Leaving the farm

Bill Kaye-Blake says there's not much that can be done about long-term trends towards rural depopulation. And he puts rural New Zealand especially on the wrong side of broader trends:

Technology isn’t going to be the saviour of rural New Zealand. We’ve been hearing for years that new communications technologies (will) allow us all to work from home, the cafe, and the beach. We do that to some extent. A few people do build business empires on the back of broadband. But we also spend lots of time in our offices, seeing and talking with our co-workers. One of the interesting economic geography arguments I’ve seen is that technology is making face-time more valuable. As a result, work that requires us to spend time with each other is becoming more highly paid, and work that can be made routine and parceled out in bits and bytes is becoming less valuable. New Zealand is on the wrong side of that trend, and rural areas even more so.

Let's take the agglomeration economic geography arguments as starting point. Tech is more a complement to big cities than they are a substitute for face to face interactions. Who gets the strongest benefit from this in a world that's mostly free-trading? Big global cities, not Auckland. Our small size makes us, over time, less competitive in sectors that compete with international big-city industries; our comparative advantage then pushes farther towards agricultural production.

This is already happening too: it's not crazy to see the "Dutch Disease" stuff as just being international markets telling us to put resources into the sector where we have a comparative advantage (dairy, ag production), abandon the ones where we don't, and build non-traded services around the sector where we have the comparative advantage. Our cities would then wind up doing more to provide domestic support services for the ag sector than building innovative non-agricultural products for international markets. And then it's a bit of a race between productivity increases in domestic agriculture pushing down needed labour and relative prices pushing towards intensified agricultural production yielding migration flows to the countryside.

Best counterargument: Peter Thiel is investing heavily in the NZ tech sector, seeing here perhaps a comparative advantage in sane regulatory approaches (albeit one that's eroding).

I still favour strongly increased immigration coupled with fixing urban land use policy to make our cities more internationally competitive. And who knows - maybe some of those migrants would then decide they'd prefer to live out in the countryside. It is ridiculously beautiful out there.

Cartels protect producers, not consumers

Mark Schatzker explains how Canada's agricultural cartels help keep quality produce from Canadian foodies (HT: @acoyne):

But here’s what hasn’t been said about supply management: It is the enemy of deliciousness.

If you have ever wondered why you can buy heritage chickens such as the famed poulet de Bresse in France but not in Canada, or pastured butter the colour of an autumn sunset in Ireland but not in Canada, or why it’s so hard to find pastured eggs here, the reason is supply management.

Great ingredients, as any good cook will tell you, come from small producers who lovingly tend their flocks and the land that sustains them. These artisan producers – the very people attempting to make food local and sustainable – are stifled under supply management because it requires the one thing these starry-eyed pastoralists almost always don’t have: money. A single cow’s worth of dairy quota, for example, costs about $27,000 (up to $40,000 in B.C.). Quota for one egg-laying hen can cost upward of $200.

Now do the math. A tiny egg farm of 500 hens (a typical Canadian farm has 20,0000 or more) can cost more than $100,000. (Exact prices and rules vary across provinces.) Ontario’s minimum allotment of chicken quota – 14,000 units (or about 90,000 birds a year) costs $1.5-million. And a tiny herd of 10 dairy cows costs more than $250,000. How many small farmers have that kind of scratch?

The resulting lack of agricultural diversity is a story told on store shelves across Canada. At my local butcher shop, the choice of chicken is limited to standard factory birds and “natural” factory birds. South of the border, by comparison, delectable breeds such as Plymouth Barred Rocks, New Hampshires and Jersey Giants can be found at farmers’ markets, butcher shops and on the Internet.

And yet the Canadian ag cartels have been able to paint themselves as the stalwart defenders of Canadian product against American imports, which all right-thinking Canadians know have to be less pure and clean than Canadian product.

Meanwhile, the Ottawa Citizen's Kate Heartfield rightly invokes Olson's Logic of Collective Action in explaining the mess:

In fact, the only thing the parties can find to argue about in this complex and vexing area of public policy is which party supports supply-managed farmers most.

