Milk madness – Take 2

Moo are you lookin’ at?

I’ve moaned before about how people generally ignore my articles about monetary economics but that if I write about fiscal policy people get very excited. Well, now I suppose I can add dairy farming to my list of ‘hot button’ topics.

It isn’t hard to understand why. This is one of those cases which economic development continually throws up where the benefits of an action, in this case lower milk prices, are spread over a wide section of society while the costs are concentrated. If, say, milk prices fall so that a pint of milk becomes 3p a litre cheaper (assuming, for arguments sake, that 60 million people drink three litres a week) then the benefits to society will be £280,800,000 pounds a year but only £4.68 for each individual.

But if the costs, on the other hand, are concentrated among a relatively small number of dairy farmers such that each one stood to lose an annual income of £30,000, you can see that they would be incentivised to act more strenuously in fighting against the change than consumers would be in fighting for it. You see this wherever benefits are diffused and costs are concentrated. You always have. It’s what EP Thompson’s ‘The Making of the English Working Class’ was all about.

Still, that shouldn’t mean that wooly thinking goes unchallenged and what struck me about some of the reaction to my article for The Commentator was how confused it was. On the one hand I was accused of defending the iniquitous outcomes of a brutal free market. On the other, I was told that there was no free market in milk and was accused of defending cartels. This should immediately alert you to the standard of argument your opponents are about to deploy.

The first set of arguments were about the price itself, specifically what it reflected. Flatpackhamster argued that because of collusion among buyers the price was being kept below its ‘proper’ price. But in my article I had argued against the idea of a ‘proper’ price as something that could be objectively ascertained. In this I was drawing on a tradition of economics which is now 140 years old and which holds that value is purely subjective. The ‘proper’ price is whatever the contracting parties judge it to be. Thus, if two parties agree to a price of £1 per litre it is no less a ‘proper’ price than if they agree to a price of £5 per litre.

This subjectivity also applies to the prevailing market price, something trapezium struggled to understand. When you add the subjective judgments of all the market participants you do not get something which actually is objective. This is, to repeat, because there is no such thing as objective value. If 50 million people like Marmite and 10 million people don’t you have not derived an objective ‘fact’ that Marmite is nice.

Another argument, made by several but most clearly by Vimeiro, was that there was no free market in milk “because of the two layers of cartels operating in the middle” (between dairy farmers and consumers). This is a curious argument. After all, when we buy clothes made in China I imagine very few of us buy them directly from the Chinese factory worker who sewed them.

But what of the cartel argument? This is stronger but there is a simple answer to it. If we want to restore market power in the face of relatively few buyers what we need is relatively few sellers. Indeed, as my article said, with productivity increasing in the dairy industry faster than demand you will see fewer dairy farmers. There really is no alternative. In other words, if we allow the market process to work the cartel argument vanishes.

Also, despite what was suggested Charles Barry and others, the fact that supermarkets sell milk at different prices to what farmers sell it for is not evidence of evil price gouging. They are, after all, selling different products. Would you want to drink milk straight out of a cow’s udder? Me neither. It has to be processed, pasteurised, homogenised, treated, and bottled before it arrives on your supermarket shelf. The untreated milk the farmer sells to the processor is a different product to the drinkable milk sold in supermarkets. Hence, and quite obviously, why they are different prices.

The same point applies to cowmangav’s argument that because spot prices are above the offered contract prices these new contract prices are somehow ‘wrong’. The spot market is so called because transactions are settled ‘on the spot’. So, if the spot price is, as cowmangav says, 32 ppl then the buyer will hand that amount over and get their milk right now. The contract price, that which milk buyers are trying to lower and dairy farmers are trying to keep at the present level, is, according to cowmangav, 24 ppl. But, crucially, if a buyer pays this now, unlike in the spot market, they will not get their milk until some point in the future, points spread out over the length of the contract. This leaves room for uncertainty about future market conditions which the spot price does not have to reflect. Hence, it will be a different price. To put it another way, if I want to sell you a cake which I will give to you today, would you pay me more or less than if I sold you a cake which you couldn’t eat until next year?

Cowmangav actually gives an example of this in action. He says that “Milk production in the UK is currently running 4 to 5 percent below last year due to weather effects. This has caused milk procesors (sic) to have to pay 32 -35 ppl on the spot market to get extra milk” So, at some point in the past, buyers committed to paying farmers 28 ppl for milk. But, because of weather, the farmers are unable to deliver so buyers are being forced into the market to get the milk they need at 32 to 35 ppl. Buyers are paying anywhere from 14% to 25% more for their milk than they thought they would be. Can anyone be surprised that the contract price would deviate from the spot price?

There is a further point to be made in response to cowmangav. If the current contract price of 28 ppl is ‘fairer’ than the proposed contract price of 24 ppl, does that not mean that the spot price of 32 to 35 ppl is ‘unfair’ as well? It is, indeed, instructive to note that he doesn’t use this as an argument that the spot price is too high. Apparently a price is only ‘artificial’ when it benefits someone else.As Adam Smith put it back in 1776

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people”

That’s special interests for you.

I drew quite a bit of fire for my Commentator piece. I’m not too concerned, as I say, when the costs of an action are concentrated those who will bear them will fight hard. And besides, one of the commenters also dismissed Adam Smith, so not bad company to be in.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s