Monday, 30 December 2013

Symbolic of their struggle against reality

Thanks to the NZ Herald and the Economist for reminding me to take another look at how the libertarian communists are getting on. These are the guys wanting to establish new societies where people can be finally be free.

It's such an inherent comical idea that you just have to stand and applaud the effort to get very selfish people to agree on voluntary collective action. Not an easy task and many have failed, as this handy table shows.


Good things take time though and the latest mob, known as the Seasteading institute, remain upbeat about the fact that they now have "a practical plan" for their dream, just 5 years after getting started. Sadly its all about floating platforms and solar power rather than the more interesting social engineering.

There is a bit of information(pdf) about social decision-making for seasteaders though, and the basic idea is very simple: if you don't like the rules, piss off. Literally. Get a tug boat in, pull your seastead away, and hitch it up to some other commune "cluster", or just float around by yourself.

This is how seasteading will harness the power of markets to develop better systems of governance. They reckon. They also tell themselves that once they've evolved this superior system, the rest of the world will gradually realise how cool it is and start copying.

There are a few startup problems of course, but once large numbers of people are paying lots of money to participate in these experiments, the evolutionary process will be able to get started. You won't be laughing then.

Saturday, 28 December 2013

Trust issues - petrol station edition

We met our new riding buddy Colin at Pokeno this morning and rode down to New Plymouth. Over coffee & meals we got to know each other a bit better but the bonding moment came when we stopped for petrol on the way home from dinner.

We pulled up on either side of the same petrol pump at the Caltex station, both saw the "pumps on pre-pay" signs and quickly agreed we could do without that hassle, so we nipped along to the easily visible Mobil station and spent our money there.

Turns out that this is Colin's standard practice, as it is for us, and the Mobil guy indicated there are many more like us. 

I wonder how many petrol thefts the Caltex guy thinks he is preventing by forcing his customers to walk into his shop twice.  


Wednesday, 25 December 2013

Uber rational, but not uber here

Uber is a recent startup from San Francisco has built a platform designed to match smart-phone users with "sedans" which are a notch more upmarket than taxis. Its obviously pitched at customers with a bit of coin, but is also working on the supply side of its platform to finance cars for its drivers.

Like all transport services, Uber needs to be scaled for peak demand. You can either do that by having huge capacity sitting around waiting for the peaks (think gas pipelines & power transmission), or by calling it as required which can work with taxis. Uber uses spot-market pricing to help this process along - prices increase when there are more customers than cars, bringing more drivers onto the road and rationing demand. All very sensible, but it annoys the hell out of their customers, despite those customers presumably being reasonably well-educated.

It will be fascinating to see whether this pricing model changes, or whether the customers end up getting trained to understand the market. One obvious change would be to give customers the option of booking ahead of time, before the price spikes.

Meantime, I note that while Uber is available in 25 countries including Australia, NZ is not one of them. Put this alongside the fact that there are regulatory barriers to entry in many US taxi markets plus Australia, and it makes me wonder whether deregulated taxi markets like ours might not have the kind of gap Uber is filling. Or maybe our markets are just too small to be bothered with at this stage.

Saturday, 21 December 2013

The Feds' meat menu

As you may recall, the meat sector is plagued by excess capacity, and lots of time & effort is going into sorting out the mess. I've been a tad critical of some of the ideas being floated.

Now the Feds have worked up a set of reform options, which will be released in "the New Year". Based on the teaser, it seems that their report considers 4 ways forward...

  • just copy Fonterra, which is rightly panned as silly;
  • Tradeable slaughter rights (TSR), which is also quite silly;
  • Toll processing, which would leave the marketing to someone(?) that isn't the processor; and
  • Total value transparency (TVT).

It sounds like the Feds prefer the last, which they describe as a "truly innovative concept" and add that it
... merits discussion as it could drive a material change in behaviours at the marketing end. It is one means to improve coordination, collaboration and in-market behaviour while generating value and demonstrating where that value is being added." 
I have no idea what that means but hopefully the full report will explain all.