The political barriers to reform are built into the system. Almost half the dairy quota goes to Quebec, an electoral battleground. There are only 12,965 dairy farms in this country — plus fewer than 5,000 in all the other supply-managed sectors combined — and every Canadian is a food consumer. But the costs to the consumer are invisible and difficult to quantify, and the complex system that imposes those costs is not widely understood. Dairy, egg and poultry farmers, though, know all about it and they’re heavily invested in the issue — literally, since the value of the quota they hold depends on what happens to prices in the future.

“If a government takes them on, they’re in for a big fight,” says John Manley, former Liberal cabinet minister, now the president and CEO of the Canadian Council of Chief Executives. “Look at what’s happening with the wheat board. It would be 10 times more vicious.”

The whole piece is excellent; it rightly points to New Zealand as example of a thriving free-market agricultural sector.

But Canada's problem is worse than Olson, though; it's Tullock. Even the winners aren't made better off by the system as all the rents are capitalised into the price of quota. But I still think there's a potential solution in buying them out.

Dairy population

Canada has roughly thirty million people and about a million dairy cattle [update: 1.4m including replacement heifers]. Its dairy markets are completely controlled by the government through supply management which works to make poor people pay too much for milk and inflate the capital value of dairy quota owned by relatively wealthy dairy farmers.

New Zealand has roughly four million people and about six million dairy cattle. It has the world's most free dairy markets and relatively rich dairy farmers; rents capitalize not via quota but rather via the relatively small proportion of land suitable for irrigated pastoral systems (most of the country isn't green pastures; rather, it's mostly mountains and dry steppes).

But isn't supply management wonderful?

And let's bat down a few defences I've heard of supply management.

First: without it, Canada wouldn't have a dairy sector any more; they'd just be swamped by American dairy imports because shipping costs are so low from the States. Interesting. Note that it's as cheap to ship milk powder from the US to New Zealand as vice versa. We have 1.5 cows per capita and ship large volumes of milk to the US every year. And NOTHING stops the Americans from selling us milk other than the basic economics of our being better at it. Our free markets have not resulted in our being swamped by foreign milk. Not that I'd particularly complain if that were the result; I don't mind that we export milk and import cars rather than the other way round, but either one's fine by me. Keith Ng's post of a few years back was great fun on this point.

Second: without it, Canada would be swamped by GE-modified, chemical-additive-ridden milk. Free markets would only supply adulterated awful product. This is utterly insane. Complete madness. First, it isn't the case here in NZ. Second, it only would happen to the extent that consumers value a price reduction over a quality reduction. Third, even if most consumers want lower quality product at lower price, the granola folks can still pay extra to get higher quality product. On the grocery shelves here, I can pay a bit more to get certified organic whole milk; I also can get raw milk, but not from the supermarket. I don't attach pejorative weight to granola here: I often get raw milk and buy the organic milk when the supermarket's out of whole (silver-top) milk. Free markets generally mean product diversification and market segmentation, not homogenization. The most reasonable, but still repugnant, form of this argument would be that the current system lets granola people satisfy their preferences at the expense of poor people who'd prefer cheaper product; economies of scale get granola folks product a bit cheaper than they otherwise would if everyone's forced into buying the no-hormones version. Why not ban cheap cars on similar argument?

Third: without it, Canadian farmers would be beaten down by some kind of big multinational to which they'd be forced to sell their milk. Again, this is utterly insane. First, here in NZ, Fonterra is a cooperative owned by its farmer-members and has the vast majority of dairy production. Nothing stops Canadian farmers from setting up their own cooperatives. Co-ops have a long history in Canada; my grandfather was on the board of one for decades. Second, nothing would stop any dairy farmer who has a tiny bit of nous from branding himself and taking his own product to market. Third, dairy companies have to compete with each other for milk.

I really don't get the status quo bias among otherwise sane Canadians about dairy. I've heard these arguments from reasonable people whose rationality flies out the window when thinking about cows.

Do hit the dairy and "transitional gains trap" tabs below for prior posts in the series...

