014 2:19:45 PM

The big corporates are going off shore in large numbers to get manufacturing and service work done. The trend is to move existing manufacturing out of Australia, and not the other way around. Anyone saying the opposite mark2 is clearly in denial and probably locked into some weird theory that regulating workers conditions is totally different to regulating other aspects of a market. Such irrational thinkers can only be protecting their own little patch. Funny thing is, those same irrational thinkers are content with deregulation for all but "their own camp" & good at spending others money.
newbroom
22/12/2014 2:52:30 PM

Some complete ignorance on manufacturing by GFA. I note the release this week that the biggest manufacturing export out of NSW is gear boxes and this will benefit from the newly active Korea Australia free trade agreement. Some facts are always useful when thinking of writing rants and waffle.
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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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