Single Desk Selling and The NSW Grains Board - Selling A Pup To The Public

Bob Farquharson and Garry Griffith (NSW Agriculture)

The debate about Government-mandated agricultural marketing arrangements was given a new direction in 1995 with the agreement of the Council of Australian Governments on a net public benefit test for legislative review ( Council of Australian Governments 1995 ). The focus in policy analysis was shifted from the previous justification of 'improved marketing', from the producer's perspective, to that of a broader societal view.

A recent Review conducted in the net public benefit context ( NSW Government Review Group 1999 , Farquharson and Griffith (2001) ) showed that the estimated gains from restrictions to competition written into the NSW Grain Marketing Act 1991 were not likely to be positive. Overlaying this review process has been the much-publicised bankruptcy of the NSW Grains Board. The reasons for that failure have been investigated, and further review processes are continuing. However, we contend that the operational reasons for the financial failure are not necessarily connected to the above public benefit test finding, and that this is an important point to make in the policy debate. In this paper we review the NSW Grains Board analysis of Farquharson and Griffith (2001) in the context of recent industry developments.

Single desk selling, price discrimination and the public benefit

All members of COAG endorsed a Competition Principles Agreement to review legislation that restricts competition ( Milham and Davenport 1999 ). The Agreement required that legislation should not restrict competition unless it could be demonstrated that the benefits to the community as a whole outweighed the costs, and that the objectives of the legislation could only be achieved by restricting competition.

In the case of the NSW Grains Board, the Act granted vesting of certain coarse grains and oilseeds (principally malting barley, feed barley and canola) in the Board and the power to sell as a single desk. The Act also allowed the Board to impose a $1.50 per tonne levy on 'authorised buyers' of these grains in NSW. In terms of concepts of economic theory, vesting and single desk selling are the monopsony (single buyer) and monopoly (single seller) cases, respectively. Farquharson and Griffith (2001) focused on single desk selling as a restriction to competition in the above framework.

For the Review of the NSW Grains Board two questions were addressed. First, was the Board able to use its single desk selling power to alter market outcomes in certain ways? Second, if this was the case, was there a net public benefit involved? The Board's use of single desk selling was considered a restriction to competition if it was used to "price discriminate" (or 'price to market'). The first question therefore involved an assessment of whether the NSW Grains Board was able to price to market and the second involved the net social benefit evaluation of that ability, if it had occurred.

Three types of price premiums are possible (Meyers Strategy Group 1996) - competitive, market restriction and price discrimination (see the first box). Of these, price discrimination was the only one considered relevant in a restrictions-to-competition context. However, we need to be careful in considering the concept of price discrimination. Lipsey, Langley and Mahoney (1981) noted that price discrimination often has a bad reputation. It is prohibited under Section 49(i) of the Trade Practices Act (in relation to the prices charged to different purchasers), but judging whether price discrimination is good or bad depends on the details of each case, as well as personal value-judgements.

Was the NSW Grains Board able to price discriminate? In theory the restrictions to competition can generate a benefit to producers in an agricultural industry through effective price discrimination. This involves using legislative fiat to acquire stocks of produce and adjust quantities sold in different markets, impacting on prices received and raising revenue for producers. The first question above asks whether the Board was able, in theory and practice, to price discriminate. The necessary conditions for this question are discussed in this section, and evidence for the sufficient conditions is presented in the next. These sections follow closely the information presented in Farquharson and Griffith (2001) .

The ability to price discriminate across markets depends on two key assumptions, that markets are separated in some dimension, and that different demand relations (price elasticities) exist in the markets. If the demand relations differ between markets, then equating marginal revenues means that different prices are received in the different markets. Prices are higher in those markets where the exporter faces relatively inelastic demand. So a supplier, such as a central selling agency with market power, may be able to achieve price premiums in some markets, which are sufficient to increase overall returns to the industry. In theory a rule can be used to maximise profit to the supplier under this arrangement.

The amount by which prices can be increased depends on market share and demand elasticities. Evidence and a priori thinking for each of the three grain types indicated that there was likely to be potential for price discrimination between markets (domestic versus export) on the basis of varying demand elasticities. However, offsetting this is that the Board's sales as shares in export markets were often small.

