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Marketing Boards

August 21, 2016

Our marketing boards have been in the news recently.  Manitoba has just opted out of the Freshwater Fish Marketing corporation.  Not too long ago, we disbanded the Canadian Wheat Board.  Trade deals, one with the EU and the other with a group of Pacific nations, have threatened our system of marketing boards.

When I went to high school, we learned basic economics, and in particular about the concept of perfect competition.  This took place in a market of many small producers, where the products were identical.  Consumers were free to choose the product that sold for the lowest price.  The result of this intense competition was to drive down prices to the point where producers were making no profit, but just breaking even on their enterprise.  All of the agricultural products fell into this category, as did fisheries products.  Government grading ensured the products were identical.

A free market doesn’t work very well in a situation of perfect competition.  The consumer is pleased because of the low prices, meaning cheap food for them.  Producers, on the other hand, are desperate because they can’t make a living selling their products.  Something has to be done to protect the producers.  Governments have tried to solve this problem in many ways.

The Canadian solution has been supply-side management.  The principle is to restrict the supply of a product so that prices will rise to the point where producers can make a profit.  Governments do this by assigning production quotas to each producer, typically a farmer or a fisher, and by tight control of the market.  They have to prevent imports of those products from outside of their region, to maintain this control.

Producers are generally happy under supply-side management, although they often want to produce more than their quota allows.  The quota itself acquires a monetary value: it can be bought or sold, or inherited from parents.  Consumers are less happy, because they are paying higher prices.  Producers outside of the region, as well as potential producers without quota, don’t like the system at all.  The marketing board must set prices, and adjust quotas to maintain these prices.  This is a form of central control, something that’s detested by people who advocate free trade.

The European solution has been to subsidize the producer.  This seems to be the American solution as well.  Under this system, the producers are generally satisfied.  However, they tend to over-produce, driving down prices.  Consumers are satisfied too, because of the cheap food.  Governments are the losers here: they have to keep paying the producers.  Taxes will be higher, taxes paid mostly by the consumers.  Maybe if the prices were higher, the subsidy would not be required.  The question is: how can this be accomplished?

When prices are too low because too much of a product is on the market, one solution is for government to buy up the surplus product.  European governments have tried this strategy in the past.  Some of them accumulated a mountain of butter.  The problem they faced was what to do with the surplus, something that would not drive down the price again.  They couldn’t just destroy it.  Destruction of food just isn’t done these days.  They couldn’t sell it on the international market.  They’d be accused of dumping if they did that.  About all they could do was to give it away, either to other countries as foreign aid, or to poor people within their country.  The big problem was that governments had to keep buying and storing the product.  Doing this was expensive, and could not be justified year after year.

Of course, many things have changed since these strategies were first introduced.  For one, products are no longer identical.  Certification, usually by private organizations, has changed the market by inventing new categories.  Some grain is now organic.  Some eggs are now free-range.  Distributers are using branding and marketing to differentiate their products from other similar products.

So, what’s the solution to the problem of perfect competition?  Supply-side management does work, but it has problems too.  One is that it can’t coexist with other solutions that demand open markets.  Subsidies also work, but also have problems.  Subsidies compromise the idea of a free market, for example.  Buying up the surplus seems not to work, at least in the long run.  Distributors that have a monopoly, like the Fish Marketing corporation or the Wheat Board, and that don’t have full control of the market seem to be of no economic benefit.  They should be replaced by a group of distributors that compete with each other.  To some extent, the problem is solving itself.  To some extent, it requires judicious government intervention, of a type that’s acceptable to other governments.

 

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