Thursday, 23 August 2018

Dairy deregulation pathway - farm gate

The original DIRA was premised on the idea that Fonterra's market power over farmers would be temporary: that there would come a time when the farm gate markets for raw milk were sufficiently competitive and attention would turn towards how to undo the regulatory provisions in DIRA. 

Triggers for deregulation were contained in sections 147 - 150 of the DIRA which were repealed on 20 February 2018. I speculated earlier that repeal was designed to buy time for a proper review, which time was not otherwise available, since Fonterra's market share (on Te Wai Pounamu at least) had fallen below 80%. The case for de-regulation hasn't gone away - on the contrary, the task now is to design a new regime taking account of the current (and likely future) state of competition. At least I hope that's what the DIRA review team are doing.

There are important outstanding questions about whether DIRA is properly promoting domestic competition in retail dairy products, but I'm going to leave them to one side for now. 

Instead, I have a suggestion for the farm gate market, based on my understanding of competition/regulatory economics and the dairy industry, but lacking the resources to fully develop and test the idea. Also, full disclosure: as you may recall, we are Fonterra shareholders based in a non-competitive region (top of the south island). So with all those caveats, here is the basic idea:
  • remove the open entry rule whereby Fonterra must accept suppliers
  • remove all of the milk pricing regulations, allowing Fonterra to set its own farm gate price
  • change s106 so that the non-discrimination clause applies within Fonterra
That's it. Here's why I think this approach could work. We know that Fonterra is losing market share in milk-rich regions like Canterbury, Southland and Waikato. In these locations the regulated milk price is limiting Fonterra's ability to compete by increasing farm gate prices. If we could define these regions clearly, it might be possible to let Fonterra set its own prices there, to match the competition and retain farm gate market share. But that would mean more intrusive regulation, not less, including lots of fights over the boundaries. It also sits awkwardly with the co-operative spirit including the view that we should all get the same farm gate price. 

So any deregulatory pathway will face two challenges: how do we let Fonterra respond to competition in milk rich regions while protecting farmers located in regions that don't benefit from competition. My suggestion would meet both of those challenges: let Fonterra set its own FGMP but legally oblige it to not discriminate between its own farmers. This is a simple MFN (most favoured nation) clause: Fonterra is free to pay any FGMP but it must pay it to all farmers. It's already implicitly there in Fonterra's statements so no harm in formalising it.

If anything, this approach would drag the FGMP up a bit, making life a wee bit harder for the independent processors. However the MFN clause would weigh heavily against large price increases. In the milk-rich areas, the independent processors would still be competing against a larger nationwide Fonterra but the MFN clause would protect them and protect Fonterra farmers in non-competitive areas.

There could be no pocket pricing under this approach. Fonterra could not do what Telecom did to Saturn: cut its landline prices (increase its milk prices) but only in the places where Saturn (later Telstra/Clear) had built competing infrastructure. More generally, the MFN clause would protect the recently entered independent processors by limiting the FGMP that Fonterra could afford.

Not being privy to the research available to the DIRA review team, I can't properly evaluate my own suggestion, but I can at least comment on how it stacks up against the statutory principles on which DIRA regulation is supposed to rely.

s71 Statement of principles
The intention of this subpart is to promote the following principles:
independent processors must be able to obtain raw milk, and other dairy goods and services, necessary for them to compete in dairy markets: They could certainly do this under my proposal
new co-op must accept applications by new entrants and shareholding farmers to supply it with milk, as shareholding farmers: This would be deleted since it is no longer necessary for the promotion of efficient markets
new co-op must not discriminate between new entrants and shareholding farmers whose circumstances are the same: My plan is to refocus this on Fonterra's shareholding farmers only - this is how the MFN would be enforced
shareholding farmers who withdraw from new co-op, and cease or reduce supply, must receive their capital in new co-op without unreasonable delay: All good - no change
the amount per unit of milk production paid, at a time, to new co-op to become a shareholding farmer must be the same as the amount per unit of milk production received, at the same time, from new co-op by a shareholding farmer who withdraws from new co-op. All good - no change

We might not be ready for this yet, but I think it is worth considering as a next step for DIRA reform. I'll be very interested to read the DIRA review team's analysis of farm gate competition. 

