Agribusiness Perspectives Papers 1997/98

Paper 4
ISSN 1442-6951

The"Meyers Report" & The Australian Barley Board*

A. S. Watson

Freelance Economist, Melbourne
Telephone: 03 9370 7438
Facsimile: 03 9326 1218
E-mail: asw@ozemail.com.au

Comments Prepared in the Context of a National Competition Policy Review of the Powers of the Australian Barley Board - July 1997
* The helpful advice of Professor Colin Carter of the University of California at Davis on an earlier draft of these comments is gratefully acknowledged.

Introduction

The following comments were prepared at the request of the Australian Grain Industry Taskforce (AGIT) in the context of a review by the Center for International Economics (CIE) of Victorian and South Australian legislation affecting the barley industry, in particular, legislation determining the powers and functions of the Australian Barley Board (ABB). The review is being conducted in accordance with guidelines adopted by all Australian governments to meet their obligations under the National Competition Policy the "Hilmer process".

AGIT is a group of grain producers who are critical of existing Australian grain marketing arrangements. AGIT notes that supporters of the status quo in barley marketing have drawn considerable comfort from work undertaken for the ABB by the Meyers Strategy Group in conjunction with Professor Gordon MacAulay of the University of Sydney, Department of Agricultural Economics. However, this work has not been subjected to detailed scrutiny.

The work in question is reported in two documents available to AGIT:

• Economic Analysis of the Value of the Single Desk, Summary Report to the Australian Barley Board April 1996, which is described as "presenting the findings emerging from the study";

• A paper by MacAulay and Richards [a Meyers staff member], entitled "Models for the Analysis of Barley Marketing", presented at the annual conference of the Australian Agricultural and Resource Economics Society January 1997.

These comments concentrate on the first paper, which is readily available to participants in the barley marketing debate. There is confusion about confidentiality and the number of papers prepared by Meyers for the ABB. AGIT believes all relevant work done by Meyers should be available to the CIE in this inquiry. For the record, the paper discussed below is 37 pages long, printed sideways, with 16 pages of Appendicies (sic), printed in the normal fashion. 

Scope and Methodology of the Meyers Report

The primary emphasis of the Meyers report is on the benefits and costs of single desk marketing. However, it is noteworthy that the first paragraph of the introduction to the report refers to other work done by Meyers concerning "alternative structures for the industry." This is an obvious example of work that should be made available to CIE, even if there were a valid reason for it to be withheld from grain growers and barley consumers. This is because it is fundamental to the Hilmer process that other ways of organising barley marketing are considered before restrictions on competition in marketing are accepted as necessary to achieve the objectives of barley marketing legislation.

Even if single desk marketing were advantageous in the sense that Australia had market power in the world barley industry, statutory marketing is not the only way Australia could benefit from that favorable circumstance. In the work that is publicly available, Meyers are implicitly assuming that all that has to be established under the National Competition Policy is a "public benefit" from existing arrangements. While that proposition is contentious in its own terms, the authors of the Meyers report have not properly considered whether a single desk, or desks given the different arrangements in the various Australian states, is the only way for the benefits of market power on export markets to be captured by Australia. Nor does the Meyers report consider the implications of Australia's longstanding commitment to state trading in grains to its credibility in international negotiations concerning market access and trade liberalisation.

As described by Meyers, the important powers of statutory marketing authorities (SMA's) in the barley industry include:

Vesting and compulsory acquisition of barley, pooling and equalizing grower returns, imposing levies, setting prices, regulating exports and controlling quality. Each of the SMA's have a permit system in place for trade of feed barley and limited direct contracting occurs between customers and growers for malting barley via various permit / license systems. Thus, for feed barley the SMA's operate essentially as a group of single export desks, with the domestic market operating more closely to a deregulated market.

It follows that barley marketing arrangements affect business opportunities available to Australian grain growers and the industrial organisation of the barley-using industries. There is obviously much more to barley marketing than the presence or absence of premiums obtained by the ABB on export markets. If work by the Meyers Group has explored other consequences of barley marketing arrangements, these studies should be made available to the CIE. The CIE should not limit its review to the single issue of the efficacy of the single desk.