Chris Auld gets shrill

But he's largely right:

Yesterday Federal Agricultural Minister Gerry Ritz uttered insane lies about dairy supply management:

I would make the argument that I don’t see those inflated prices, certainly, depending on where you buy,” Ritz told a joint news conference with Alberta Agriculture Minister Evan Berger and Saskatchewan Agriculture Minister Bob Bjornerud.

I received a flyer in my mailbox last night when I got back to my apartment and I opened it up and it’s from Canadian Tire. They’ve got four litres of milk for $4.19. That’s completely comparable to the American price that we’re always being beat up over.

Canadian Tire Econometrics aside, consumers are of course harmed by high prices driven by quantity restrictions. Click here to see a graph showing how much higher our prices are than the EU, US, or New Zealand (all of which also have some sort of supply management, Canada’s is just more severe).

I'm a bit puzzled though by Auld's claim that New Zealand has supply management. The closest thing we have is that Fonterra is required to sell some of its milk at to its smaller competitors - this is more a form of antitrust action than supply management as Fonterra is a very dominant producer cooperative. I'm not defending the regulation, but it can hardly be counted as a form of supply management. There will eventually be an effective form of supply management via irrigation permits for pastureland - irrigation consents will eventually become the binding constraint, at which point those start accruing the kind of rents that dairy quota gets. But I don't think we're there yet. And, again, a real resource constraint is different from a regulatory one.

Auld excoriates all of the Canadian political parties, from the Conservatives to the Communists, for their siding with producer rents over the public good. The Greens' concerns in particular I worry have some resonance with Canadian voters - that the Canadian market would be overrun quickly with hormone-laden, genetically modified American poultry and milk. It's not been the case with beef despite the lack of supply management for beef. It's not been the case in New Zealand despite our free markets in dairy and poultry - we have lots of product heterogeneity here without supply management. The Greens' worries only come to fruition in the case in which consumers care more about cost than about having yuppie-quality products, in which case it's best that that outcome obtains anyway.

He asks:

Supply management is effectively a hidden tax: Would any the major political parties support this inefficient and regressive policy if it had been implemented as a tax on consumers combined with a subsidy to firms?

I point to the old Tyran and Sausgruber results on tax incidence and voter inability to understand same. I'd expect the problem is worse for regulatory incidence than for tax incidence.

Post-Kyoto

Extending the date for various industries' entry into the New Zealand Emissions Trading System costs the public purse only to the extent that the government is required to buy carbon credits on the international market to make up for any failure to reach aggregate pollution reduction targets.

I've argued that there is only such cost if the government wishes for there to be such cost: Kyoto is not binding, and it's hard to point to other countries willing to impose very large fiscal costs on themselves to meet the targets by buying credits. Some are spending relatively small amounts of money. But nothing like the amounts that agriculture is held to be costing the country through delayed implementation.

And now we find that most folks are banking on there being no binding second stage post-Kyoto. Here's the Science Media Centre; here's a Nature commentary piece.

If there is no binding second stage, then there is no penalty for non-compliance in the first stage. Recall that the penalty for first stage non-compliance is tougher second-period targets. If the second period doesn't bind, then the first period doesn't bind. And we're, again, kinda nuts if we're going to spend measurable fractions of GDP buying international carbon credits to make up for a delayed accession of agriculture to the ETS.

I could be missing something, but here's what I'd expect this means:

• New Zealand still should be doing its best to do its part to reduce global warming. I think this is better done by biotech research into low-methane pastoral systems that's then released under free licence to anybody who wants to use it, but it's more than plausible that keeping the ETS is second-best given its existence and given lots of folks' investments having been made on expectation of its continuation. And, in the longer term when everybody's moved to ETS or tax regimes, we'd want to be there too anyway.


• New Zealand should not expect to be on the hook for big national costs if it winds up making more sense to delay any sector's accession to the system. Agriculture will fail to earn carbon credits for any reduction in emissions, but if implementation is delayed because they can't abate in the very short term, that's no real loss.

Keep Canadian supply management in play

Conflicting reports emerge on whether Stephen Harper is really prepared to open up the Canadian Dairy cartel. This is understandable: there will be really large political costs if Harper abandons supply management. Why? Every dairy farmer in Canada owns quota: a permit giving the farmer the right to milk a cow. Those quota permits cost real money. The price varies from province to province, as each province is allocated a different amount of quota. In October of this year, that price ranged from $25,000 in Quebec to $40,000 in British Columbia.

