Julian Alston and I recently completed a paper on “Sources of Institutional Failure and Underinvestment in Levy-Funded Agricultural Research.” Julian presented this paper in Australia at the Australian Agricultural & Resource Economics Society (AARES) meeting in Fremantle, Western Australia, February 7-10, 2012. Click here for a copy of the paper.
Abstract
Commodity taxes (or levies) are used widely to finance commodity collective goods such as R\&D, promotion, public relations, market information, uniform grades and standards, and quality assurance. In this paper we develop heuristic and formal theoretical models to examine producer choices of rates of levies for financing agricultural R\&D programs, and the implications of matching government support, the justification for which has been questioned by the Productivity Commission. Previous work has emphasized the roles of characteristics of markets and the nature of the research-induced technological change as determinants of the choice of the levy rate and the total research investment. Here we build on that work in an analysis that emphasizes the roles of heterogeneous producers in collective decision-making processes when change is costly and a simple majority is not the usual criterion. Our analysis implies that collective decisions will lead to underinvestment and high private and social rates of return, especially if supermajority rules effectively apply, which is consistent with evidence on existing levy-funded agricultural R\&D programs.
I gave a seminar in the Bioresource Economics Policy Business and Economics department on February 3, 2012. The abstract for the seminar is presented below. Click here for a copy of the slides that I presented at the seminar.
Abstract
The removal of the CWB as the sole seller of grain from Western Canada will have a significant impact on the grain handling and transportation system (GHTS). Of particular concern is the pricing of port access at the West Coast. The grain handling industries in Western Canada are highly concentrated with the top four grain handling companies having 72 percent of primary grain handling capacity inland and 97 percent of the port capacity at the West Cost. The concern has been raised that these companies will not have an economic incentive to provide access to port facilities to competing firms such as the new voluntary CWB, producer loading facilities and producer-owned terminals. Without port access, these competitors will not be able to compete for grain at the country elevator level, which in turn will affect the price offered at the country elevator level. This paper examines the economic incentives for the existing holders of terminal capacity. The paper shows that generally the owners of port facilities will use their market power to restrict sales through their facilities by charging very high prices for port access. This behaviour has implications for competition on the country elevator level, where spatial could emerge, and for the significantly reduced farm gate prices that farmers receive. The paper also examines the implications of introducing competitive port access, as has been done in Australia in the wake of the removal of the AWB’s single desk powers.
The purpose of this conference is to lay out key issues that farmers, agribusiness firms and government will face in the grain marketing, handling and transportation system that will emerge after the passage of Bill C-18. The status quo will not be viable. All participants in the system will have to respond and adapt. This conference examines the areas most likely to see change and provides an analysis of options for industry participants.
The conference is being held December 12 and 13, 2011 at the Saskatoon Inn in Saskatoon SK.
Click here for conference details.
On October 18, 2011 the Government of Canada introduced Bill C-18 to remove the Canadian Wheat Board (CWB) as the sole seller of wheat and barley produced by farmers in Western Canada. On the surface this legislation looks merely to introduce a change in the way that Western Canadian farmers market their grains. Deeper down, however, there is something much more fundamental happening. The changes proposed to the CWB represent a significant regulatory change in which administrative fiat would be replaced by market transactions.
While the shift in the structure of the GHTS is significant, it should not be assumed that this is the end of the changes. As is argued in this paper, there are numerous reasons to believe that the GHTS will suffer from a number of market deficiencies — in particular, high market concentration, externalities and the lack of provision of public goods. If a government’s role is to put in place a GHTS that is efficient in its operation and provides widespread benefits to its participants (perhaps at the behest of some of the participants that feel they are not benefitting), then it will be incumbent on policy makers to look at ways at addressing these market deficiencies.
Although the upcoming changes to the CWB will mean the end of policy discussions about the CWB, they will not mean the end of policy discussions. The deficiencies that will be present in a market-oriented GHTS are not new. Indeed, they have been an integral part of the industry for over one hundred years and will be the focus of policy discussions for years to come.