Other aspects of marketing need to be carefully considered to investigate whether it is feasible to maintain any benefits arising from the single desk, whilst avoiding the detrimental effects of regulation. Possible marketing institutions and policies include grower co-operatives and/or the licensing of private traders operating in particular export markets.

Even more importantly, the effects of regulation on the costs of providing other marketing services and the incentives of producers has to be considered. Furthermore, the report does not give the flavor of results obtained by Meyers in their studies of the "single" desks of New South Wales and Western Australia. Again, this information would be potentially beneficial to CIE in assessing various claims concerning the ABB.

The Meyers report sticks to discussion of the barley industry without much attention to the wider economic environment in which crops are now marketed. In recent years, crops such as canola have grown in importance, with private enterprise-based marketing arrangements. A similar story could be told about cotton, where co-operatives have also been important.

Another obvious criticism of the Meyers report is that it displays a narrow view of price formation in the grain industry. There is inadequate recognition of the multi-dimensional nature of grain prices. Grain prices reflect underlying supply and demand conditions together with premiums and discounts for location, time, form and quality.

This is not being pedantic or carping. The report contains useful descriptive material, which is consistent with information available from other sources. However, the essential economic characteristics of barley production and consumption are submerged in excessive background detail and unverifiable trade opinion.

Barley is a heterogeneous product sold to diverse markets, domestic and export. The markets are extremely unstable because of fluctuations in production in Australia and elsewhere. On its own, the wide variation in Australian production of barley and other grains calls into question the notion that Australia can establish and defend its "market share" in preferred markets. Obviously, Australia's customers for grain are just as aware of the effects of climate on Australian grain output as Australian farmers.

Like many other commentators on the barley market, feed and malting types are discussed in the Meyers report as if the boundary between the end-uses of barley was known and fixed. In reality, "supply and demand" for barley and associated marketing services are more important than the sciences of brewing or animal nutrition in determining end-uses of barley.

It is misleading to claim that "feed and malting barley markets need to be considered separately to provide an accurate picture of Australia's relative position" (Meyers, p.7). "Feed" and "malting" barley are obviously substitutes in production, and also in consumption Ð except for Islamic countries. Treating barley as if its end-use is known in advance misses the point.

There are serious conceptual and measurement problems associated with identification of price premiums and discounts in the barley market. Rough orders of magnitude for annual storage and carrying charges (both physical and interest costs) are around 20 per cent of the "price" of barley. Transport costs from most Australian production regions to export destinations are upwards of 25 per cent of the final price received. The pervasive and damaging economic effects of the pooling of transport, handling and storage charges are well documented in the Australian literature on grain marketing.

Prices observed in the barley market are an amalgam of different influences. It is hardly surprising that there are vigorous disagreements concerning price formation in the Australian barley industry. For example, the Boston Consulting Group (BCG), whose earlier work was done for the Grains Council of Australia (GCA), was extremely negative about the single desk for malting barley Ð although more for reasons to do with industrial organisation than BCG's views on the presence or absence of premiums obtained by the ABB on export markets.

The professional reserve displayed in the first full paragraph on page 8 of the MacAulay-Richards paper is well justified:

One of the difficulties with many models, the Carter model included, is that it is not possible to directly impute causality. It is possible that factors other than the ability to price discriminate may cause differences in prices between markets to be observed. The capture of rents from trade distortions, such as import quotas in the case of Japan, is an example. Other factors such as differences in quality and services may have an impact.

Unfortunately, the same caution and good judgement is not always displayed in the version of the Meyers report which is more generally available and has been so enthusiastically embraced by supporters of the ABB and other SMA's. Instead, at page 4, immediately below the heading "Objectives" we read: "The objective of this study is to identify the benefits of single desk marketing of barley for barley growers in South Australia and Victoria."