Evidence of price differences

The sufficient condition to be met for price discrimination is that prices must differ substantially between markets. Statistical tests following those described in Griffith and Mullen (2001) were conducted of sales data provided by the Board. The analytical model tested the effects of market, year and exchange rates in explaining FOB grain prices received by the Board.

The maintained hypothesis was of a single competitive market (ie a single price) for sales of the given commodity by the Board. The alternative hypothesis was of an imperfect market involving price discrimination. If some of the individual market influences were not zero, and the price was higher in the less elastic market, then price discrimination could have occurred and price premiums could have been obtained.

For feed barley and canola there were no significant statistical relationship suggesting price differences of this sort. This suggests a competitive market for these products. However, the analysis indicated that malting barley prices on the domestic market were higher than on export markets, suggesting the possibility of price discrimination.

When combined with the conditions considered necessary for price discrimination, this evidence indicates that price discrimination may have occurred for malting barley. The next step was to measure the costs and benefits to affected parties.

Evaluating the effects of price discrimination

The existing price and quantity information in each market was the starting point for the analysis of benefits and costs of the arrangements. The requirement was to estimate the prices and quantities that would have occurred in each market, if price discrimination were not practised , ie if the law of one price prevailed. With this information the producer revenues and consumer/end-user impacts of removing the competition restriction could be valued. The methodology developed by the Centre for International Economics (1997) was used to make these calculations.

The methodology, assumptions, analysis and results used in this evaluation are presented in Farquharson and Griffith (2001) . The graphical representation of price discrimination is presented in Figure 1. The observed domestic and export prices under the current (price discrimination) arrangements are P_d and P_e, respectively. Using assumptions about the demand elasticities in each market and an equilibrium equation, the equilibrium price P_c was then calculated. This information, together with observed prices and quantities, allowed estimation of consumer and producer benefit levels associated with price discrimination compared to the perfect competition case. These benefits are calculated using the concepts explained in the second box.

Figure 1: Graphical representation of price discrimination

The analysis for malting barley showed that the operations of the Board delivered a small net benefit to producers. It indicated that the Board price discriminated between domestic and export markets and, as a result, prices on the domestic market were higher. This implies that processors of malting barley paid a higher price, resulting in a net cost to them.

For a best estimate of the export demand elasticity of -10, the results indicated a net gain to grain producers of $0.206 million per annum, a net processor/consumer loss of $1.235 million per annum, and an overall net cost of $1.029 million per annum. These results assumed that the Board knew with certainty the values of export demand elasticities, and further that it used that knowledge to maximise returns to growers. In sensitivity analyses these assumptions were relaxed, but the results were seen to be quite stable and there was never likely to be a net (positive) benefit for the NSW economy as a whole from price discrimination in malting barley markets.

Failure of the NSW Grains Board

A Public Accounts Committee of the NSW Parliament found that reasons for failure of the NSW Grains Board included a conflict between the Board structure and incentives, industry change, the high growth strategy pursued by the Board in later years, and other operational factors ( Public Accounts Committee 2001 ). These reasons are not related to the public benefit test. However, there is a link in that the high growth strategy appears to have been prompted by the deregulatory push and the review under National Competition Policy (NCP) guidelines ( Wyatt and Allen 2000, p. 3 ).

Issues in monopoly selling

The results above indicate that in a strict consumer surplus/producer surplus context there were unlikely to be net public benefits from the price discrimination model used to assess the activities of the NSW Grains Board. Examination of Figure 1 leads to the conclusion there are never likely to be net public benefits in this context.

The transfer of product from domestic to export markets leads to higher prices paid by domestic consumers or manufacturers, a transfer of surplus in the domestic market from consumers or manufacturers to producers, and an associated efficiency loss to consumers or manufacturers. Product shifted to the export market is likely to earn a lower price with no net gain. However, there are other broader considerations that can be considered in considering such arrangements ( Lipsey et al. 1981 ).

A review of the national Wheat Marketing Act by an independent Committee also considered the effects of single desk selling of bulk export wheat ( Irving, Arney and Lindner 2000 ). This Committee could not find clear, credible and unambiguous evidence that these arrangements for the marketing of export wheat were of net benefit to the Australian community.

This is very difficult to do in the broader context beyond consumer surplus/producer surplus measures. Irving et al. (2000) considered that any single desk price premiums were likely to be small; and that because there was uncertainty about the magnitude of the key effects (single desk price premiums, innovation in marketing, and grain supply chain costs) there was uncertainty about whether or not there were net benefits to Australian wheat growers and the Australian community.