Good on the Feds though for having a crack in this way: lining up some options and putting them out there for discussion. I'm keen to see the report - actually I wish they'd just release the whole thing now instead of making us non-members wait till next year.

Hopefully the report also tackles the higher level questions about whether there is any collective market power available to NZ meat farmers in international markets, and about what that implies for organising the industry here.

Friday, 20 December 2013

Compensating investors for regulation

Bryce Wilkinson has an NBR article that expands on his recent NZ Initiative email about telco regulation. He argues that NZ started down a slippery slope by regulating telecommunications in 2001, against the advice of "critical economists", that the Chorus mess is a consequence of doing so, and that its a long hard road back to "respect for private property rights and the rule of law".

He points to productivity growth in a group of industries that includes telecommunications, which was 2.9% p.a. from 1987-2001 under "light-handed regulation", but fell to 1.7% p.a. from 2001-11. The reader is invited to conclude that regulation caused this productivity slump. It didn't.

Here are the relevant data as reported by StatsNZ.
The ICT, media and telecom sector (the one Bryce cites) has always had higher productivity growth than either the goods producing sector or the service sector as a whole, both before and after 2001. I can't see how you could reasonably blame telco regulation for a general productivity slow-down.

There has of course been a monumental stuff-up over UFB, but its a bit rich to blame that on regulation when well informed adults signed up to those contracts voluntarily, knowing full well how the regulation would work.

Bryce's main theme though is a broader assault on regulation, because it is disrespectful of property rights. He recognises that Parliament has the ability to regulate but says
...in a civil society, respect for private property rights should provide some protection against the politically expedient use of the Crown’s coercive powers. First, the Crown would have to demonstrate that a taking of rights in private property was justified in the public interest; second, it would have to consider the issue of compensation.
I agree 100%. Where we disagree is on applying these principles. For example, Bryce thinks NZ shouldn't have regulated Telecom's market power in 2001, because that market power was acting as an incentive for competing investors rather than a deterrent. This paper from 1998 (pdf) is a good example of his thinking at that time - the executive summary alone is worth a read.

Bryce argued that Telecom should be fully compensated for the entire stream of future profits that were being lost. This same argument was run in the context of unbundling in 2006.

Lets just follow that logic for a minute. If you somehow end up with an unregulated investor-owned natural monopoly, then regulating it is definitely a "taking of rights in private property". Bryce says it might be OK for a country to do that, but only if investors are fully compensated for their loss.

In the 1990s, investors in electricity distribution networks enjoyed a dream run. They racked up hundreds of millions of dollars a year by simply writing up the value of their assets, and then increasing their prices to "compensate" for all that extra "capital". This wasn't illegal - far from it. It was in fact a direct consequence of the "light-handed regulation" that Bryce advocates, which also conferred on those investors a property right to keep doing it. By his logic, when this game was finally stopped we should have paid out those investors for all the future write-ups that were being taken from them.

I think there is a counter-argument that Kiwis had a right to not be charged excessive prices for basic services, and that those rights were breached by this ridiculous form of "regulation". This approach is tricky though. For example it leads to questions about which of the previous status-quo positions should be selected as the dawn of time, from which point compensation should be calculated. There is also a practical problem of the leaky-buildings type because many of the perpetrators have moved on, closed down their legal entities, etc.

To summarise, I am a firm believer that compensation should be paid for unjust takings, that we should assure investors this will occur, and stick to those assurances. Nevertheless, there certainly are cases when it is entirely just to dispossess investors without compensation, and to ignore the inevitable outrage. The revaluation rort is a good local example and I'd put this classic in the same category.

Wednesday, 18 December 2013

Popenomics doesn't exist

I didn't read all of the Pope's 224 pages, or any of them actually. My normal media diet has been enough to pick up on the main point, namely that the Pope said that laissez faire economics will not inevitably lead to economic justice. That upset some economists.