The methodology used by Meyers more or less follows that developed by the consultants Booz Allen & Hamilton in their work for the Milling Wheat Strategic Planning Unit established by the GCA. [The parallel study on malting barley by the Boston Consulting Group seems to have been largely ignored by Meyers.] The essential difference between the approaches of Meyers and Booz Allen & Hamilton is the addition of a quantitative study designed to assess the extent that prices in various export markets differ from what might be expected without the ABB exerting market power. As in the quotation above, this approach has at times been referred to as the "Carter model". There is some irony in this description. While Professor Colin Carter of the University of California introduced applications of the Krugman / Knetter concept of "pricing to market" to the professional literature on grain marketing, Professor Carter is well known as a fully paid up critic of the export monopoly powers given to the Canadian Wheat Board (CWB) in his native Canada (Carter and Lyons 1996).

The study approach in the Meyers report includes the following methods of analysis:

• Price comparisons;
• Price discrimination analysis;
• Competitor price premium analysis;
• Market mix analysis
• Costs and financial management; and
• Scenario analysis.

Price Comparisons

The basis of price comparisons as described by Meyers at page 5 of their report is to compare "average annual prices across all markets for the ABB and its key competitors, with no adjustment for quality."

Almost by definition, the approach is valueless. Meyers have compared cash prices for Canadian malting barley delivered Minneapolis with ABB export prices for malting barley, and for feed barley, compared contract export prices (FOB) for the European Union with ABB export prices for feed barley. Transport, location and quality factors could explain the result without bothering about the ABB's single desk and the presence or absence of market power.

Professor Carter pointed out in a letter to the writer that a recent study commissioned by the CWB found the CWB earns significant price premiums due to its single desk status (Schmitz et al. 1997). The report claims that from 1985 to 1995, the CWB earned a "single desk" premium of $34/mt for 2-row malting barley, $42/mt for 6-row malting barley and $3/mt for feed barley (all $Cdn). The ABB is the CWB's largest competitor and both agencies are alleging premiums in the same market. How can that be? [Similar claims of separate price premiums in the world wheat market have been made by the CWB and the Australian Wheat Board.] 

Price Discrimination

This is the most important and contentious part of the consultancy conducted by the Meyers Strategy Group for the ABB. More detail is provided in the paper by MacAulay and Richards than in the report, which is widely available. A separate section on that paper is presented below. The two pages of text concerning Price Discrimination in the report include the following two categorical statements on page 18 under the heading "Findings":

• The analysis showed that the ABB was able to exert market power to achieve price discrimination in both malting and feed barley markets
• The premiums obtained have delivered around $7.00 per tonne to growers for the period 1987/88 to 1994/95 across all barley sold.

These confident statements contrast markedly with the qualifications expressed in the MacAulay-Richards paper cited above. And with the following statements on page A3 in Appendix 1 of the report itself!

A limitation of the framework of the pricing to market test (or the Carter / Knetter model) is that it does not necessarily account for whether an un-competitive scenario is a result of direct action by the ABB. It is not possible to determine whether the ABB has acted in a manner, which has achieved price discrimination, or if other market particulars have influenced the outcome.

In both page A1 of Appendix 1 of the Meyers report and page 8 of the MacAulay-Richards paper, statements are made which call into question the relevance of the pricing to market model to the problem at hand. It is stated that the ABB negotiated most of its contracts in US dollar terms. As developed by Krugman and Knetter, the pricing to market model was intended to investigate the competitiveness of international trade - in truly competitive markets, exchange rate changes would be quickly and fully reflected in the prices of traded goods and services set by companies engaged in international trade. The model was designed to test this hypothesis. If the ABB prices in US dollars, inclusion of bilateral exchange rates for all the countries included in the application of the Carter / Knetter model is irrelevant and likely to lead to spurious results. Put another way, pricing in the currency of another country is effectively an indication that the ABB has little in the way of genuine market power.

It is therefore reasonable to conclude that both the Meyers report and the MacAulay-Richards paper do not support the single desk powers of the ABB in the unequivocal way that many supporters of current barley marketing arrangements have alleged.

Two questions arise:

• What alternative explanation (or explanations) can be given for the results?
• Where should the onus of proof lie?

The simplest explanation for the results of the application of the Carter model to sales data for Australian feed and malting barley is that prices would be expected to be different in different markets, irrespective of any arguments about the market power of the ABB. Differences in quality and transport costs are obvious reasons. In addition, there is no doubt that higher prices can be obtained by offering more marketing services. But the case for value adding is not self-evident; it depends on the benefits and costs of providing the services. Put loosely, premiums can always be obtained by "over-servicing" of markets.