That quota value is really important to dairy farmers; it's the nest egg a whole lot of small farmers can pass on to the next in line. Abolishing the quota system means abolishing some farmers' retirement or inheritance plans. That's not the kind of thing folks accept without a fight. Think the Canadian Wheat Board has been contentious? That's just a single desk seller. If there are capitalized rents anywhere, they'll be in land values for farms especially suited to growing quota crops; that many farms opt out by growing non-board crops suggests the value of those rents is pretty limited. At best, the system provides transfers to small farmers who don't want to handle their own marketing arrangements and, perhaps, offsets some market power enjoyed by the ports, rail lines, and grain companies. Abolishing it wouldn't immediately destroy a substantial portion of any farmer's asset portfolio, but there's still a non-trivial subset of western grain farmers who really want to keep the system.

It's exceedingly unlikely that any Canadian politician can simply abolish the quota system. The benefits of the system are highly concentrated in the capitalized rents embodied in the trading prices of dairy quota. The holders of that quota will fight very hard to make sure that the system stays in place. The costs of quota management are dispersed among thirty-odd million Canadians who have to pay more for butter, ice cream, chocolate, cheese, and baby formula than they'd otherwise have to pay. Mancur Olson's Logic of Collective Action takes hold: if you think the CWB's ads trying to save the Board's single desk tug at heartstrings, wait 'till you see the ads featuring small dairy farmers facing the eradication of their retirement nest eggs.

Gordon Tullock suggested there isn't any real way out of a transitional gains trap. Here's how the trap works. The regulatory barrier confer excess profits on those holding the asset in fixed supply, like New York Taxicab medallions (now trading at $1 million) or Canadian dairy quota. The initial set of people who held the asset when asset prices jumped enjoyed a windfall gain, but most of those medallions, or quota permits, trade on the open market and are bought by people who can only earn a normal profit if the system stays in place. At that point, the system really benefits nobody - everyone earns only a normal rate of return on investment. But it's impossible to abolish because the political costs of imposing massive capital losses on permit or medallion holders is too high.

But I think there is a way out.

The cartel arrangement has to be inefficient - it destroys some value in the process of taking money from consumers and giving it to producers. Dairy farms are smaller and less efficient than they could be. Processors have to use less suitable milk substitutes. So long as there is some inefficiency associated with the system rather than there just being a transfer, it's possible in theory to abolish the system and transfer some of the consumers' gain back to producers to compensate them for their loss.

How would you do it in practice? Start by buying out the quota held by dairy farmers: abolish the quota system while paying farmers for the value taken. This will not be cheap. Where does the government come up with the money to pay the farmers? Institute a new and temporary tax on all dairy products. The supply management system, as best I understand it, winds up charging larger excess prices for industrial milk, where price inflation can be more hidden, than for fluid milk. Set the tax proportionate to the excess price that currently obtains in different parts of the system. That tax would pay off a bond issue used to fund the farmers' compensation. When the bonds are retired, the tax is retired.

The benefits of this accrue immediately. CD Howe proposes a great plan for a gradual elimination of the quota management system. But I'm not sure that's enough to get Canada into serious trade negotiations: I don't think New Zealand would look kindly on Canadian promises to abolish quota in a decade - just look at how seriously Canada's taken its promises under Kyoto. The immediate buy-out of quota farmers lets free trade in dairy start very quickly. The dairy tax would be TPP compliant as it would be assessed on all milk, whether domestic or imported. There'd be some technical hassles about appropriate tax treatment of milk embodied in products, but that can be worked out.

If I take off my economist hat and put on my libertarian hat, I'd go a bit further and say that quota compensation could be based on a fraction of quota value rather than on full quota value to save some money and in recognition that Canadian dairy farmers have been ripping off consumers for decades. But that's a trivial detail.

The same logic holds for poultry and eggs.