I am no papist - far from it. I was raised catholic but have been happily lapsed for decades. I quite like the multi-theistic approach and if forced to choose a god I'd probably go for Ganesh, remover of obstacles and mischievous happy dude despite being lumbered with an elephant's head - that's him on the right.

I've also listened to the Dalai Lama a couple of times and I credit our friendship with Ahmed Zaoui for disabusing me of a previous prejudice against muslims.

But the pope? He (& its always a he) has usually been irrelevant at best. And at worst? Well it was pretty disturbing that the last one, after hanging around the nazis as a youth, came away with the idea that people should just do what they're told. If you think that way, any normal person would seem like a dangerous radical.

The interesting thing about the current guy's pronouncement on economics though, is it succeeded dramatically in the most important domain: the news media. If you want to examine the economics, read Mankiw and then Avent who concludes, correctly in my view, that
Growth often creates significant injustices which are ameliorated when popular outrage demands change. 
Popular outrage is not easy to spark-off, because by definition it seeks to change the existing order and is therefore challenging to the powerful. Their entrenched structures have a strong in-built resistance to change, so getting a clear message out is essential to making progress.

Economists tend to celebrate creative destruction at the micro level, and the profession has definitely been a force for good.  But the profession is a broad church and seems as divided as the wider population on the questions of poverty and economic justice that the pope was tackling.

We economists can amuse ourselves for ever, examining trade-offs and presenting nicely posed questions to politicians and other decision makers, but there is no real point unless someone will ultimately put a stake in the ground with a clear decision, and even then we may be disappointed. I've certainly advised decision makers and then been at least slightly disturbed by their thought processes. Even when they agree with me (yes, I do offer opinions), I worry that they haven't appreciated the real reasons (yes, I am trying to get over myself.)

So anyway, at this point I'm pro-pope. He's shaping up as a somewhat revolutionary leader (if that's not an oxymoron) and now that Nelson Mandela has passed on, the world could do with another one of those. I'm not going to quibble about the details of whether/how to apply popenomics, because there is no such thing and even if it becomes a thing there will be plenty of scope for concrete policy analysis & debate on actual applications.

Tuesday, 17 December 2013

Not all bullshit is smarm

Bullshit season is back, right on cue. A year ago my colleagues and I sent out a pile of hard-cover copies of Harry Frankfurt's masterful "On Bullshit" essay in place of Christmas cards. It was a nod to the shared experience of having to contend with so much bullshit in our professional lives.

And now Tom Socca's new essay On Smarm is set to play a similar role this year. Socca is no Ivy League philosopher but what he might lack in rigour is repaid through a wealth of examples. And he does have a classification system in there that looks a bit like this (I think). 

Bullshitters in the Harry Frankfurt sense are people who are simply trying to make an impression and have no regard for the actual truth. Socca regards smarm as a type of bullshit because it involves 'moral and ethical misdirection', but it does so in a uniquely greasy way that is
"unctuous or flattering, or smug. Smarm aspires to smother opposition or criticism, to cover everything over with an artificial, oily gloss..."
If someone triggers your bullshit detector, you need to decide how to react. Socca suggests any response that challenges, or even just overtly notes the existence of the bullshit, is direct enough to be labelled snark. Smarm is a passive form of aggression, and your options are to either call it out (which is snark), or allow the oily smarm to spew forth and then just take a shower later.

This all rings true for me, and it reminds me of a twitcident from last month. It started with an observation that the TPP could kill entire sectors of NZ's economy, so those planning to ratify it in secret had better know a lot about whether and where that is a risk. Federated Farmers (who hope to benefit from the TPP) replied with this tweet:
an asteroid may also wipe out all life too, or as FDR put it, "the only thing we have to fear is fear itself" 
What is this saying? "oh, you poor misguided fools, don't fret or oppose or criticise; rest your fevered imaginations, for everything about the TPP will be covered over with a gloss so beautiful you won't even notice its a bit oily".