Unfortunately, the Meyers report does not contain a comprehensive description of the way the ABB markets barley to Japan and the United Arab Emirates, which are the export markets identified in the MacAulay-Richards paper where premiums have been achieved. [Nor has domestic marketing of feed and malting barley been described in any detail for that matter.] It would be necessary to know when and how prices are determined, and who is responsible for physical storage and carrying charges until grain is delivered. Only with such information would it be possible to tell whether premiums or discounts were associated with market power by the ABB.

While it is good business for marketing firms to provide services like management of price risks, storage and quality assurance to their customers, this is true for private firms as well as marketing organisations supported by statutory powers. Given the specialized nature of marketing services in the barley trade and the problems of deciding which services should be provided in diverse markets, it is arguable that these services could just as efficiently be provided by private firms as SMA's like the ABB.

With respect to the "onus of proof", surely it is the case following adoption of the "National Competition Policy" by the Commonwealth Government and the states that the burden of proof has now shifted to the supporters of ABB, rather than its critics. Post-Hilmer, the base case or "status quo" should be considered to be the absence of regulation rather than the maintenance of the existing widespread restrictions on competition that currently exist in the barley industry.

An important issue to be considered in this review of the powers of the ABB, is the extent of compulsion in marketing that should apply to farmers engaged in barley production. There is absolutely no reason why the advantages of pooling for risk management cannot be achieved by voluntary means. Moreover, there are already several "single desks" operating in the Australian barley market. Presumably, interstate co-operation between those farmers with faith in the existence of Australian market power could realize the same benefits as existing arrangements, without having to conscript their reluctant colleagues.

Competitor Price Premium/Market Mix

According to Meyers (page A4, Appendix 2), "[A] competitor price premium or discount can be defined as the difference in price between two suppliers of the same product into the same market at the same time." Economists would have a problem with this definition. Nor would their concerns with the precise meaning of the terms "same product" and "same market" be removed by the material immediately following, describing factors like "favorable credit terms, service associated with the product, loyalty and security of supply" as "non-price factors."

It is a straightforward exercise to calculate the price equivalent of credit concessions to buyers. Loyalty and security are obviously somewhat intangible Ð but there should be no argument that goodwill and trade connections can be established by private firms just as easily as by state trading enterprises.

Calculations of price premiums are calculated from "international trade data" and for Australia as a whole Ð presumably, using unit values of exports of the major countries involved in the barley trade. An average gain of $1.99____ [about $2?] per tonne is claimed across all Australian sales. Freight and quality considerations could easily explain that small difference. Of course, the ideas of "same product" and "same market" imply zero transport costs and homogeneous products. This section of the report is arithmetic Ð not serious economic or business analysis.

"Market mix gains or losses measures the ability of a firm or organisation to sell a higher percentage or share of a product into the higher priced markets than would be expected on an equitable sharing of the markets available" (Meyers Report, page A4, Appendix 2). Fundamentally, these are silly calculations. As is acknowledged implicitly in the text and explicitly in Appendix 2, market share is not a sensible success indicator for a firm in a competitive market or a firm with market power. Successful firms maximize net revenue not market shares.

The last paragraph of Appendix 2 states:

It should be noted, however, that the measure of market mix has no specific connection to market power or price discrimination and, therefore, no connection to what can be achieved by a single desk marketing board. It would be expected that an efficient commercial firm might choose to maximize profits by selling a higher proportion of exports into the higher valued markets than the lower valued markets. However, depending on the elasticity of excess demand for the country's commodity, it may be profit maximizing to sell a larger share into the lower valued markets.

Questions that immediately spring to mind are: Why bother with calculations of market mix? Why state in the text at page 20 "The analysis shows that Australia achieved an average gain, for the period, of $44.5 million from market mix calculations Gains from "market mix" are the result of arithmetic rather than serious analysis of the workings of the barley market. 