Wednesday, 22 August 2018

Fonterra's slush fund

Here's a wee puzzle for you.

Back in 2011/12 during the last DIRA review, the "independent processors" (IPs) who are seeking to capture farm gate milk supply from Fonterra argued that Fonterra's farm gate milk price was rigged against them. They said the milk price manual set the price so high that they couldn't compete. In response, Parliament amended DIRA to require monitoring of Fonterra's farm gate milk price (FGMP) by the Commerce Commission.

Since then,
  • the Commission has consistently worried that the FGMP is too high, and 
  • IPs have nevertheless continued to win farmers across from Fonterra which seems now to be down to 82% farm-gate market share nation-wide (pdf) and is clearly well under 80% on Te Wai Pounamu.
How can both of these things be true? If Fonterra's FGMP really is "too high", then the IPs would not be gaining market share.

There are lots of things going on in here, most of which we can't see from the outside. One thing we can see though, and which at least helps to explain this apparent puzzle is that the milk price manual that produces the FGMP is indeed rigged, but it has a downward bias. This comes through the revenue line. The manual assumes that Fonterra's revenue is determined by global prices for the various commodities it supplies, at prices determined by the gDT auctions. In broad terms, the FGMP is set by taking gDT prices and subtracting the efficient cost of processing milk into products sold on gDT.

Staying true to it's brief, the Commerce Commission is fretting about the cost side of the model, wondering whether the cost of capital is understated. Meanwhile, on the revenue side, Fonterra is telling (pdf) us shareholders that it sells less than 25% of its output on the gDT auctions and that everything else is sold at higher prices.

This means that part of the value of every kg of milk solids we produce is being diverted into a slush fund. Most likely, this fund helped finance our disastrous Chinese investments in Sanlu and Beingmate. Maybe it was also used to prop up the dividend yield when TAF was being launched. I don't know because it's a slush fund: Fonterra managers/directors know its there, but we farmer/shareholders don't hear much about it do we?

Apart from possibly providing big-wigs with opportunities to piss our cash up against the wall, the slush fund also offers a potential explanation the wee puzzle noted above: none of Fonterra's farm gate rivals rely on gDT price either, so they can afford to pay farmers more, just as Fonterra could.

Wednesday, 8 August 2018

CLPINZ Preview

This weekend is the 29th annual workshop of the Competition Law and Policy Institute of New Zealand (CLIPNZ). It's a chance for practitioners to meet and discuss topical issues and this year's program looks great.

Keynote speaker Prof Joe Harrington from Wharton will kick us off. His current research focuses on collusion and cartels and designing competition policy to detect and deter collusion. Just what we need.

Heaps of great stuff follows, on cartels, litigation strategy, telecommunications regulation, the Commerce Commissions new market studies powers, consumer data issues, and economic analysis of mergers. 

I'm tail-end Charlie, with a paper that advocates serious changes, particularly in how we treat service-supplying oligopolies. Impartial observers such as the OECD and the Productivity Commission (led by Graham Scott) agree that weak competition, particularly in services, is a serious drag on our economic performance.

My main argument is that we have to learn how to regulate oligiopolies.

I'll be more specific about what this means after my ideas are road-tested at the workshop.

Friday, 20 July 2018

First they came for...

First they came for the misogynists,
and I did not speak out because I agreed with them

Then they came for anti-tour protestors,
so I fought them in the streets

Then they came for those opposed to settling valid treaty grievances,
and I did not speak out because I wasn't opposed to redressing past wrongs

Then they came for those opposed to gay rights,
and I did not speak out because I wasn't homophobic

Then they came for the slightly racist nazi-adjacents who shouldn't talk like that,
and I did not speak out because I wasn't nazi-adjacent and I give nothing to racism

Then they came for the actual nazis who wanted to use public venues,
and I did not speak out because I wasn't a nazi 

They're coming for me next apparently,
I won't put the kettle on until they arrive

Friday, 13 July 2018

Slippery Slopes

In these days of ideological warfare, the slippery slope argument can be particularly treacherous.

Slippery slopes can easily be ridiculed as a logical fallacy. Just because I'll happily flip you a few bucks for a coffee does not mean I'll invest all my savings in your mad scheme.