That's pure smarm. Its also self-serving and devoid of any actual argument. But if you call it out (as I did) then umbrage will be taken, and you will be called snarky or something similar. Because you went negative, which broke the smarm spell, and negative is bad mkay?

So there we have it, a new concept for the new year, and perhaps something of a challenge also. Next time you hear someone being brave enough to call bullshit, maybe try engaging them on the subject of whether its just ordinary bullshit or actual smarm.

Update: new wonkblog interview with Socca


Monday, 16 December 2013

That sucking sound...

If growth is the measure then 2013 must have been the year of Xero. The firm's stock price really shot away over the last few months as its market capitalisation blasted past Telecom, becoming the forth biggest on the NZX. Here is the price chart from the ASX.

Xero is a great example of a platform business. It wants to attract several different types of patron, and as this happens Xero becomes more attractive to everyone else. The main groups seem to be:

  • final customers, mainly SMEs looking for an easier option for accounting;
  • investors in the very sexy SaaS sector; and
  • app developers looking for opportunities to sell add-ons to Xero customers.
Think about the connections between these groups: investors want more customers because that means more profits. They also want more app developers because that builds the 'ecosystem' and helps to add customers. App developers want more investors and more customers because that gives them confidence that the business will endure and they'll get a decent return on their investment.

As for customers, well these days when people want me to switch to Xero, they often mention its sharemarket success as evidence that it must be a good thing. I don't buy that story but suspect others do. Anyway, Xero has very wisely decided to contract out large chunks of the customer side of its business by recruiting accountants to sell the service to their clients. Which incidentally also tells us that this model is modifying but not supplanting accountants.

The most interesting point though, is that we are watching a massive network effect in operation here. It is stimulated by Xero marketing itself to several different groups at once, and by each group wanting more of the others around. As the buzz grows, more patrons of different types get sucked into the Xero ecosystem. Its a truly wonderful thing, even though it does confound the hell out of valuers.

Saturday, 14 December 2013

Are we there yet?

It feels this week as if NZ's monopoly regulation regime might finally be "in place", 14 years after we started down this road. Whether we have indeed now reached the exhalted nirvana of "certainty" will be decided by regulated firms who still have an option to appeal the High Court's 657 page decision (pdf) on their appeals, released on Wednesday.

Here is a brutally brief backgrounder.

In the 1990s we didn't really care what natural monopolies did provided they disclosed a set of information. We called it "light-handed regulation" and kidded ourselves that NZ was world-leading (no-one followed). Firms had a lot of discretion over how to "disclose" and what they defined as "information", so it was hella tough for outsiders to figure out what was going on. Insiders knew though: the revaluation racket involved ratcheting up asset values, and then increasing prices to "compensate" for the revaluations. About $300m of such ill-gotten gains were booked each year for a decade in the electricity lines sector.

The 1999-02 government started to stop this, but regulation was still a dirty word in Wellington, so something fairly tame and non-intrusive was required, ruling out regulatory regimes used elsewhere. The answer was called a "thresholds" regime for electricity lines companies (n=40ish). These firms were clustered into a few groups and each group got a "threshold" which was the annual rate of price change that the Commerce Commission would be comfortable with. Pains were taken to signal that breaching a threshold could lead to actual detailed regulation, but it might not because there could be a good excuse.

This didn't work at all well. Firms breached and the Commission didn't lower the boom but threatened to. End result = UNCERTAINTY! Complaints, tension and lobbying ensued. By now the labour government was in its 3rd term and in need of answers. MED convened a small group of externals (including yours truly) and cooked up the Input Methodologies (IM) plan, the main purpose of which was certainty. We agreed on the basic idea that more pre-commitment would be useful and that an IM-like process would be useful. The end results were baked into Part 4 of the Commerce Act in 2008.

<BTW>  Two basic tensions are relevant to this backstory
1. Firms quite rationally hate being constrained, it takes time for them to adjust to new regimes, and they have strong incentives to haggle vigorously over the rules.