Costs and Financial Management

The claim is made at page 21 of the Meyers report that ABB's core costs appear to be comparable or lower than commercial operations" yet no information is provided about how that conclusion was reached. The Meyers report only considers the obvious accounting costs of running the ABB. It fails to account for the hidden costs of the regulated system.

The operating costs of the ABB can only sensibly be compared with the costs of the ABB itself. This is true of most commercial organisations, the fashion for "benchmarking" notwithstanding. Private firms would incur costs like the ABB, according to the marketing services the firms offered. In effect, the Meyers Report concedes this.

The section of the report on "Financial Risk Management" tries to have it both ways. After the statement "government guarantees are not required by financial organisations", the next paragraph says that the ABB "would probably incur an additional margin of 1.5 per cent per annum" without legislation and lower first advances would be paid to growers. This section of the report adds nothing to our understanding of the difficult issues concerning the efficiency and distribution consequences of changed financial arrangements between growers, the ABB and the financial system generally that follow from intervention in the barley market.

Under the heading "Community/Public Costs", the authors of the Meyers report have provided an extraordinarily revealing paragraph:

Another aspect to take into consideration is the cost imposed on grain consuming sectors from the ABB's activities, which extract premiums from the market. The price discrimination analysis highlighted that (along with some export customers) domestic consumers, both livestock and beer consumers, are paying higher prices for barley than they would in a competitive environment, with this being further confirmed in the scenario analysis.

The ABB has a problem Ð however succeeding paragraphs of the Meyers report try to qualify and pick and choose between the results of their own analysis. If the ABB has market power on the export market, there is a gain to the community as a whole Ð a "public benefit" in Hilmer parlance. However, exercising market power on the domestic market can only yield transfer benefits to barley growers at the expense of their fellow citizens, including fellow farmers in grain-using industries. Further, the pattern of agricultural production will be different than would be the case if all prices reflected world prices, with some loss of economic efficiency.

These issues are well-rehearsed in the literature of agricultural marketing. An obvious point of reference for this Review of the Victorian and South Australian Barley markets is the discussion in the Hilmer Report itself (Hilmer et al. 1994, pp. 139-44). The "public benefit" of exercising market power on the export market is achieved by comprehensive regulation and restrictions on the economic activities of barley producers at the cost of domestic consumers. In short, this is anti-competitive. Previously, anti-competitive behavior by SMA's was beyond the reach of trade practices legislation. Post-Hilmer, such disdain for the excesses of monopoly and special treatment of some farmers should only be tolerated in very special circumstances.

"Qualitative Factors"

It was obviously sensible for the Meyers study to conduct interviews and discussions with producers, customers, and ABB management and grain trading houses in their investigation of the single desk. Much of the information presented is persuasive and interesting with the following qualifications:

• The same approach was adopted by the BCG, also credible investigators, who reached different conclusions on many of the same issues;
• Market research has serious conceptual limitations where trade-offs between competing objectives and interests have to be considered,
• Lipsey's famous textbook on economics recognized this problem as an expression of the paradox of value ("water versus diamonds") or the difference between total utility and marginal utility, from a different perspective, Mandy Rice-Davies explained the inherent human trait of being selective about evidence as "he would say that anyway";
• Over the years, the marketing system has adjusted to regulation and there are market, political and administrative checks on the performance and behavior of the ABB.

The same sort of qualitative judgements and slides between fact and opinion are made by uncritical advocates of reliance on market forces. This is not the place to evaluate all the arguments about the respective roles of regulation and the market in the Australian barley industry. However, an historical perspective is warranted. In summary, the ABB came into existence a generation or so ago because of fears, whether real or imagined is immaterial to the argument at this stage, about abuse of market power by traders and/or large domestic users. Whether these fears are justified in present circumstances is at the nub of the controversy over agricultural marketing.

Two points are worth making:

• Australia now has a body of trade practices law and associated institutions to combat anti-competitive behavior;
• The essence of the workability of market processes is the information that is available to the parties, economies of scale and scope are now far less important in the grain trade because modern methods of communication have reduced barriers to entry dramatically.

