Throughout history, much of the government intervention in agriculture has aimed to redress the imbalance between the bargaining power of many small-scale farmers who are often weak sellers due to the seasonality and perishability of their products, and the bargaining power of major corporate entities involved in processing and trading those products. Often, governments intervened by setting minimum prices, creating single desk marketing arrangements, or imposing production quotas or other restrictions on participation in certain markets. More recently, governments have recognised the importance of transparent market information as a key factor in ensuring markets remain efficient and fair, and have legislated accordingly. This approach is now up for review in the USA, with legislators and policymakers trying to understand whether more transparent market information really does fix ‘sick’ markets.
The importance of transparency in ensuring that agricultural markets remain fair and not prone to excessive volatility is widely recognised. At the global level, the agriculture ministers of the world’s largest twenty economies launched the Agricultural Market Information System (AMIS) in June 2011, in part in response to the enormous volatility of global agricultural markets in the 2007-2008 period. At a regional level, the EU implemented an initiative termed the European Food Price Monitoring Tool (FPMT) in 2009 as a measure to increase the transparency of transmission of food prices along supply chains, and to reduce unnecessary market speculation. The history of measures to enhance agricultural market transparency is much more extensive in the USA, with initial legislation dating back to 1946, but more substantial legislation in the form of the “Livestock Mandatory Reporting Act” being implemented in 1999 and 2001. This legislation is now up for review, under a process in the USA whereby existing legislation is subject to review after five years.
The USDA has recently released the findings of a research project, the objective of which was to assess the effects of mandatory market information reporting on the operation of US agricultural markets. The legislation currently in place in the USA requires large-scale participants in specific livestock markets, including beef, pork, and sheep and lambs, to provide specific details of the numbers purchased, and the weights and prices paid for livestock to the USDA within specified timeframes.
One of the challenges associated with this sort of analysis is to try and establish what would happen in the absence of mandatory price reporting, and to use that as the basis to analyse the impacts of the mandatory reporting measures. This challenge is made more complicated by the drift away from more open price discovery mechanisms such as open-cry auctions, towards what the USDA refers to as Alternative Marketing Arrangements (AMAs) that include contract supply arrangements, formula pricing forward sale arrangements. These AMAs have become predominant in the US pork and poultry industry, and also for the sale of slaughter cattle – mainly by feedlots.
The analytical method used to determine the effects of mandatory livestock reporting are somewhat complex, and essentially involve a comparison of the differences between AMA prices (forward sale and futures contract prices) and open cry auction prices, before and after the introduction of mandatory livestock reporting. The analysis is made all the more complex by the fact that the USA had a system of voluntary livestock market reporting prior to the introduction of the mandatory reporting system.
In summary, the analysis found that while results were mixed under mandatory reporting, the prices observed for AMAs generally were more closely correlated with prices reported at open auction, and that the prices farmers received under AMAs were responsive to changes in prices received at open auction, indicating that the mandatory reporting system resulted in welfare gains to livestock sellers, meatpackers, and—ultimately—consumers, all of whom benefit from having more information on prices.
It is interesting that, in contrast to the focus in both the USA and the EU on transparency of market information as an important factor in ensuring agricultural markets remain fair, there has been little or no focus on this issue in Australia. In fact, graingrowers effectively argued against measures to increase market transparency by arguing to shut down the Wheat Export Authority, and the dairy and horticulture sectors have never had comprehensive market reporting systems in place. The livestock sector is currently looking at this issue in response to the increased concentration in the meat processing sector, an issue that is also the subject of a current inquiry by the Australian Parliament.
As Australian agricultural markets become more concentrated, it will be interesting to see whether an increased focus is placed on obtaining more transparency as a means of ensuring markets remain fair and efficient. There is also no doubt that having mandatory reporting in place also helps to address some of the deficiencies that are evident in national agricultural statistical systems – something that has been and remains a major challenge in Australia.
Mick Keogh is the executive director of the Australian Farm Institute. This article was first published on the AFI website. To view the original article click here