2. Regulation wouldn't be needed if we could specify everything in legislation. Flexibility is useful but we don't want these regulators running amok, do we? So there is a trade-off between the 'certainty' of laws and the discretion delegated to specialist regulators. The Australians addressed this by dividing regulatory roles between different entities for rule-making and rule-enforcing. We did it by requiring a single entity (the Commerce Commission) to first make the rules (IMs), then subject them to merits review in the courts (hence the appeals that have just been decided), then enforce the results. </BTW>

What are IMs and where have we got to?
The IMs required the ComCom to decide in advance how to regulate. It had to determine "input methodologies" that explain in detail how the discretionary bits of the regulatory model would be assessed. That would give CERTAINTY, because firms would fully understand how the regime would work. But the ComCom might stuff up the IMs, so we required it to consult with regulated firms, and gave firms a one-time appeal right to the High Court. But that might become bogged down, so we limited the appeal to material that was already on the record, and required firms to show that some other decision was "materially better" than what the ComCom had determined. The sectors affected were electricity lines, gas pipelines and AKL, WLG and CHC airports.

So the ComCom embarked on this massive pre-commitment project to design the IMs in consultation with the regulated firms, with everyone knowing at the outset that the whole process would end up in the High Court (because of the $@risk) before it was actually a commitment, ie before CERTAINTY.

The first discussion paper was issued in December 2008 and was followed by issues papers, draft views, and conferences that stretched on for another 2 years, until the IMs were finally determined in December 2010. I assisted the ComCom, participating in conferences, reviewing ComCom reports, and writing a paper on asset valuation with three British economists. It was a fascinating experience, not least because lawyers for the regulated firms were constantly trying to trap the ComCom experts into saying silly things that would enter the record and be available for submitting to the High Court.

Sure enough, 58 appeals were filed. The High Court delegated the job of hearing them all jointly to Justice Denis Clifford, who I have never met, but who surely deserves a badge of honour for ploughing through literally thousands of pages of detailed record and emerging still sane. He was assisted by two Australians, recruited as lay members of the High Court especially for this task. Their decision dismisses all but two appeals. Dismissals of appeals on the big ticket items of the cost of capital and the initial valuation for the asset base are particularly important.

So now the big question is whether we are certain enough yet.


Wednesday, 11 December 2013

Optimisation fetish strikes again

In an ironic coincidence, the day after I wished that optimised replacement cost (ORC) valuations would die in telecommunications, its effects show up in cowsheds across the country.

The gDT index of dairy commodity prices is at record levels and Fonterra watchers have been tipping that the farmgate milk price would be increased in the scheduled December announcement. Here are prices for the last five years for whole milk powder.

You can see why people were excited. But instead, farmers were told today that while the milk price manual justified a price of $9.00/kgms, it was holding its forecast payout at $8.30.

Confusion ensued: if the milk price manual says $9, why restrict the payout to $8.30? Answer: the manual is a fiction, and Fonterra can't actually afford to pay $9.

The manual/model starts from the world price of a set of commodities X, which are the ones Fonterra & its rivals compete over. Fine. But from that point onwards, the manual/model is assumption-central. Three assumptions are particularly important, and none of them is correct.

  • All of Fonterra's NZ milk is made into a product from a set we'll call X
  • Every site has a standard-sized equipment installed to make X products
  • Every month the world prices are used to decide how to divide the milk between the products in X

The manual's price is the difference between the revenue and costs arising from these assumptions.

It is the first assumption that has tripped Fonterra up. According to today's announcements, this assumption is 30% wrong - ie, 30% of Fonterra's NZ milk does not get made into products from X. It goes into less profitable stuff like cheese and casein (this is new information btw).

Normally, Fonterra likes this fiction, because by pretending to not make that less-profitable stuff it can pay higher milk prices, which makes life a bit harder for its rival processors. But there are limits to how much it can afford to artificially support the milk price, as we have seen today.

