Are Marketing Boards Yesterday’s Idea?

Commentary, Marketing Boards, Milton Boyd (historic), Rural, Uncategorized

Governments have responded to the farm crisis with some infusions of short-term aid, but creating a freer and fair marketplace ought to be the long-term goal. As if a horse-kicking by foreign subsidies has not been painful enough, Canadian farmers are hemmed in at home by the rules that govern marketing boards.

For marketing any commodity, whether cars or chickens, the “four P’s” should apply: To achieve success, choose “the right product, the right price, the right promotion, and the right place.” But marketing board regulations mandated by law and their production quotas remove the four P’s from the process and undercut the chances for a successful harvest. The marketplace is turned on its head, and replaced by a new “P” word — the marketing “paradox.”

Why a paradox? While they are called “marketing boards,” and are established with good intentions, they actually prevent the marketplace from working, by fixing prices through production quotas that restrict the quantity that farmers can produce.

By fixing prices for products like dairy and poultry – they base their decisions on complicated calculations of input costs — marketing boards drive a disconnecting wedge between the producer’s plans and the consumer’s needs. Prices no longer move to balance supply and demand, and this violates the “right price” rule. The overall effects are lower farm exports.

One justification usually offered for fixing prices is to stabilize farm revenue. But fixed prices do the opposite. In years of low production or crop failure, prices cannot quickly adjust upwards to increase falling farm revenue, nor signal the need for increased production to avoid future shortages. In years of harvest glut, prices are not allowed to fall to clear supply and signal the need for less production. The best farmers cannot capitalize their comparative efficiency.

The economy loses because the system’s rigidity discourages innovations in processing that adds value and creates jobs. Restricting supply violates the “right promotion” rule of marketing. If Microsoft, for instance, operated under marketing board rules in Ontario, Bill Gates could never have been successful. While he might get a fixed price of about $5,000 per copy of Windows, with a production quota of 1000 copies and no competition, he would have no exports. And high costs would force small profits, allowing no expansion or growth.

In order to control prices, marketing boards restrict imports. In retaliation, foreign governments often restrict exports from Canada. The loss of world markets means that farmers lose the opportunity to maximize their incomes. Poultry processors cannot easily locate in Canada to serve the world market, because of uncompetitive Canadian costs and supply and export restrictions. New farmers entering the industry find it costly because they must buy expensive production quota. This drives up the cost of production without adding value, and leaves Canadian producers with a high uncompetitive cost structure compared to their world competitors. As well, production quotas reduce the size of producers, and so the Canadian industry is left with a large number of smaller high cost producers. Risk is also a problem with quotas, since WTO rules may someday mean that quotas be disbanded, leaving the farmer with substantial losses on the high priced quotas they bought.

Even McDonalds and Kentucky Fried Chicken have experienced shortages of chicken due to restrictive production quotas. Sometimes they have even had to buy chicken from U.S. farmers instead of Canadian farmers, because Canadian supplies were insufficient due to production quotas and pricing. And while grain farmers are fighting for more open foreign markets, dairy marketing boards are cutting off dairy imports. Foreigners then retaliate and keep their grain markets restricted, and this hurts the Canadian grain farmer. When it comes to WTO trade negotiations, Canada’s position is weakened. It leaves foreigners feeling like Canadian negotiators are talking from both sides of their mouths, arguing for others to open up their markets, while Canada keeps it’s markets closed.

Outdated wheat milling and export restrictions in Western Canada recall the days of prohibition and moonshine. Recently a group of Weyburn, Saskatchewan farmers wanted to start a pasta processing plant and use their own wheat, but were prohibited by Wheat Board rules. In order to operate, they were required to pay above market wheat prices, rather than simply using their own wheat as they wished. In the end, they may have to relocate across the line in North Dakota where they face less restrictions and lower taxes, and then ship the product back to Canada. This is the same economic process that brought American bootleggers up to Moose Jaw in the 1920s to buy cheaper whiskey, only in reverse.

A few years ago, Manitoba provided a sterling example of how to restore markets when it threw out restrictive rules on pork marketing. These rules had allowed the Pork Marketing Board to set the price above market levels, and discouraged processors because they could face a restricted, uncertain, or expensive supply of pork. Following deregulation and restoration of the marketplace, both new and existing pork processors more than doubled production and the pork industry took off. The result is a Manitoba agricultural economy that is much more prosperous and diversified.

Before marketing boards came along, Winnipeg had the role of being the largest wheat market in the world. Other commodities also had healthy exports, but many exports were substantially reduced or stopped when marketing boards came into existence. The restrictions in Canadian production simply meant that other countries stole Canada’s market when Canadian exports stopped. Getting these markets back may not be easy at first, but on the positive side, Canada’s plentiful supplies of grain will help some commodities such as poultry and dairy.

Farmers and consumers the world over will do better if they have the freedom to produce and consume as they choose in a competitive marketplace. South Koreans eat well while the North Korean dictatorship starves its people with ironclad restrictions on agriculture. Years of restricted markets have left parts of land rich Eastern Europe and the Former Soviet Union with a sad food shortage, while neighboring Western Europe is abundant in food.

The complex system of marketing boards in Canada was put in place at a time when our understanding of markets was much less sophisticated. We now have a fuller understanding of the negative consequences of price-fixing and quotas. Abandoning these failed methods through an equitable transition program is the best way to ensure a vibrant and sustainable farm economy.