Is there intelligent life on Cab Davidson?

Cab Davidson ?@gnomeicide

@worstall Overproduction? Farmers are losing pennies per pint of milk they produce. Normal economics can\’t produce that @paulkingsnorth

I\’m sorry, what?

Overproduction leading to producer losses *is* standard economics.

Too many car producers then car producers make losses. Too many buggy whip manufacturers then buggy whip manufacturers make losses. Too many newspapers then newspapers make losses.

And yes, too many farmers producing milk means farmers producing milk lose money.

I mean you have tried looking at the standard supply and demand curve introduced around page 3 of the GCSE textbook have you?

35 thoughts on “Is there intelligent life on Cab Davidson?”

  1. Your assumption here is that low price obtained by farmers must mean that there is overproduction. And while yes, overproduction CAN lead to low prices (which usually leads to some going to the wall),- in the UK dairy industry that isn’t the case. Few farmers have a practical choice to sell to numerous different middle men. There is no real competition in that part of the supply chain so farmers aren’t obtaining a fair price based on competetive demand. It is, effectively, not a free market for them. Fix that part of the market and farmers can make a profit. The UK is a net importer of dairy products – it is not the case that there is insufficient demand.

    Tim adds: No, not quite. My assumption is that increasing efficiency of production will mean that we need fewer producers. Note what I said in the Telegraph. Each cow now produces 22% more milk than one decade ago. If we assume that demand has stayed constant then that means we need fewer producers and cows, right?

    How does a market get over the point that we need fewer producers? The prices paid to producers fall leading to some leaving production as a result of losses.

    This isn’t some aberration of economics as you seem to think. This is simply how market economies work.

  2. If the UK is a net importer of dairy products (potentially less surprising than it might be if excellent parmesan and camenbert are included as they have no real UK produced substitutues) then it suggests that overseas producers are more efficent so they are cheaper. Cheaper imports are a sign to an economy to focus on areas where it has a comparative advantage. I think this is fairly well known…carrots, Kuwait and all that.

  3. Few farmers have a practical choice to sell to numerous different middle men.

    This is largely because customers don’t want milk per se, they want milk, cold, fresh, in the middle of a city, when they want it. The farmer can only provide some of that (the milk at the farm gate, at 7am), the supermarkets provide the rest. And it is what the supermarkets provide which customers value more: milk available 20km away at 7am is of no use to them. That is why farmers are at the mercy of supermarkets when it comes to selling milk, because the supermarkets are the ones providing the lion’s share of the service. It’s the same reason why those who smuggle drugs into America do a lot better than cocaine planters in Columbia.

  4. British dairy farmers are not being out-competed by the rest of the EU: producer prices for milk in the UK are lower than in any significant competitor. Rather the structure of the milk supply chain in Britain gives the retailers an advantage in setting producer prices.

    However, in considering what “normal economics” can produce, it might be relevant that the Single Payment Scheme makes it sustainable for farmers to produce food at a loss, and hence lowers the prices which monopsony buyers can impose.

  5. We should be heading towards the super farms of tens of thousands of cows under cover where the cows milk themselves with robotic help. That way we will have the most efficient means of creating milk.

    So small diary farms close down and the farmers are out of work. Some will diversify to use the cheap milk to make cheeses. Others will use their farms for non-diary purposes. Others will go to work in a some new industry.

    All just the same way that the corner grocer went out of business and were replaced by supermarkets. All to the benefit of the poor who can now afford all kinds of fancy food. Could you imagine an unemployed person being able to eat out of season food from thousands of miles away. Just 50 years ago this would have been thought impossible.

    All the same way that the agricultural workers were kicked out of their jobs by tractors. They went to work in the mills and were kicked out of their jobs by increased mechanisation. Then they went to work in the factory until they were kicked out by cheaper labour elsewhere. Now they are working in the service industry. Soon they will be kicked out of that and find work in something else, possibly manufacturing but this time round in high value stuff.

    All the time these industries need fewer workers. All the other workers can go and do loads of interesting stuff like start up new businesses creating chutneys or go and become nurses and teachers.

  6. @PaulB: I’m glad someone else has worked out that agricultural subsidies actually lower the cost of food, not raise it. It is most likely that if the CAP were abolished that huge swathes of UK farming would cease, being no longer viable, and the prices paid in the stores would rise significantly, as production fell. And prices would be entirely at the mercy of world market fluctuations.