To download a copy of the Working Paper on which this analysis is based, click here.
Professor Brady Deaton at the University of Guelph has launched a website FARE-talk where he provides podcasts of interviews designed ”to provide an enduring conversation about contemporary topics relevant to food, agricultural, and resource economics.”
The October 20, 2011 podcast is titled “The Canadian Wheat Board (CWB): Assessing the future of wheat marketing in Canada.” As Professor Deaton outlines on the site, “In this podcast Dr. Murray Fulton and I discuss the Canadian Wheat Board (CWB). Specifically, we assess the current marketing arrangement under the CWB and changes that will occur if the CWB’s single-desk authority is removed. Murray reviews the history of the Canadian Wheat Board and anticipates a future without it. Murray ends the podcast by directing our attention to issues that will be of ongoing interest as future events unfold.”
To go to FARE-talk, click here.
A colleague of mine, Richard Gray, has been doing research on agricultural research and its implications for food security and food prices. This short video nicely captures his conclusion that agricultural research funding needs to be substantially increased if the world is to escape rising food prices.
I had a request recently for a paper I co-authored a few years ago on the restructuring that was underway in the co-operative sector in Canada and the United States. The paper suggested a number of lessons that co-operatives might find useful as they attempted to deal with the significant changes that were occurring in the economy and society. Since these lessons would appear to be applicable today, I have presented them below. The full text of the paper can be found here.
(1) Be careful about letting power accumulate in the hands of the CEO and senior management
(2) Board members need to be properly prepared and equipped if they are to participate effectively in decision making in what is an increasingly complex world
(3) There is a need to create an identity that members can buy into and embrace
(4) This identity, and the strategies that go with it, must be aligned with the interests of the members and the interests and the ability of the co-operative
(5) The co-operative and its activities must be structured so as to provide members with a sense of ownership and trust
(6) Develop a sense of realism about what a co-operative can and cannot do
(7) Make sure that decisions are not based on the latest business school prescriptions or are undertaken on “faith”
(8) Instead, undertake the required research before entering into new ventures or activities
(9) Identify and tackle the key structural issues that the co-operative is facing
(10) Retain flexibility so that the co-operative can reposition itself as events change
Potash is back in the news this past week when it was announced that Cargill was selling its shares in Mosaic, one of the world’s major potash companies. The sale of these shares could make Mosaic a take-over target. The sale could also signal that Mosaic itself is now open to undertake acquisitions, something it has not done historically. Regardless of the what happens as a result of the Mosaic announcement, it is clear that there is likely to be considerable activity in the potash industry in the next while. In December, a Russian billionaire announced the merger of two Russian potash companies. Although it is impossible to say who the merger partners might be, expect to see additional mergers as firms rush to position themselves in what many analysts expect will be a highly profitable industry.
See the following links for more on these developments:
Russian Merger – Globe and Mail, December 20, 2011
The Mosaic Announcement – Globe and Mail, January 18, 2011
What This Might Mean for Mosaic – Globe and Mail, January 18, 2011
Saskatchewan Government Reaction – Globe and Mail, January 19, 2011
I recently gave a presentation at the Structure and Performance of Agriculture and Agri-products Industry (SPAA) network meeting in Ottawa on January 12, 2011. The presentation argues that the market power of the railways in Western Canada, combined with the rate cap on grain shipments, is a contributor to the level-of-service problems experienced by grain shippers in Western Canada over the past number of years. Click on the link below for a copy of the presentation.
Further Thoughts on the Rail Transportation Problem in Western Canada – January 12, 2011
The proposed takeover of PotashCorp by BHP Billiton has generated considerable interest and discussion. Here are some links to op-ed pieces and other commentary.
Conference Board Report – October 4, 2010
The economics of takeovers – Star Phoenix editorial (Sept. 23, 2010)
Audio recording – Taking Stock of Potash: A public policy panel (Sept. 10, 2010)
Bid Puts Spotlight on Crucial Player in Potash – New York Times article (Sept. 9, 2010)