To avoid the fallacy, you need more than just the mere assertion of a slippery slope: some combo of facts & reasoning that makes a plausible case for the existence of a slippery slope.

For example, I personally find it hard to believe that the bigoted cake-baker who sent the lesbian couple elsewhere is at the top of a slippery slope, so I'm with Rachel Stewart on this one. I just don't see this country accepting a roll-back of hard-won gay rights, or why a single bigoted Christian baker might trigger that landslide. If there's a coherent explanation of why this is a risk, then let's hear it. And if I turn out to be wrong, I promise to do my best to staunch the flow of bigotry, as I've been doing on this particular topic since the early 80s.

Similarly, I struggle with the idea that any limits on free speech put us on a slippery slope to authoritarian dictatorship. My evidence is that we don't live in such a dictatorship and yet my own efforts at promoting weird notions have often been suppressed: advocating for economic regulation during the mania of the 90s was not a career-advancing move, and don't get me started on agriculture.

I'm sure many other people have examples of progressive views that just can't get coverage and/or are actively suppressed. This feels like a restriction of our right to freeze peaches, and sometimes/often it really is exactly that. But I can still write blogs and inflict my views on others via twitter, so I feel like we in NZ are a long way short of Orwell's 1984.

But the world does seem to be on a slippery slope towards fascism. We have a sordid history to remind us of how this process works. It reminds us that fascism creeps, but has clear signposts. These days, in many parts of the world, it is out of its kennel and barking. This is pretty obviously a slippery slope to fight against. Not just for fear it might be us next, but because everyone it comes for is an innocent victim of a violent ideology.

So it is particularly galling that influential New Zealanders are misusing slippery slope arguments in such a despicable way to agitate in favour of two foreign fascists. Maybe they're just really thick, or perhaps what Nassim Taleb describes as IYIs (intellectual yet idiot). Maybe their judgement is clouded by tribal resentment of their team losing power. Or maybe they are actually fascists.

Whatever, their motivation, they definitely are hypocrites, so I feel totally justified in calling them whining hypocritical toadies.

Friday, 22 June 2018

Beware of Economists - Dairy Edition

Andrea Fox's excellent report on Fonterra has flushed out some bold opinions, none more so than those of "independent economists" Cameron Bagrie and Peter Fraser.
Bagrie manages to miss the vertically integrated wood for the functionally distinct trees:
"There's a major issue between the economic incentives of the two parts of the business. One part is trying to maximise milk payments and the other is trying to maximise value-added. When one does well, the other tends to suffer."
Shared-up Fonterra suppliers really don't care about this "major issue" Cameron, because we have a natural hedge against the price risk you are highlighting. It's the main strength of the co-op model. You might want to talk to some of our large electricity generator/retailers about this - they understand the concept pretty well.
Fraser is more like a shotgun on full choke, spraying thoughtlets wildly around the place. Bagrie is wrong but at least he put up an argument. There's no trace of one in Fraser's comments, despite the boldness of a break-up proposal. 
I'm not dismissing the idea, by the way. Fonterra has been a serious disappointment, as my fellow shareholders well know. I just think the idea deserves some serious analysis before people start promulgating it.

Sunday, 29 April 2018

Incel Libertarians

Robin Hanson argues that if you're in favour of government's redistributing income you're pretty similar to incels = linked to the Toronto terrorist.

Hanson opens by dwelling on people who care about income inequality: what twats they are, and how they're always threatening violence. He then cites Toronto and speculates that
those with much less access to sex suffer to a similar degree as those with low income, and might similarly hope to gain from organizing around this identity, 
Its all about envy you see. Redistributists stoke up resentment and envy using implicit threats of violence, such as citing previous revolutions. Incels are similar in some ways: they also get aggrieved about who gets what and have incentives to organise to get a better deal. And now they've demanded government redistribution of girlfriends and turned violent.

The subtext seems to be that it's the same thinking - envious losers agitating for government redistribution. Yet they don't seem to be the same people: hmm.

Maybe the incels actually have as much in common with libertarians? I don't know, just an idea like Hanson's. There is a clear link though: property rights. In theory, property rights are sancrosanct. In practice, liberatarians are pretty keen on expanding their own property rights. As are the incels.

The targets of Thiel & the incels are different (taxpayers/women) as are the methods. But it's all about expanding property rights.