  7. @Jim there’s certainly a grain of truth in that as the conventional analysis of the CAP ignores Chinese consumption which as anyone who has visited Australia or New Zealand will realise. However, With import liberalisation, one would hope more efficient producers and concomitant Supply Chains from areas outside the EU would take up the slack but I agree that you would be in a much more globalised market….

  8. Another way would be to ‘prove’ that milk was both unecessary and cruel ( motherhood).
    And so ban it.
    You all eat far more than is good for you.
    So bring back the good socialist response food rationing. ( see 1945)

  9. Kim, no, sorry, the cap may make food “look” cheaper, but that’s only because you aren’t seeing the proper price. I mean, you coul make milk look really cheap if you subsidised it at the supermarket so it cost 1p a litre, but the milk wouldn’t actually be cheap. You’d certainly be paying for it, just in a more obscure way.

    The CAP is responsible for horrendous distortions in the world’s food supply, and at a huge cost which you all pay for through general taxation and VAT.

    Why not just let the efficient producers grow or farm it where it makes sense to do so, subject to what ever reasonable standards that can be applied. That alone would probably do more to allieviate poverty in many third world countries than any aid program. Some foods may look more expensive to purchase, but the savings would counteract it, and if you wish subsidise directly the prices. That’s less distortionery and more transparent. And there always be a local market for fresh, it’ very difficult to import fresh milk for example.

  10. Cab Davidson (@gnomeicide)

    Tim, you’re completely ignoring the argument put to you and merely repeating you dogma. It is not a free market, there are not multiple middle men for most farmers to sell to. Most cannot go to another buyer if they don’t get a good price, so the middle men (quite reasonably) demand lower and lower prices – regulation in milk retail and distribution (much of it quite fair, being about safety of the product) has made collecting and treating milk too expensive for most of the small players to get in to, leaving this a market that ultimately has no competition. Its like selling fruit and vegetables in a market square where there is only one customer who can then go on and sell the produce to everyone else in the town at whatever price he likes; that person will obviously demand the lowest price he can get and sell the produce on at a much higher price. If that was how we distributed most fresh food in the UK you’d be arguing that we need to change it; why are you suggesting that this grossly distorted milk market that doesn’t get the best deal for farmers or consumers should continue?

  11. Cab Davidson (@gnomeicide)

    Charlie B – we don’t import the same dairy products as we export. We import some fresh milk (but usually it costs more to do so than home produced), but mostly we import higher value speciality products – types of cheese we don’t produce here, for example. The net value of dairy imports is greater than the value of exports. Simply put we export a lower value of cheese etc. than we import. My understanding of fresh milk import (I’ll confess I haven’t talked to anyone in that part of the industry for four years) is that it tends to be done to flatten out problems with supply, its at higher cost.

    Regarding some other comments here, there are serious problems with importing milk – noteably environmental, safety and health standards we want in milk production are out of our control. The idea of super farms with tens of thousands of cows is folly, as the environmental footprint (and financial cost) of such becomes vastly greater when you can’t do the simple thing and feed dairy cattle primarily on grass with some supplental feed – imported feed is simply more expensive than grass or farm produced silage or hay. It works, financially, for meat production where you’re tryng to get rapid growth for younger slaughter, but it isn’t producing the kind of high quality product that we do well with in the UK (which makes UK meat such a good product for export). And you can also add in the animal welfare factor – high welfare products making an increasingly important part of the market.

    Sorry, the analysis on this page really does need to take into account the reality of dairy farming and the serious problem there is with a supply chain that remains entirely uncompetetive. I can’t imagine anyone here would argue that a series of effective local monopolies works when there is little price competition for the consumer and no real competition between farmers, and middle men dictating price they pay and receive effectively distort the entire market?

  12. “Tim, you’re completely ignoring the argument put to you and merely repeating you dogma. It is not a free market, there are not multiple middle men for most farmers to sell to.”

    So what? Why are lefties *complaining* about cheap milk? I couldn’t care less if the supermarkets are screwing the farmers.

  13. Its like selling fruit and vegetables in a market square where there is only one customer who can then go on and sell the produce to everyone else in the town at whatever price he likes

    But that only works for as long as the one customer’s monopsony is legally protected. Otherwise, I’d go into the market place, buy at a higher price than the one dude, and then sell to his customers at a lower price than he does.

    The fact that there aren’t people queuing up to take advantage of this failure and offer farmers a better deal highlights the fact that there isn’t, in fact, a failure.