In related news, Fonterra also cut its projected divided by 22c to 10c. Predictably, the share price tanked and no doubt we will shortly hear complaints from external investors in those shares. The things to remember here are that

  • those investors supplied around 6% of Fonterra's capital, which was only issued to provide liquidity;
  • other things being equal, Fonterra would prefer a low share price (ie a low dividend) because that
    • limits the cash its farmers will get if they sell their shares and jump ship to an investor-owned processor; and
    • makes it easier for its farmers to buy the shares required to back increased production.
I think Fonterra supplier/shareholders will be happy, if they understand what's going on. But I wonder whether a less optimised milk price model might be better.

Tuesday, 10 December 2013

My Christmas deathwish for TSLRIC

The government is reported to be reviewing "Commerce Commission laws" in the wake of the Chorus debacle and following concerns expressed by a grumpy foreign investor (who, incidentally hasn't been interested in NZ for some time).

This is worrying because it seems rushed. However there definitely are improvements that could be made, so in the spirit of constructive engagement here is what I'd be thinking about. For simplicity I'll refrain from considering the s36 problem and stick with telecommunications.

A good start would be to admit that TSLRIC is a silly concept for pricing access to a monopoly network. Investors and consumers would both be better off if it was scrapped. Here's why.

TSLRIC is a way valuing network assets at their replacement cost. To make it work, you first decide how the network would be rebuilt (architecture, equipment, installation, commissioning etc) if it was destroyed (yes, it really is fictional). Then you estimate the cost of doing that rebuild today.

This is hugely time-consuming and expensive. Last week, the Commission got started on a TSLRIC process for copper network services that "international experience suggests...can take some years".

It's not just slow and costly though: the outcomes are also very uncertain. For example, if the Commission decides to (notionally) rebuild the copper network, it will need to pick a price for copper wire. As the graph shows, copper prices are not exactly stable.



So we have hard-wired into the Act some very significant risks for both investors and consumers. This is a recipe for very big and expensive fights, not to mention political lobbying around the fringes.

Why do we have such a thing embedded in our Act? The best reason is that some of the services being regulated (UBA for example) can be supplied by competitive firms. In that case, regulating at replacement cost preserves an incentive for competitive investment. So it is not always utter madness.

But for most of what Chorus sells, there is a cheaper, less risky and more stable alternative form of regulation. It goes by a few different names (RAB, building blocks, rate of return regulation) but the key point is that the assets are not valued at their new build cost. Instead, we strike an asset value at the start of the regime and stick with it, updating each year in line with extra capital investment and depreciation. Then, when arguments arise, it doesn't take years to estimate the asset's value. And there are no massive risks to consumers or investors from volatility in things like the price of steel, exchange rates and other things that would be needed to build a new network.

This is still regulation and so its still difficult to do it well, but it is a much better approach for monopoly network assets. The Australians saw the light a few years ago, and its about time we admitted they were coughrightcough.

And now I'm really going to tempt fate. There has been a massive regulatory effort going on in NZ to design "input methodologies" for regulating monopolies like electricity power lines, gas pipelines and a few big airports. This seemed like a good idea in 2008, and it probably still is. One of the big changes that the Commission is making in this process is to abandon replacement cost valuations for these monopolies. What I'm suggesting here is simply the extension of that model to telecommunications monopolies. [This is tempting fate because we are still awaiting the High Court's judgement on appeals to these methodologies.]

The only losers would be consulting economists and lawyers who would just have to find something more productive to do :)

I should add that while TSLRIC is a dragon worth slaying, doing so would only be the first step in reform. While we do have a lot of the alternative machinery in place, it would take some time and effort to get it configured properly to apply to Chorus, and there would be plenty of potential for mischief along the way.

Friday, 6 December 2013

Farmer-led certainty & discipline

As I said yesterday, excess meat processing capacity is probably good for farmers because it intensifies competition for stock, driving up prices. Processors hate this cut throat competition, but they can’t easily escape it because none of them wants to close down factories. 

