RURAL: Wheat industry needs market support sche
by Colin Teese
News Weekly, May 6, 2000
KW news weekly, National Civic Council, colin teese, wheat industry, farmers, economic rationalism, globalisation, wheat board, economics, deregulation, international trade, trade, Paul Volcker, IMF, Department of Trade
Colin Teese, former Deputy Secretary of the Department of Trade, looks at means to give stability to grain producers.
Farmers are up in arms about the Wheat Board's privatisation (Australian Financial Review, April 3). Notwithstanding farmers' current lamentations, the Board's capacity to assist growers was probably largely destroyed in 1989, when the Labor government deregulated the domestic wheat market.
Memory-challenged politicians may not recall it, but the Wheat Board - and indeed other farm product marketing boards - go back to the 1930s, when farmers were suffering the full economic consequences of the operation of unbridled competitive forces in their export markets.
Like most farm output, wheat is an undifferentiated product, and, in the end, must compete on price. Prices fluctuate according to the balance between availability and demand. Basically, demand is not subject to ordinary marketing stimulations, and therefore prices are low whenever the product is in over-supply and high in time of shortage. Availability (and therefore price movement) is largely weather-influenced, and, therefore, significantly outside the control of producers or marketers.
Moreover, Australia, unlike almost all of its competitors, is a very large exporter of wheat relative to its total production. For this reason, wheat producers, especially small farmers, are in no position to bear the cost of subsidising exports from domestic sales returns.
Following the 1930s crisis, a sympathetic government's response was to set up a selling board through which all export wheat would be sold.
The Wheat Board sent its own specialist sellers into the market place on behalf of growers. It couldn't much influence market prices, but it could stop Australian growers competing with each other and driving prices needlessly lower. The Board was able to sell larger quantities to some countries, especially the Middle East, which seems to prefer to negotiate purchase contracts with semi-governmental institutions.
Additionally, the Board was able to exert a powerful influence on grower returns, first by helping growers to manage price fluctuations, through a system of levies collected from growers in times of high prices and returned to them when prices fell. That was one side of a price equalisation scheme.
The other was the regulation of the domestic wheat market. Before 1989, local growers were effectively protected from the possibility of import competition, and thus were able to extract a higher than export parity price for domestically sold wheat. Well paid and fully employed workers willingly paid the higher prices. And, importantly, collections from PAYE taxpayers and tariffs helped create a revenue stream large enough to help farmers in other ways.
The price differential thus created between domestically sold and exported wheat allowed the Wheat Board to manage a pooling arrangement that generally resulted in higher overall returns.
This careful balance of prosperity between complementary city and country interests was only possible in an appropriately regulated economy. Farmers, however, have been encouraged to believe differently. Today's wisdom holds that protecting the jobs of city workers comes at the expense of farm income. But farmers aren't fools. They know the evidence of their own eyes. They have watched the decline in manufacturing industry, and with it the prosperity of workers and farmers.
Consequently, farmers suspect the motives of those responsible for privatising the Wheat Board. But, while important, privatisation is not really at the heart of their problem.
Wheat growers may not fully understand - and their political and organisational spokesmen and women stand condemned for not informing them - that market-based solutions, especially when they are focused upon exports, cannot work for farmers. For most of their income, farmers rely on export returns which they cannot influence.
Despite what the Federal government and opposition may tell them, neither should hope be pinned upon the World Trade Organisation and a new round of trade liberalisation talks. Farmers should remember that the same unfulfilled promises grew out of the Uruguay Round of agricultural trade talks almost a decade ago.
What farmers must press for is a re-regulation of the domestic market, which at present is off the agenda of all political parties and major farm organisations. Only, certain sections of the National Party in Queensland and Victoria, seem prepared to focus on the real problems of farmers. They should be cultivated.
Farmers can help politicians by specifying what they want. The solution lies in what worked before. A starting point is re-regulation of the domestic wheat market. That alone will not be enough though.
What made regulation work before was a kind of compact whereby industry policies protected the jobs and incomes of city workers, who in turn paid a little more for wheat. Then PAYE tax contributions of well paid workers, along with tariffs, generated revenue streams to help maintain the prosperity of farmers. Farmers did their part by earning foreign exchange from exports.
It's time to restore that compact.