Scenario Analysis

The Meyers report includes a modeling exercise, which uses a spatial equilibrium model to compare the current marketing system with a deregulated scenario. The results are predictable. According to assumptions made about the behavior of supply and demand as embodied in the parameters of the model, a case can be mounted for or against continuing the single desk powers of the ABB.

If, as seems likely, the demand for barley is less responsive to its price on the domestic market than on export markets, the single desk is a "success" if only from the limited perspective of barley producers. With inelastic export demand the opportunity for "public benefit" presents itself to the Australian community overall.

Table A2 of Appendix 5 [referred to as Appendix 4 in the text] gives the flavor of the analysis. Under the assumptions chosen to demonstrate the difference between a competitive scenario and an oligopoly scenario, domestic prices are around 12 per cent higher, domestic consumption around 20 per cent lower and exports correspondingly higher in the situation where the ABB is believed to have market power.

This is standard stuff. Supply diversion, two-price or home consumption price schemes, marketing orders do have those sorts of effects. Presumably, removal of the adverse efficiency and distribution consequences of SMA's is what is supposed to flow from the Hilmer process. [Notably, at the time of writing, longstanding pricing and marketing arrangements in the dried fruits industry are in the process of being dismantled.]

It is hard to accept the equanimity with which the authors of the Meyers report regard the exercise of monopoly power. This is indicated in the last paragraph on page 33 of the report:

One of the major uses for barley domestically is in the production of malt for the production of beer. To assess the impact on final consumers of such a margin, consideration needs to be given to the value of barley used in the production of beer. The above margin would reflect a very small change in the overall cost of beer production.

The demand for beer is inelastic. The demand for the inputs used in beer production is also inelastic. Whether these facts of economic life should create money-making opportunities for government treasuries, brewers, maltsters or barley growers would be considered a moot point by most observers. Monopoly behavior is usually described as involving "very small change[s]" by its beneficiaries.

Of course, Meyers type logic could be applied to the glass in beer bottles, the aluminum in cans or even the services of brewery workers higher charges of which "would reflect a very small change in the overall cost of beer production." It is unlikely that the Australian Competition and Consumer Commission would share this relaxed attitude towards the exercise of market power on the domestic market for suppliers of other inputs to the beer industry.

Meyers and Hilmer

The last section of the Meyers report is entitled "Implications of National Competition Policy the Hilmer Report." This section of the report is not the ringing endorsement of the ABB and Victorian and South Australian barley marketing legislation that many have claimed.

Pertinent paragraphs on page 35 are as follows:

In the context of this report, the National Competition Policy implications are best highlighted by the price discrimination analysis and trade model scenarios

The former reveals price discrimination on the domestic market for malt and feed barley, which in turn will calculate into producer gains. Although the public benefits are not directly assessed, the higher price charged to domestic consumers would have spin off effects on national welfare and international competitiveness for the associated industries.

The scenario analysis indicates a similar result. A net producer gain has been calculated, however, the framework also displays the impact on trade flows. The oligopoly scenario increases the demand price facing Australian consumers and thus, reduces domestic consumption, while exports increase. The intervention by the ABB may have positive advantages for the growers represented; however, the overall economy will face associated losses (emphasis added). Subsequently, to weather public scrutiny, the overall effects will need the reconciliation of public interest resulting in overall welfare gains.

In summarizing their findings on page 37, the Meyers report concludes, "There appears to be little justification for regulation in relation to the domestic feed market, however, the case is less clear in relation to export markets and the domestic malting barley markets."

The ambivalence concerning domestic malting barley is based on arguments advanced in the section of the report discussing "Qualitative Factors". It is concluded on page 37 that "the boards do provide a service in relation to reducing risk for maltsters". This is an example of an argument that might have applied once but has been taken over by events in the rest of the economy. It is scarcely credible that SMA's are required to provide risk management services to maltsters in a deregulated financial market. An uneasy feeling remains that if current arrangements are preferred by maltsters, then the present system is unduly favorable to maltsters, most likely at the expense of growers.

The Meyers report is less equivocal about export markets stating that "it appears that barley producers have gained from the export disciplines exerted by the single desk." This aspect of their work is discussed further in the following section of these comments in the context of the paper by MacAulay and Richards.