    Rather, the market price of milk is the correct one. It reflects the fact that current production massively outstrips demand, because far too many farmers carry on with the business after it has become economically unviable (because, as Tim says, production yields have increased by 22% while the approximate amount of milk we all want to drink has stayed flat).

    The best solution would be for 22% of dairy farmers (or, more accurately, for the dairy farmers accounting for the most expensive 22% of undifferentiated production – by undifferentiated I mean they sell their milk to the same pool as the cheapest industrial farms, rather than as Jersey cream or whatever) to give up and do something else, leading to a natural increase in prices.

    I can’t speak for Tim, but given the disruptive nature of this I’d be in favour of one-off government adjustment grants to help these unproductive, un-needed farmers move to doing something more useful (ie anything else that didn’t actively destroy value).

  14. JohnB, a dairy farmer can’t aggressively jump in to the milk collection and distribution market because the financial and regulatory hurdles to get there are very, very high – the cost is huge, the rules (milk has to be safe!) are complex and demanding. Dairy farmers are not in a position to jump past those middle men – and even if they do, a limited number of big buyers above have already got contracts sown up with those middle men. One could argue that there could be an enormous consolidation of dairy farms into a few ‘megafarms’, but for reasons already stated thats environmentally horrible, its bad for animal welfare standards (and we have strict laws there – both domestic and EU) and and for milk its dubious whether it makes economic sense anyway. Add to that the fact that milk quality (hence value) degrades rapidy if you don’t feed cows the right diet and its cloud cuckoo land.

    Bluntly, you can’t fix this with a ‘natural increase in prices’ because the price setting farmers see is not a natural consequence of a competetive market. Such principles do not apply where the market is not working.

  15. James James – I’m not a leftie. And I care if the market isn’t working because I’m ultimately paying for it anyway – forcing UK dairy farmers under will cost me more when I buy milk that has instead been imported. It’ll cost me more when farmers rely on subsidy (which will happen increasingly). Unless you ONLY buy loss-leaders at a supermarket you don’t even benefit financially – do you honestly believe that the price of milk at the supermarket is unrelated to the price of other goods you’re buying?

    British farmers want a free, fair market. Right now they haven’t got that, and dairy is an excellent example.

  16. So much wrong!

    “forcing UK dairy farmers under will cost me more when I buy milk that has instead been imported.”

    They won’t all go under, you idiot, just 22% of them, as John B says.

    If your complaint is that supermarkets have special privileges, and we should abolish the planning system or whatever, or that farmers are subsidised and we should abolish the subsidies, then I’m right behind you.

    But talking about the price of milk is a red herring.

  17. James James, resorting to name calling? Seriously?

    If you don’t have competition between buyers (and we don’t) then the squeeze on the price farmers can get is not removed by having fewer farmers. Why would it be? You have no practical choice who to sell to, the buyer knows that, and will keep prices depressed as low as possible while not driving too many farmers under. That means farmers aren’t living on the money they make from the milk, they’re scraping by on scraps of subsidy etc.

    Go. And. Talk. To. Some. Dairy. Farmers.

    Tim adds: “If you don’t have competition between buyers (and we don’t)”.

    Entire mind-gargling fucking nonsense.

    Here’s the NFU:

    http://www.farmersguardian.com/home/business/asda-morrisons-and-co-op-under-pressure-over-milk-price/48236.article

    Asda, which is based in Leeds, was besieged by angry farmers on the opening day of the great Yorkshire show. Farmers turned up in large numbers at Asda’s stand to demand that it introduces a fairer pricing policy on Tuesday.

    The three retailers currently pay a premium over the price processors pay to the farmers that supply them with their liquid milk. But this means they are currently paying significantly less for their liquid milks than their rivals, Tesco, Sainsbury’s, Waitrose and Marks & Spencer, which all pay their suppliers, who are on aligned contracts, a price linked to cost of production.

    Sainsbury’s announced at the end of June, for example, that it was raising the price it pays to 324 farmers on its Dairy Development Group by 0.26 pence per litre (ppl) to 30.56ppl. With Arla recently announcing a 2ppl cut this means farmers supplying Asda are receiving nearly 5ppl less than those supplying Sainsbury’s.

    The differential has prompted widespread criticism of those supermarkets that are still not providing aligned, cost of production contracts.

    Different prices from different buyers. The name for this is “competition”.

