Costs and profit

[cowman]

I think that Ralph and crew are going to come up with a few ways to spend our surplus pretty fast during their meetings this week . If the cash isn't in the bank its pretty tough for the feds to get their hands on it.

[FarmRanger]

Unfortunately, supply and demand has very little to do with costs right now. Prices rise to compensate for a reduction in supply (temporary, I hope). In a free market, price increases are the only legitimate way to ration a limited supply.

I suspect that demand for airline travel is a lot more elastic, if prices rise too much, people just stop flying. Some people are required to travel by air for work, like I’m forced to burn fuel to operate my farm. I suspect though, that there are more people who won’t fly than won’t operate their cars when prices rise.

[farmers_son]

I would add that in a free market competition is the only legitimate way to prevent price gouging. Supply and demand elasticity is a means of describing the relationship between price and either supply or demand. It is not an indicator of either the presence of absence of competition within a market. As you point out, price of fuel does not serve to ration use, at least in the short term.

While the price of oil has dropped 10% from its high after Katrina, we have not seen similar decreases at the pumps. Light crude closed at $64.08 on Friday, the same level as a month earlier. One month ago the price of gas at the pumps was 96.9 cents, today it is 112.5. One month ago Unleaded Gas futures were trading for $1.89 U.S. gallon, Friday the close was $1.93 and the trend was sharply down. But adjusted for the stronger Canadian dollar Unleaded Gas futures are trading lower today than a month ago, CAN$2.27 per U.S. gallon versus CAN$2.29 U.S. gallon mid August. The increase at the pumps of 16 cents a liter over a month ago is nothing less than absolute gouging.

I think it is very open to question whether supply and demand is at work here. Price gouging and market manipulation account for the retail price of gas being 112.5 a liter instead of the 96-97 cent range as it was a month ago. We simply would not see this kind of retail pricing if competition existed within that market. Supply and demand… I think not.

[FarmRanger]

Good points f_s, but you have to remember that its refining capacity that’s been affected. Its all well and good to have oil, but if you can’t get it refined, then you still have a shortage of gasoline. Futures traders may indeed expect refining capacity to come online again, I’m just saying it would be wise to be leery of federal Liberals making any comments about oil companies.

[cowman]

I wonder how a big powerful monopoly union is much different than a corporation that has a monopoly? I guess that definitely isn't a free market either?
We lament the fact government doesn't set limits to a monopoly situation in beef packing, but in reality how is education and health care any different?
Don't these powerful unions basically force the government to pass laws that protect their monopoly?
And in reality they have been price gouging as well as they are the only game in town?
I think the whole concept behind Wayne Easters report on agriculture was about increasing market power for primary producers? Or bemoaning the lack of market power?
Aren't Cargill/IBP dealing from a position of market power right now? Aren't the doctors and teachers dealing from a position of market power right now, also?
If farmers had market power they could pretty well do whatever they chose...pretty well like Cargill/IBP and the doctors and teachers?
Would that ever happen? Would a government ever allow it to happen? Well definitely not in Canada where the whole country operates on a policy of exploiting the peasants for a source of cheap food.

[farmers_son]

What you are really talking about is competition. It could be argued that labour unions are a means of employees increasing their bargaining position with their employer. When it comes to increasing their wages they may have created a competitive advantage over if there was no union. The downside is they pay dues.

Cargill and IBP do have market power because of their dominance in their industry. Doctors have market power not only because of the service they provide but because the universities limit how many doctors are graduated creating an artificial shortage.

If we realize the effect of competition is to drive all profit out of an industry then we can understand why the oil companies not to mention Cargill and IBP seek ways to limit competition’s effects on their enterprises.

Farmers have no market power. Another way of describing the primary producer and agriculture is nearly pure competition. We are told and have come to believe that our low returns are a natural result of supply and demand. While supply and demand do work to match production to demand that does not explain why many industries are profitable while primary agriculture is not when they all face supply and demand issues. In the case of Cargill and IBP they are part of the same value chain yet they are more profitable than the producer. Competition does explain how different industries can sustain different levels of profitability whether those industries are the energy industry, the health care industry or primary agriculture. The five forces of competition are:

1) Competitive Rivalry
2) Power of suppliers
3) Power of buyers
4) Threats of substitutes
5) Threat of new entrants.

You can see that these forces are all in play in primary agriculture, explaining our low profitability. Likewise you can see how Cargill and companies like them use these forces to maintain their competitive advantage.

Anyone interested in reading more about the Five Forces there lots of information on the Internet. One good source of information is at:

http://www.quickmba.com/strategy/porter.shtml

[Horse]

It seems quite obvious that those making exorbident wages or profits from the oil sector feel all is well ,but the other 3/4 of the population are footing the bills and no way to recover thier costs,
I wonder how many of thge farmers of today are making thier income from farming and how many are hiding taxes in the farm and pretending to be farmers.

[cowman]

Horse: Do you think you are the landed gentry or something? That the world owes you a living?
Hey if oil is where the money is then get into oil.... if your desire is to make "exorbidant wages or profits"! No one holds a gun to your head and tells you, you have to keep losing money raising crops or cattle?
Everyone makes their own choices in this world? In Alberta you have one hell of a lot more choices than just about everwhere else? I see kids, eighteen, nineteen out hustling, making a buck and getting ahead in a big way...is there any reason any other person can't do that?
There is no reason anyone, in Alberta, can't be successful and share in the wealth!

[farmers_son]

I think Horse has a point. While Cowman is correct in saying that if oil is where the money is then people would be expected to leave agriculture to go seek their fortunes in the oil sector. And certainly we are fortunate to have the oil and gas here close to home in Alberta and Saskatchewan rather than just being on the paying end of the stick.

But after all this is an agricultural discussion site and one would expect the discussions to focus on agricultural issues. I for one still believe that farmers should farm, should be able to earn a decent living and pass the farm down to their children instead of having to sell out to an oil industry executive. The high cost of energy is a very, very serious problem for agriculture throughout all of Canada. The prospect of people having to leave their farms to seek employment off farm because farm returns are not enough to support a family is a serious issue also. It should not have to be that way.

Cowman said “There is no reason anyone, in Alberta, can't be successful and share in the wealth!” That is all fine and good. But who is going to look after the farm? We need agriculture in this country too, not just oil and gas. If we want an agricultural industry then it needs to be profitable too.

[FarmRanger]

Whoa! I agree with you f_s, didn't think that would ever happen! hehe

I think the difficulty lies in finding workable solutions to the problems of low commodity prices and high input costs. We don't want more programs that allow our suppliers and buyers to just skim off any government support we manage to get as farmers.

Countries that have ignored simple market forces have weakened their agriculture industries in the long run, do we want to do the same?