The MacAulay-Richards Paper

The work of the Meyers Strategy Group for the ABB can be interpreted in three ways:

• Enthusiastic support for the status quo, especially maintenance of the single desk Ð this is the common reaction of farmers and farm organisations satisfied with existing arrangements based on their reading of the version of the Meyers report that is widely available;
• Qualified support for the status quo the reaction of careful readers of that document;
• Not conclusive one way or the other this position would be reached by many readers of the Appendices to the Meyers Report and the MacAulay-Richards paper.

The MacAulay-Richards paper contains much of the same information as the Meyers report, especially that contained in the Appendices. When it discusses material on "Price Premia" and "Market Mix", the style is apologetic, almost confessional. For example, at page 5:

From basic trade theory there is no reason to presume that an equitable share of the markets is optimal or even likely in an undistorted world. Also, there is no reason why an exporter should choose to distribute sales across different countries so they are equally shared. A competitive trading system does not necessarily generate an equitable share of trade. The outcome depends on the supply and demand for the commodity concerned, the transport costs, exchange rates, etc. There is therefore no economic basis for assuming an equitable distribution of trade across importing countries.

In addition, the MacAulay-Richards paper at pages 5-7 contains as coherent a summary of issues concerned with pooling as could be found anywhere, correctly identifying that "The trade-off between the benefits and costs of pooling needs recognition."

The controversial parts of the MacAulay-Richards paper are the price discrimination analysis and the application of the spatial equilibrium model. The qualifications attached to the interpretation of the results obtained from application of the Carter model have been referred to above. The results of the price discrimination analysis are difficult to follow because the countries are not identified because of confidentiality. Presumably, the ABB has some inhibitions about letting its customers know they are being played off against one another.

In this regard, there is a distinct whiff of paternalism about claims by the ABB and other SMA's that their marketing prowess enables them to consistently achieve higher prices for the same product in different markets. For claims about the single desk to be true Ð that is, price premiums are achieved through the exercise of market power not differences in quality or service Ð customers would have to be ill-informed, passive or lacking in commercial acumen (or all three). This does not accord with most people's experience in world trade in commodities.

Apart from Australia, the MacAulay-Richards paper identifies Japan and the United Arab Emirates (UAE) as countries where a premium is obtained for feed barley. The first is explained by quota limitations on the Japanese market. No explanation is offered why a premium is earned in the UAE. Given the controversy that exists over other commodities traded between Australia and Japan Ð for example, beef, coal and sugar, it is strange that Australia's grain growers are so easily convinced that premiums are available from single desk marketing arrangements. The following points are made:

• Countries without single desks also trade successfully in feed barley with Japan and deal with the Japanese Food Agency;
• The size of the "premium" has not been convincingly demonstrated because the terms and conditions of trade in barley between Australia and Japan have not been revealed by SMA's the premium could be an artifact of marketing services provided by SMA's;
• There are other ways of capturing quota rents without imposing substantial costs on the marketing system.

For malting barley, the results support the possibility of price discrimination in relation to China and the domestic market. The Chinese are no pushover in commodity trade. China is far and away the most important market for Australian malting barley. Indeed, China is the only single country identified in the data provided on trade in malting barley on page 8 of the Meyers report. The other categories are continents and aggregates like US/Mexico and the EU!

As in the case of trade in feed barley with Japan, a possible explanation of a Chinese price premium for malting barley is that more marketing services are being provided to the Chinese by the ABB than residual markets for malting barley like Peru and Zimbabwe which were included in the analysis. This is marketing common sense by the ABB, not market power.

As suggested above, the application of the spatial equilibrium model in the MacAulay-Richards paper is a text book exercise, revealing the effects of price discrimination by a monopoly marketing board but with little relevance to the policy problem under discussion. No further comments are offered.

Concluding Comments

The ABB and many barley growers are being overly defensive. The best interests of the barley industry could be served by deregulation. This was the conclusion of the BCG in their study of the malting barley industry for the GCA in 1995. The BCG recommended deregulation rather than the current situation where the ABB operates in South Australia and Victoria, Grainco markets Queensland-grown barley, the Grain Pool operates in Western Australia and New South Wales barley is marketed by the New South Wales Grains Board.

