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Who Does Ag Serve? PDF Print E-mail
Written by Steve Dittmer   
Friday, 06 October 2006
AFF Sentinel Vol.3 #28

At the very core of the disagreements and discussions regarding agricultural structure and marketing methods is this question: "Who is agriculture trying to serve?"

Free market advocates always hold that an industry exists only to serve the consumers of its goods and services. That seems obvious, yet is often a forgotten tenet. But that is where the money comes from to pay any industry, absent income from some other - usually government - source.

The most efficient system affords a free flow of information regarding consumer preference. The most basic feedback comes from sales - what quantity at what price customers will buy. That feedback plus other information about preferences needs to go to all segments of that industry. Going the other direction, a good system provides a free flow of information regarding new offerings an industry, with all production chain segments cooperating and/or competing, can provide for customers at what levels of price and supply.

A problem occurs when some segment of an industry's production chain decides that their self interest trumps that of the interests of the revenue source - the customer. This usually happens when one industry segment focuses only on itself or becomes fixated on beating the next link in the chain. Forgotten is that that next link is passing on dollars from the consumer, not making money out of whole cloth.

The classic example is the U.S. auto industry and their labor unions. Unions used their government- sanctioned monopoly power to force higher wages and benefits out of the automakers by threatening or carrying out strikes. The unions were not concerned about supplying consumers or the cost to the consumer. They were concerned with their wages, benefits and the number of jobs.

The cumulative effect, over decades, was to raise prices for cars, increase costs in labor and benefits for automakers and reduce capital available for product innovation. Labor restrictions limited critical production efficiencies and increased manufacturing costs. Coupled with the automakers ignoring changing consumer demands, the result has been a lack of competitiveness. When compared to cars from foreign-owned manufacturers, dissatisfaction with the price/value perception drove sales down and the whole domestic auto industry suffered.

Ironically, the unions' fixation only with keeping wages and benefits increasing and the number of jobs up, in the long run, served to contribute greatly to plant closings and lost jobs - the opposite of their goals. The principles of economics can be flouted for awhile, but eventually short-sighted outlooks kill the goose. The airline industry has followed a similar pattern.

What everyone in the chain must remember is that there is only so much room in any industry pricing model for each segment to increase its profit without seriously affecting the cost structure and profitability of the entire chain. While every segment must look after its own needs, it must act generally in ways that do not harm the ultimate consumer in the long run, or the industry may shrink or disappear. Government subsidy programs interfere with the efficient communication of market signals. Industries may fail to recognize changing conditions and adjust production to fit customer demand.

As the Farm Bill debate heats up, watch for telltale signs of anti-free market principles. Watch for segments of production chains - or entire industries - looking to solve their problems by calling down the law to hamper other segments of their own production chain, insulate themselves from market forces or ask government (taxpayers) to pay costs customers will not.

So-called activists who are neither fish nor fowl will appear. They are not part of any production chain nor do they truly represent the average consumer. They simply want to tell industry what to do in order to further their elite political or cultural causes.

None of these activities do anything to make a product better or cheaper for the consumer. If we agree that is the goal of any industry, then the Farm Bill debate should largely be about keeping out new attempts, and eliminating old attempts, to make the systems less efficient, less responsive and short change the consumers from which wealth flows.

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Last Updated ( Monday, 30 October 2006 )
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