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Economist says farmers are smart but not strong

by Paul Beingessner
Canadian farmer, writer

(April 5, 2004 -- CropChoice guest commentary) -- Canada's Agriculture Minister peered into the crystal ball last week and came to a startlingly obvious conclusion: prices for generic agricultural commodities are going to remain low into the foreseeable future. Citing the vast food production potential of "agricultural powerhouses" like Brazil, Speller warned that Canadian farmers cannot and must not rely on producing "commodities".

Plainly put, Minister Speller was telling us that we might as well forget the wheat, oats and barley type of farming. What is coming, and what will allow us to continue to till the soil is the production of industrial, pharmaceutical and energy products.

It is another version of the same old song. Farmers must get awfully tired of hearing it. When I was a kid, the mantra was "specialize". The day of the family farm with a few chickens and cows and some cash crops was gone. Concentrate on one thing and do a good job on that. Didn't work for long.

A couple decades later, farmers were told to diversify. Ostriches, buffalo, a few acres of strawberries. Spread out the risks. When those balloons burst, it was value added. Invest in agriculture by investing in agribusiness. Better to have shares in a hog barn than to raise a few hogs on that inefficient family farm. (Turned out they were partly right. The mega hog barns produced until the prices were so low the small-scale producer couldn't possibly make a go of it. Trouble is, neither can the big barns.)

The theory behind the off-farm investment strategy was that since there's no money in raw commodities, there has to be some in processing, or maybe in selling the raw product to your own processor. Now the farmer will succeed as the stockholder.

Minister Speller's new insight is another version of the magic bullet syndrome. If we just exploit our comparative advantage in technology, we might yet prosper.

What makes Speller's argument problematic is that he is partly right. He is right in that commodity markets will never, under the current world economic system, give a decent return to farmers. He is wrong in thinking that salvation will come from growing a different crop. At best that will be a short term fix.

Farmers with a better crystal ball have, for some time, been fingering a different culprit. They are looking at the processor, the middleman as being the villain. So we see the lawsuits in the U.S. against the meat packing giants, alleging they are using captive supply to keep down the price to the feedlot owner and the farmer.

A somewhat similar, though seemingly unrelated complaint came this past week from the Canola Council of Canada. It was in the form of a motion to end the canola contract on the Winnipeg Commodity Exchange. The reason was the massive basis that has developed recently, taking the bloom off surges in cash prices. Someone, in the middle, appears to be taking much of the profit out of canola.

Economist Richard Levins thinks he understands the problem. "Farmers are smart", he says, "but they're not strong." Levins says the real power in the food system today is no longer the processor, but the retailer - specifically retailers the size of Wal-Mart. Because of its incredible size, (20% of supermarket food sales in the U.S.) Wal-Mart is able to force suppliers to cut prices, hold inventory, and dance to its tune. No processor can afford to be shunned by Wal-Mart and its take-it-or-leave-it style of negotiating.

Levins solution is simple in theory, darn tough in practice. Farmers need to band together and bargain from a position of "market supply strength". It sounds remarkably like supply management, or at least single desk selling. And while a few farm groups still prattle away about fixing the market, others realize the market isn't broken. It's functioning exactly as intended. Farmers are simply the losers in a win-lose situation. And they always will be if they go it alone.

A few feedlots in Alberta put Levins' theory into practice during the ongoing BSE crisis. When they felt packers were taking advantage of the situation, they got together in an informal but very serious way and agreed to ration the number of animals they would offer to the packers. Their own version, if you like, of single desk selling. You won't read about it in the farm press, but it happened. And it drove the prices up.

This, and some other examples will give farmers a chance to examine the real causes of their dilemma. It is a dilemma technology will never fix. That's because it isn't a problem of technology. It's a problem of power.

(c) Paul Beingessner (306) 868-4734 phone 868-2009 fax