There are several reasons for doubting whether Australia has significant market power in the world barley market. The share of Australia is small and variable. Australian influence on policies pursued by subsidized exporters like the EU and importers is limited. Apart from Japan, where it is claimed that quota rents arising from Japanese domestic policies are shared with exporting countries, the barley market malting and feed Ð is one where the description "price taker" can be safely applied.

The market power argument is based on the premise that the international barley market is imperfectly competitive and that markets can be segmented. In other words, there is little or no arbitrage between markets. While a degree of differentiation might be expected in the malting barley market because of exacting quality requirements for different styles of beer in some markets, that argument cannot be entertained for feed barley.

For many years, the Australian grain industry was dominated by statutory controls with pooling of prices and averaging of the costs of performing marketing functions amongst growers. The purpose of pooling was to share inter-temporal price risks. Other methods of risk management were slow to develop, including voluntary pools. Pooling of prices and averaging marketing costs had subtle effects on the performance of marketing functions. Charging an average price for marketing services meant that some users paid more than the costs they imposed on the system and vice versa. In particular, Government transport and handling systems for grain were allowed to recover "costs" and were characterized by over-manning and other manifestations of regulation-induced slackness.

With deregulation of the domestic market for wheat since 1989, this situation has changed substantially. The adverse effects of pooling have been largely eliminated as producers make their own arrangements about sales on the domestic market and private marketing firms compete in the provision of marketing services to farmers and domestic grain users. However, domestic deregulation does not remove all the problems of regulation of the grain industry while export controls are in place. This is because without the option of exporting grain, large domestic users are unable to manage price risks effectively.

The Meyers report suggests that domestic users of barley are disadvantaged by current arrangements. Losses to livestock industries, local maltsters and brewers and costs of delaying the emergence of a competitive marketing system are likely to outweigh any "public benefit" of a premium for feed barley in Japan or malting barley in China.

The National Competition Principles Agreement under which this review of barley marketing in Victoria and South Australia is being conducted shifts the onus of proof to supporters of the single desk, rather than the previous situation whereby critics of the single desk tried to convince governments that the export monopoly was harmful. Competition is supposed to prevail unless public benefit can be clearly demonstrated.

Establishing the case for and against a single desk poses both conceptual and measurement problems. The inherent difficulty is that agricultural prices are both transient and have many dimensions. Given the variability of production and prices over time, how can the effects of the single desk even be measured? In particular, there is no convincing evidence that the data used in comparisons of prices in the Meyers report have been standardized to correct for margins for storage and quality.

The same difficulties have beset other analysts of the grain market. In the report of its 1988 inquiry, the Industries Assistance Commission concluded that that it was impossible to conclude anything from the data that were available, stating at page 117 "the Commission considers international price comparisons of these types of limited usefulness for the purposes at hand". 

References

Boston Consulting Group (1995), Malting Barley, Consultant's Report to Grains Council of Australia's Strategic Planning Unit.

Carter, C. A. (1993), "The Economics of a Single North American Barley Market", Canadian Journal of Agricultural Economics, 41 (3) 243-55.

Carter, Colin A. and Lyons, R.M.A. (1996), The Economics of Single Desk Selling of Western Canadian Grain.

Hilmer, F. G., Rayner, M. R. and Taperell, G. Q. (1993), National Competition Policy, Report by the Independent Committee of Inquiry, AGPS, Canberra.

Industries Assistance Commission (1988), The Wheat Industry, Report No. 411, AGPS, Canberra.

MacAulay, T. G. and Richards, R. (1997), "Models for the Analysis of Barley Marketing", Contributed Paper to the 41^st Annual Conference of the Australian Agricultural and Resource Economics Society, Gold Coast, Queensland.

Meyers Strategy Group (1996), "Economic Analysis of the Value of the Single Desk", Report to the Australian Barley Board, Meyers Strategy Group, Willoughby, NSW.

Schmitz, A., Gray, R., Schmitz, T and Storey, G. (1997), "The CWB and Barley Marketing: Price Pooling and Single Desk Selling", Canadian Wheat Board, Winnipeg, January.