Monday, February 3, 2014

Modify Supply Management before it's too late

Yesterday, we discussed our support for the new egg quota trading system for Ontario (see Egg Quota Sale by Auction ).

But wait, there's more!

Supply Management ("SM") was originally created as a clumsy, ham-fisted solution to the power imbalance between individual farmers and the large powerful corporations who bought from the farmers.

SM wasn't perfect then, and is less perfect today.  If the system was supposed to balance power, how come we still have all the same problems as before, and the power imbalance has gotten even worse over the 50 odd years of SM?

Instead of continuing with a flawed SM system for determining how many eggs to grow and the price those eggs are to be sold at, why not apply this same effective, modern tool to that side of SM too.

Here are the facts as I understand them:
  1. Farmers know what it costs to grow their eggs.
  2. Farmers would like to get the highest price possible for their eggs.
  3. The farm gate egg sale price has to be above the farmer's break-even price if they are going to stay in business.
  4. There is the ongoing possibility that some farmers are sufficiently incompetent, dastardly, lazy, or unwilling &/or unable to improve that they have lost (or deserve to lose) their social license to continue doing what they do; they need to retire or find a different career.
  5. Some farmers are more efficient than others, and therefore have lower break-even prices.
  6. Some farmers produce a higher quality egg than others.
  7. Farmers need a steady production volume to avoid wild cycles of feast and famine (which can lead to inefficiencies and financial ruin).
  8. If a farmer produces a higher quality egg at more reasonable prices, they deserve better remuneration for their skill and efforts.
  9. Egg grading stations, egg distributors, and Canadian wholesale and retail customers want to buy the best possible egg at the lowest possible price, and have a consistent supply (not too many, not too few).
  10. We are able to do random sampling of a farmer's eggs and develop a quality score.  A time weighted averaging of these quality scores will dampen any short term fluctuations in these quality scores.  The quality levels could be divided into 3 categories (Gold, Silver, & Bronze) with set minimum standards for each grade level.  Due to continuous quality improvements by some farmers, the egg quality will likely improve over time.  Once more than 50% of the eggs are in the Gold standard, the quality standards would be re-defined to re-balance the distribution of eggs into equal thirds again.
  11. Egg sales can be done well in advance of the planned delivery date for a farmer's eggs so as to ensure stability in the marketplace (ie. don't grow an egg if you can't sell it).
  12. Multiple sales can be done for the same delivery date, so if you are unsuccessful in the previous sale, you can try again in subsequent sale.  As long as there are enough buyers and sellers to hold a sale, another sale is held.  Using automated systems, the sales could happen every day, or every hour, or maybe every 5 minutes if need be.  Buyers and sellers could let their previous bids stand, or based on the results of the previous sale, they can make an adjustment in their bid.
  13. For each current specification, there would be 3 separate auctions for three levels of quality (gold, silver, & bronze).  One would think that gold standard eggs would be limited in quantity, and will fetch a premium price.  If there are limited buyers for Gold eggs, the excess Gold eggs can be sold in Silver and Bronze auctions, thereby virtually guaranteeing that Gold eggs will always be sold.  Bronze eggs may have insufficient buyers, and therefore may have to go to a cracking plant at a significant loss in income due to their inferior quality.  This helps ensure continuous improvement in egg quality.
  14. The sales are run as a truncated k-double auction, so as to ensure maximum value for consumers.
  15. To avoid conspiracies and dysfunctional game playing during the auctions, there may need to be some mechanism or rules to prevent both farmers and buyers from using predatory bidding practices.
This proposal builds a level playing field for farmer, buyers, and the Canadian consumer.

Which of the Supply Management is brave enough to consider this alternative system for ensuring Canadians get the very best deal for their supply management commodities?

You can change a little now, or wait to have the decision ripped from your grasp.  The choice is yours.

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