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.

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


22/12/2014 5:27:13 PM

Why don't you look up the total statistics on closures and transfers of jobs off shore, newbroom. Cherry picking is old hat. We are not at record high unemployment by accident. Add to that the record high levels of "Official" welfare recipients and public servants. About 55% of Australians are now on some level of welfare. It is as clear as the nose on your face that we are losing jobs to other countries because employers just can't afford their regulated wages and conditions continuing at such unrealistic levels particularly matched against our relatively low productivity.
23/12/2014 8:14:23 AM

not only that GFA, also our bloated and unaffordable overall social welfare net will bring us to insolvency if we stay on our current path. BB, I have noticed that there is very little local manufacturing of Ag machinery left , even the stayers are getting most of the work done off shore and shipped back for assembly, go and ask a local steel fabricator about the quality and source of the steel they are using , the evidence is everywhere BB ,all you have to do is look . BB you can hurl all the vitriolic claptrap around you like, whatever floats your boat, just proves what a plonker you are.
23/12/2014 8:18:45 AM

must be the leftover product from the cars we're no longer building, Newbroom.......
Rob Moore
23/12/2014 9:56:07 AM

David L says "“Australia’s lack of long term price-making power in agriculture and mining is not something to lament” Easy to say now he has entered the 2 ring circus and is set for life.The fact that this is heading for 90 comments , a record that I hav seen here- says that he is talking crap. How is it such a difficult concept to intoduce a rule to create competitive tension for our Ag products. Everyone else has it but Ag prod are at the bottom of chain and are helpless against the big fat cat. Use your senate vote-PPP/2015 please David
Bushie Bill
26/12/2014 8:51:15 AM

Some people are ignorant because they have not had opportunities for education and learning. They should be helped wherever possible. Others, such as GFA and m2, are ignorant because they choose to be.
28/12/2014 10:09:27 PM

"The last 3 years have seen global meat demand reach record levels with record retail prices being paid the world over. In this same period in time, Australian producers have been forced to endure 1980's prices......there is a guaranteed collapse ahead" Rob Moore From his white paper submitted to the Fed Gov 1983. How can it be fair that none of this windfall comes back to the producer? David L you have had 30 yrs in agribusiness so you know this is trueYou are now a politician. This is your chance to do the right thing in the national interest.......or have the fat cats already got to you too?
28/12/2014 10:51:16 PM

David L you wrote "Most farmers will never be able to influence the price of their product" You know for sure that if the prices for cattle don't change the system will collapse. David L, as a politician, is that what you want? As a politician, you now have the power to effect change. You have an opportunity to do something really significant. I hope you do.
29/12/2014 5:50:18 AM

What a sell-out article. USA AUD$5+/kg Lw. v Oz at $2.10?/kg + a now advantageous exchange rate and exports to USA are increasing?... Beef to China 2.10?/kg Lw. > grain fed > processed and boxed > landed China for $10/kg cost and selling in the local supermarkets at $130+/kg?... Oz farmers are being screwed by processors and exporters and the Davids of government have the attitude as displayed in this article?
29/12/2014 4:53:34 PM

Those whose best argument is that those with opposing views are uneducated or ignorant, have no argument at all and very likely no education or sense of logic either.
29/12/2014 10:53:25 PM

I have often heard the assertion that farmers are unable to influence the price of the goods they sell and as an agricultural merchant I can assure you this is simply UNTRUE. Here are some ways in which farmers COULD use to increase the prices we may them: 1: Speed up loading; particularly of commodities like grain and potatoes. If we can use a lorry for for farm loads a day rather than 3 we will pay a premium. 2:Make sure the goods are what you claim them to be, variety, breed, weight et.c; if we have a penalty imposed on us by the end user we have to pass this on to the producers.
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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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