  18. Its ONLY competition if te farmer can go to a new buyer in the event of not being offered a fair price – that is not the case. It isn’t as easy as that for a farmer who is being offered a poor return – if it were said farmers would all go to the better buyers paying the better rate. Instead its a series of ‘take it or leave it’ deals depending on where the farmer is and what they can produce, often with complex contracts that are hard for the farmers to get out of even if the COULD find another buyer. It is NOT real competition, the buyers are NOT effectively competing, the market is, for the most part, entirely devoid of competition. But as you’re not at all interested in the reality of life and business for dairy farmers, merely in arguing that your dogma must be applicable, you’ll not be interested in that…

  19. Of course it is competition. True the competition is currently stacked in the supermarkets favour, but that is because there is too much milk about. If there were less milk, then the competition would be in the favour of the producer.

    A free market does not mean that you are guaranteed the price that you want. If milk production halved, I guarantee it would be the farmers calling the shots.

    And not, I am not interested in the reality of life and business for dairy farmers, or for teachers, or bankers, or bakers or candlestick makers. Nor do I expect farmers to be interested in the reality of life and business for software developers.

  20. “the cost is huge, the rules (milk has to be safe!) are complex and demanding.”

    Two possibilities here:

    1) the value of the service provided by the processors in meeting the above requirements exceeds the value of the service provided by the farmers, in which case the market price is the right one.

    2) it doesn’t, in which case there’s no reason why farmers can’t team up to form a business that competes with the processors on more advantageous terms. You could call it a “dairy cooperative”, maybe.

  21. ChrisM ‘competition’ occurs where if you say ‘no’ to one buyer there may be another you can go and sell to. That is not a reality for many dairy farmers who have only one buyer who will come out to them.

    John B, high regulatory hurdles from complex safety and processing have effectively killed many of the smaller middle men (and I’ll add that decades of government regulation left the whole area of milk collection in disarray). Processors simply don’t compete – it isn’t in the interests of the few big players in this sector to compete for farmers, so even if farmer (a) refuses to sell because the price offered is too low, that doesn’t mean that another buyer already offering farmer (b) more will come and give a better price. Whats sorely needed here is effective competition between middle men – more players in the market. But most of the smaller players have long since gone, and the non-competing bigger players have no interest in fighting it out at the farm gate.

    You’re right about the ‘dairy cooperative’ idea, but thats very hard to do when you’re in a market where you’ve got such high startup costs and no clear route to market anyway (supermarkets want the same milk on every shelf in the country – thats a big ask for a small dairy startup) – a better approach IMHO is to diversify into other products (such as speciality cheeses), and thats increasingly popular (Britain now produces more types of cheese than France, this has been a great success story of farmers diversifying, forming cooperatives, selling product locally to specialist manufactureres, etc.). And thats great, but it ain’t getting a pint of milk to the consumers fridge.

    But ultimately we’ve got big players running a market and not really competing – thats not good for the consumer and its not good for the producer either. Farmers want a fair market where those at every level compete on price and quality, as things stand they’re taking the whole strain because no one else is really competing as they should.

  22. Sorry Cab, you are correct, I meant to say a free market does not guarantee you will receive the price that you want. Nor does it guarantee that you will have even one buyer, let alone multiple buyers. With respect, that is just tough. No one is owed customers, nor owed a guaranteed price.

    The fact remains, there is clearly too much milk on the market, or the buyer(s) would not have all the power that you claim they have.

    In any event, what is is exactly that you are proposing as a solution to what you perceive to be a problem?

  23. Tim, john b, JJ: Your claims of 22% oversupply are wrong. EU milk quotas stop production increasing with yields. UK milk production is in fact slightly lower now than it was a decade ago.

    Tim adds: I’ve not claimed 22% oversupply. I have claimed that in the absence of demand rising (which those EU quotas will do quite well) that a 22% rise in yield from a cow will lead to fewer cows/fewer cow farmers.

    Also, for Cab: competition does not mean that you find a buyer at your preferred price. It doesn’t even mean that there has to be more than one buyer. All you actually need is the *potential* for there to be more than one buyer. A contestable monopoly is a very different thing than an uncontestable one.

  24. Tim, ok, unlike the other two you didn’t explicitly say that. But your point about rising yields is completely irrelevant to the discussion given that production has in fact fallen.

