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It's competition, not cooperation

By David Leyonhjelm - posted Wednesday, 19 October 2011


News that Australia is about to cease licensing wheat exporters, and Canada is planning to abandon its single desk for wheat and barley exports, has revived debates about whether farmers should cooperate or compete.

Cooperation in the form of sharing major equipment, bulk-buying inputs such as seed, fertiliser and fuel, and aggregating commodities like wheat or wool to reduce freight costs, have long been a feature of agriculture.

But there has also been a lot of cooperation in the marketing of commodities. Sometimes this was because there was little or no alternative, but more often it was due to the perception that farmers needed to cooperate to avoid being exploited.

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For over a century, from Europe and Japan to America, New Zealand and Australia, cooperatives and other farmer owned entities sought to retain control over the marketing of their produce.

But whereas they all began as voluntary organisations with a clear purpose, over time many gained the backing of legislation and their purpose became confused. Quite commonly, cooperation gave way to compulsion.

At one time Australia had numerous so-called marketing boards with the power to compulsorily acquire and sell farm produce, from the lamb marketing board in Western Australia to which lamb producers in the state were obliged to sell their lambs, to the Australian Barley Board which controlled barley grown in South Australia, and the Australian Wheat Board which bought and sold all wheat in Australia.

A lot of voluntary cooperatives were discontinued as they lost relevance, with commercial providers concentrating on what they were good at replacing farmers trying to do something they were not good at. But farmers also became more commercially aware and saw that when others made a profit, it was not necessarily at their expense.

Legislated versions have been heading the same way, although the process has been slower and there are many willing to defend the status quo. It is only a few years since ABB and AWB were privatised and lost their monopolies amid much gnashing of teeth. Now, only the NSW rice industry clings to an enforced cooperation model with all rice grown in the state automatically vested in the NSW Rice Marketing Board.

The same trend is occurring in Canada. The Canadian government has said it will allow wheat and barley growers to sell their crops to whoever they choose, when they choose, from 1 August 2012. Again, there is a lot of teeth gnashing.

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It is curious that cooperation should have been made obligatory in the case of wheat and barley when canola, oats, pulses and myriad other crops faced no such constraint. Nobody could seriously argue that growers are capable of marketing their canola crops but incompetent when it comes to wheat and barley, and only ardent socialists would argue for collective marketing of them all.

A clue to the explanation can be found in the Canadian dairy industry, which is still highly regulated. The Canadian Dairy Commission manages price support, market sharing quotas and production targets reminiscent of Australia prior to 2000, in order to "stabilise revenues and avoid surpluses". Imports are also limited to 5% of the market. Widely known as "orderly marketing", this keeps dairy product prices up and allows Canadian dairy farmers to stay in business despite an average herd size of just 50 cows.

What it illustrates is that government intervention in agriculture in the name of cooperation and orderly marketing is invariably at the expense of consumers and often at the expense of those wishing to become farmers. The only certain beneficiaries are established farmers who would otherwise find it difficult to compete.

As a strong proponent of free trade in the international arena, Australia has set a good example with its unwinding of legislated cooperation. If the Doha trade negotiations are ever finalised and become a binding international treaty, we will be a key beneficiary in agricultural trade with only the rice industry needing to make adjustments. Canada's deregulated wheat industry will also benefit, although its dairy industry will require a painful process of change.

But a treaty is not needed to generate benefits from competition. Despite the Canadian Wheat Board's protests that it increases returns to producers, which AWB also used to claim, the evidence is lacking. Imposing average prices on producers increases the returns of those delivering poor quality wheat (who inevitably sing the praises of collectivism), but it has the opposite effect on those producing an above average crop.

Although three of New Zealand's four dairy processors are cooperatives, membership is voluntary and dairy farmers are highly competitive. With an average herd size of 375 cows (compared to Australia's 220 and the UK's 100), NZ dairy farmers can produce as much milk as they like and enjoy the proceeds as international prices soar.

The Australian Government's decision to abolish the Wheat Export Authority completes the job of creating a competitive wheat sector. Since the abolition of the single desk, wheat exports have expanded to 41 countries, up from 17, and growers are rewarded for quality rather than mediocrity. Growers gain no benefit from licensing wheat exporters, and lose nothing from the fact that exporters of cotton, beef and canola are not licensed.

Cooperation has its place, but it is not something the government needs to concern itself with. The Nobel Prize winning economist, Friedrich Hayek, summed it up well in his 1988 book The Fatal Conceit:

'Competition generally fosters discipline and helps motivate existing talent to achieve outstanding results. One revealing mark of how poorly the ordering principle of the market is understood is the common notion that cooperation is better than competition. Of course cooperation is also useful, but particularly in small homogenous groups in which there is a great amount of consensus. But when it comes to adjusting to unknown conditions there is not much merit in cooperation, ultimately is was competition that led man unwittingly to respond to novel situations, and through further competition, not agreement, we gradually increase our efficiency.'

He must have been referring to agriculture.

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About the Author

David Leyonhjelm is a former Senator for the Liberal Democrats.

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