The Federal Government response was to retain the legislative underpinning for Australia's single desk arrangements for exporting wheat ( Truss 2001 ), with a possible review in 2004 depending on government political decisions.

For barley, the deregulation of the Victorian industry in 2001 ( Brumby and Hamilton 2000 ) occurred on the basis that there was no compelling reason for an export monopoly and that this was expected to stimulate investment and innovation. While the South Australian and NSW ( Amery 2000 ) industry regulated arrangements have been maintained, the Victorian move will provide additional dynamics and a test of state allegiances.

The availability and level of cash prices offered to Victorian producers, and the development of a freer market with more certainty for companies and investors will allow an interesting comparison in 5 or 10 years time.

Concurrently, there have been changes in the co-operatively-owned Bulk Handling Authorities, with Graincorp and VicGrain merging, The Grain Pool of WA and Co-operative Bulk Handling Limited merging, and GrainCo taking over the NSW Grains Board. At least some of these entities are becoming involved in trading grains.

There is also vertical integration with AWB Limited and FreightCorp combining in joint rail freight agreements to invest in Victorian and NSW rail and grain handling infrastructures. These include construction of high volume grain freight consolidation facilities at several centres and investment in grain wagons for rail transport.

Thus, there is an expansion of handling and transport authorities into grain trading, and of trading organisations into handling, transport and storage. This vertical integration should allow further competition and efficiencies in the industries.

This is no doubt being driven by commercial pressures, but also by the public inquiry process in the competition policy framework as evidenced in Irving et al. (2000) and NSW Government Review Group (1999) .

For the time being, the debate about monopoly selling powers has appeared to subside. However, the issue will surface again if governments again decide to review legislation. The measurement of direct benefits from single desk selling will be complicated by new commercial structures, but there will be more information as a basis for analysis.

There may also be less importance placed on the net public benefit test if NCP guidelines are watered down. However, debate and analysis of the benefits from a single desk arrangement will be part of the process.

References

Amery , Richard (2000), 'State Government Retains Vesting Powers of NSW Grains Board', Media Release, Minister for Agriculture, Sydney.

Brumby , John and Hamilton, Keith (2000), 'Victoria opens its $102 million barley market to export competition', Media Release, Minister for Agriculture and Office of the Treasurer, Melbourne.

Centre for International Economics (1997), Review of the Victorian and South Australian Barley Marketing Act 1993: Under the National Competition Policy Review Legislative Restrictions on Competition, Canberra.

Council of Australian Governments (1995), Competition Principles Agreement, Memorandum between Governments, Canberra.

Farquharson , R.J. and Griffith, G.R. (2001), 'Single Desk Selling by the NSW Grains Board: Public Benefit or Public Cost', Australian Agribusiness Review , Paper 6, Volume 9. Available on line at: http://www.agrifood.info/review/2001/Farquharson.html

Griffith , G.R. and Mullen, J.D. (2001), 'Pricing-to-market in NSW rice export markets', Australian Journal of Agricultural and Resource Economics 45(3): 323-334.

Irving , Malcolm, Arney, Jeff and Lindner, Bob (2000), National Competition Policy Review of the Wheat Marketing Act 1989 , NCP - WMA Review Committee, Canberra.

Lipsey , Richard G., Langley, Paul C. and Mahoney, Dennis M. (1981), Positive Economics for Australian Students , Weidenfeld and Nicolson, London.

Meyers Strategy Group (1996), 'Economic Analysis of the Value of the Single Desk', Confidential Report to the Australian Barley Board, Sydney, April.

Milham , N. and Davenport, S. (1999), 'Plant and Animal Health Regulation: Some Competition Policy Issues', Agribusiness Perspectives , Paper 19. Available on line at: http://www.agrifood.info/perspectives/1998/Milham.html

NSW Government Review Group (1999), Review of the NSW Grain Marketing Act 1991: Final Report , The Government of New South Wales, Orange.

Public Accounts Committee (2001), Inquiry into the Collapse of the New South Wales Grains Board , Report 10/52 (No. 128), Sydney.

Truss , Warren (2001), 'Wheat single desk to remain', Media Release, Minister for Agriculture, Fisheries and Forestry, Canberra.