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Mick Keogh: ‘Market transparency matters’

by Mick Keogh, Australian Farm Institute , 20 March 2017

In the current post-regulation era for Australian agricultural markets, there is a growing awareness of the importance of market transparency as a key factor to ensure markets remain competitive, and the benefits of sectoral efficiency gains are distributed equitably through supply chains.

The focus on market transparency is much stronger in overseas markets, and governments expend significant resources to maintain it in specific markets.

Among the features of the much derided model of perfect competition often espoused by economists is that no single market participant can influence the market price, and that all participants have ‘perfect knowledge’ of all aspects of the market relevant to supply, demand and prices.

The reason perfect competition is so often derided is that the conditions required for a market to be considered perfectly competitive rarely, if ever, exist in real markets. However, some of the derision arises because it is not well understood that the model is basically used as a reference point, rather than as a description of an actual market. Economists use the concept of perfect competition to evaluate the relative competitiveness of markets, rather than presuming that any market can actually be perfectly competitive.

The perfect knowledge requirement is a relevant example. It is obviously not possible for all participants in a market to have identical information about all the factors that might affect supply, demand and price. However, certain markets – such as equities markets – expend a great deal of effort to make sure market participants have access to real-time market information, and also impose strict disclosure conditions on market participants to ensure that none have an unfair advantage via information that is only available to a few participants who can use this to profit – otherwise known as insider trading. These market rules therefore attempt to achieve as close as possible to perfect knowledge among market participants.

It is obviously much simpler in a centrally-traded market such as the share market to achieve equal access to market information, than it is in disperse markets such as those that occur in the agriculture sector. However, both EU and US policymakers have increased their focus on market transparency, especially as markets become more concentrated, and have an increased risk of the misuse of market power by a few major participants.

The EU Commission recently established a task force to examine ways to make EU agricultural markets more competitive, and in December last year the task force released a report detailing some observations and recommendations. A section of that report devoted to market transparency contained some relevant discussion on this issue – in particular about why market transparency matters.

Transparent markets in general allow an efficient allocation of productive resources. For instance data on prices, production, stocks and trade helps producer take well informed production decisions rooted in an understanding of market conditions. 

Market transparency benefits producers´ market expectations and understanding of what shapes their commercial relation with processors, their direct partners in the supply chain. On that basis they can adapt their production and decide upon appropriate risk management strategies.

In general, greater price transparency helps farmers negotiate their contracts, including forward contracts. Robust, specific and transparent price data for specific commodity grades facilitates acceptable contract specifications and cash settlement and can thus promote the development of futures markets 

Transparent markets can improve access to finance by enabling more robust business plans and thus better appreciation of market risks by lenders. Last but not least, accurate and complete market information supports evidence based policy measures.

The report noted efforts that have been made to increase the transparency of European agricultural markets, such as the EU Markets Observatory for markets such as dairy and meat. The dairy observatory publishes monthly raw milk and milk product prices across all EU member states. It enables the EU to publish information such as the following graph, which shows changes in the farm operating costs, farmgate prices and farm profit margins of EU dairy farms over the past three years.

The ability to produce information like this is just one of the benefits of increased transparency. Other benefits include the ability of all market participants to understand changes in the profitability of different parts of the supply chain, and also the potential to develop risk management options (such as forward markets and futures contracts) on the back of robust market reporting systems.

In relation to future developments, the report recommends;

The Commission should take further steps to increase market transparency so as to foster effective competition along the supply chain. Bigger and better-equipped up- and downstream operators usually have a clear view of the market while farmers – often fragmented and small – frequently do not. This information asymmetry creates mistrust, in particular in relation to price transmission and the distribution of value added along the chain.

The report canvasses many issues that have a great deal of relevance to Australia. At a time when beef, dairy, sugar and horticulture farmers in Australia are increasingly critical of how their respective markets are operating, it is worthwhile Australian policymakers looking more closely at measures to improve market transparency as an important way forward.

This article first appeared on the the Australian Farm Institute website



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