    What we have here is a perishable commodity, with relatively small producers dependent on milk sales to survive, compared with large diversified retailers. If the producers decline to sell then the retailers have to pay a premium to import milk from overseas, but the price they then pay (35p/l say) is still well below the retail price (about 90p/l). Meanwhile, the producers have to throw their product away. This asymmetry hands all the power in the negotiation to the retailers. The natural result would indeed be that dairy farmers would go out of business, but since their production would be replaced by more expensive imports, that wouldn’t be in the interest of the supermarkets. So the supermarkets do in practice pay more than they have to, just to keep the farmers (barely) in business.

    You might like to believe that free markets produce optimum results, but it ain’t necessarily so.

  25. PaulB

    1) who says that imports will be more expensive?

    2) retail prices (especially when VAT is included) tend to be above wholesale prices (especially if the wholesale price is for unprocessed goods). Nothing strange with that (see also Tim Newman at comment 4)

    3) what is suboptimal about the result you describe? That farmers need to buy smaller cars than they’d like to?

  26. @Ed Snack: You are right that we don’t have a true sense of the real market price of food because of the distortions created by the CAP. But I would argue that the distortion is mainly in the form of marginal producers being able to continue production. Ergo without the subsidy marginal producers leave the market. Total production falls. Now the loss of production in the EU might not affect world prices that much, but I can’t see how any fall is going to make stuff cheaper. And with food small marginal changes in production can bring large price movements.

    And with regards to milk, it is a very perishable product, as a liquid, so imports are difficult, and would be more expensive that home production. Butter, cheese and other dairy products are not an issue, they can be shipped from abroad with no great problems. If the removal of the CAP saw 20% of UK milk producers disappear, the boot could be on the other foot quite rapidly. Suddenly dairies would be screaming out for milk, and farmers could name their prices. Consumers would end up paying lots more.

    Removal of the CAP is not the simple ‘get rid of it, and we can all have cheaper food’ concept that many seem to think it is. Remember in a large urbanised population it is better to have a small to medium sized surplus of food every year, than surpluses most years with occasional years of shortages. Food shortages tend to have violent results – see the Arab Spring for what can happen when large numbers of urbanised people suffer a lack of food in the shops.

  27. Emil:
    1) I do, because I’ve looked up producer prices across the EU.
    2) Yes I know, and I’m not complaining about it.
    3) My point is that this is a situation where the Nash equilibrium is not Pareto optimal.

  28. Yes, of course.

    1) If UK producers fail to sell their milk to the supermarkets, they have to throw it away – they lose their entire income. If the supermarkets fail to buy the milk, they have to pay a smallish premium – a few percent of the retail price – to import it. So all the bargaining power is with the supermarkets: they can impose prices below production costs.

    2) Because the supermarkets can do this, they have to do it, or they’ll be outcompeted by other supermarkets.

    3) The result will be that dairy farmers will go out of business, until the shortfall in supply restores the balance of power in negotiations. In this state (the Nash equilibrium), the supermarkets will be paying more for milk (some of it imported) than they would if they paid enough now to keep the farmers in business.

  29. Thanks Paul.
    Some of what you say sounds plausible, but not necessarily likely and a long way short of certain.

    I have heard the claim a number of times that supermarkets can impose prices below production costs.

    I guess is could be true, but it sounds highly unlikely to me. Why would farmers produce milk at all if doing so costs them.

  30. You’re a dairy farmer. You think you’re a good dairy farmer. You’ve spent money on your cows and on your milking equipment. Then the price you get for milk falls and you’re operating at a loss. If you close down production, you’ll have to get rid of the cows at a loss, and they’ll be no way back. And you like your cows.

    Perhaps next year some other guys will have given up, and the price will rise. Or perhaps you’ll be able to cut a deal with a supermarket to pay a bit more in return for guaranteed long-term supplies. Or perhaps that cheese you’ve started making will catch on with the public. You decide to give it another year…

  31. This could only go on for so long before dairy farmers have to stop producing milk. I have been hearing about the plight of farmers and milk prices for over a decade now. Thus I really do not believe that they are selling milk at a loss.

    The picture you paint above is very realistic for a year or two, but not for year on year.

    The too-much-milk-on-the-market explanation sounds a lot more plausible to me than the supermarkets bullying suppliers explanation.

  32. Production has fallen over the last ten years while yields have risen substantially. Naturally the process of adjustment has given rise to considerable anguish. But the adjustment has happened.

    This is not a simple market. I wouldn’t claim that my explanation is the whole story – there have been changes in demand patterns too – but it stands up to examination a lot better than Tim’s does.

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