A tax and compensation regime can get Canada out of supply management very quickly while largely attenuating the political fallout. It would let Harper make some trade progress without slitting his throat in Quebec and Ontario. It can and should be done, and that right soon.

Export monopolies

I'm usually pretty smug about New Zealand's free trading agriculture sector, especially as compared to Canada's mess of mandatory marketing boards and quota management systems.

At the margin, I'm going to have to get a bit less smug. And that hurts me. The National Post reports that the Harper government is going to allow western Canadian wheat farmers to sell the wheat they grow to the buyer of their choice.

Meanwhile, New Zealand still has the Zespri export monopoly. If you grow kiwifruit and you want to sell it someplace other than Australia or New Zealand, you're compelled by legislation to sell through Zespri. Writes Roger Kerr in the National Business Review (not online as far as I can tell here):

...it is an illusion to think that New Zealand can manipulate world markets. More important, there is intense competition from other fruits.
...
The former Dairy Board export monopoly was justified on similar arguments. Deregulation has shown them to have no validity.
...
In short, it is unlikely that Zespri has any exploitable market power as a monopoly seller. In reality it is a monopoly buyer (a monopsonist) and it is growers who are at risk of 'exploitation'.

Kerr calls for the Productivity Commission to hold an inquiry into whether Zespri's monopoly ought to be maintained, noting that the OECD and 2025 Taskforce already have recommended an end to the monopoly. I'm not sure what additional good is done by having another agency find that monopsonies are bad, but I suppose truth bears repeating.

Food superpower

Dan Gardner's piece in The Ottawa Citizen contrasts Canadian and New Zealand agriculture:

“Look at us,” [Agriculture Economist] Larry Martin suggests, “and look at New Zealand, sitting out there in the middle of the ocean, not close to anything.” In the world of food, New Zealand is a “superpower.” And yet, thanks to daring reforms in the 1980s, New Zealand’s farmers owe almost none of their income to government support. “You think, ‘if we could do even half of what they have done wouldn’t we be in great shape?’”

Good for us. Good for the world. If only the politicians would talk about it.

I'd noted before just how much bigger New Zealand is than Canada in dairy exports:

For most things, if you want to get a ballpark comparison from NZ to Canada, New Zealand is about order of magnitude smaller. Not on dairy though. 2007 dairy exports for New Zealand: $6.3 billion (about $4.5 billion Cdn). On that one, we're more than an order of magnitude bigger than Canada [at $255 million Cdn], or two orders of magnitude bigger than you'd expect given everything else about the two countries.

How to get out of the mess? I'd suggested paying the dairy farmers off. But New Zealand liberalized without that kind of compensation. Instead, and I hope Seamus can help me out on the timing on this one, I think the farmers received other forms of liberalization as compensation, including freeing up the ports from pretty heavy union control.

As much as western grain farmers might rejoice were Canada's newish majority Conservative government to put in place the kind of legislation* that would break the Longshore and Warehouse Union, I doubt it would do much for the Quebec and Ontario dairy farmers who are the ones that really need to be bought out.

*Here's an excellent model; here's a perhaps less ambitious but still reasonable alternative.

Markets in Everything - Pretend to be a farmer edition

Pay £30 and join an online community telling a British farm how to run its affairs:

What sorts of decisions can subscribers expect? And how many?

Decisions will range from relatively simple ones such as what crops to plant and which rare breed animals to stock, to thornier, more controversial issues, such as which cow to slaughter, whether to spray wheat crops with an organic molluscicide to kill the slugs, whether to tail dock sheep, and when to start the harvest.

As the farm is already a going concern, and is run in accordance with the National Trust’s commitment to sustainable methods of farming (Wimpole has undergone conversion to organic), then the community of new Farmers will be given the information and parameters to make their decisions from. Some things will be immovable, but as many decisions as possible will be open to discussion and vote.

The year will be structured around a key decision each month, but there may well be dozens of decisions to be made throughout the year – just like a regular farm manager. These shorter timeframe decisions will be introduced a few months into the project, once we’ve got an idea of how things are going and where people’s interests lie.

The deliberative democracy folks could have some fun with the data that would here be generated. The farm managers craft the referendum questions, which ought to constrain outcomes.