The processors are in a nasty bind. If firm X shuts a plant, it bears the entire cost while all its rivals get a benefit from reduced competition. In that context, everyone waits politely for someone else to exit first: “after you…. no, I insist, after you…”

This is why the meat industry is constantly seeking new ways to “collaborate”, a delightful term which in this sector is code for “reduce competition”.

Earlier in the year, there was an attempt to revive a much older proposal known as Tradeable Slaughter Rights (TSRs). At its heart, this is a market sharing scheme. Processors sit down together and allocate themselves the same share of animals for killing as they had last year. Then they go out and buy stock from farmers secure in the knowledge that if they don’t fill their quota (eg because their prices are too low), one of their rivals will be obliged to reimburse them. This is the “tradeable” part. 

Keith Woodford suggests that TSRs were intended to promote exit by weak firms who would sell their rights to expanding firms. But side payments like that could happen anyway, so its hard to see the merit of TSRs, and the market division aspect of it is most unappealing. I can’t see why farmers would support it, and I'm not surprised it was apparently turned down by the policy community in Wellington this year. 

Oddly enough, Federated Farmers seemed comfortable with TSRs. National President Bruce Wills didn’t share my pessimism and told me by email that the Feds support anything that brings “certainty and discipline” to the market. 

That's a worthy goal, for sure. But if the Feds and the MIE want to stimulate some farmer-led certainty and discipline, they should perhaps start by recognising that their interests and problems are very different to those of the processors. The most obvious strategy from that point would be to get a big group of farmers together and call tenders for processing and onward sale services. 

That would inevitably lead to long-term contracting arrangements between farmers and processors. But farmers would have the whip hand, at least initially. And if enough farmers joined the club then the scale of their collective business would likely force exit of some processors, which would address the core problem. Moreover, in a well-run tender process, the strongest processors should win, which is efficient.

The reason I prefer this approach to the merger route is that it focuses directly on the contract between farmers and processors, and exit of some firms is a by product that is sorted out by market forces. By contrast, having farmers try to force mergers is very difficult (as we are seeing) and even if it succeeds it still leaves unanswered two crucial questions. Which plants will shut? And then, finally, what kind of deal will the remaining firms offer farmers now that they have less competition?

Thursday, 5 December 2013

Economics for meat farmers

The red meat industry in NZ has been examining its navel for some time over how to cope with a single basic problem: excess processing capacity. That problem has become worse as farmers have converted sheep & beef farms to dairy. 

It is now dominating the rural press, and the MIE has been formed as a ginger group to push things along. It says:
MIE was formed in response to the crisis facing our industry.

Sheep and beef farming is under pressure with earnings and stock numbers declining. The processing sector is also in crisis. Dairy conversions continue at a rapid rate.
You’ll see from much of the analysis presented here that there is quite a lot of consensus about what needs to happen in the red meat sector– but no one is taking the lead.

That’s why MIE was formed – to help farmers step up to lead change and reform in our industry. We’re the ones with most at stake, and no one’s going to do it for us. (emphasis added)
The consensus referred to basically involves copying the dairy industry by seeking mergers. That is why we now see dairy guys like Henry Van Der Heyden, Andrew Ferrier and John Monaghan putting their hands up to help out their meat farming whanau. They can spot a new gig when they see one!

But here's the thing: the current situation is bad for processors, but not for farmers. On the contrary, farmers are beneficiaries of excess capacity because competition for stock is increased, which bids up the price of stock.

This is probably hard to see when (a) there is constant pressure is to push for mergers and (b) returns are lower and more volatile than farmers would like. But the crucial question for farmers is: what would change following a merger? How exactly would reduced competition for stock lead to higher and more stable prices for farmers? 

Unless this can be answered satisfactorily, the MIE is heading in completely the wrong direction. Farmers should not be "stepping up to lead change", they should be standing back and letting the processors sort out their own mess, and enjoying the benefits of intense competition along the way.