Wednesday, November 12, 2014

The SM Price Penalty

An anonymous poster on Better Farming proposes that Canadian food prices for Supply Management ("SM") foods must increase even more and faster so as to ensure production quantities increase so as to feed the growing population.

As you might expect, I have a different opinion.  That's the basis of today's Blog posting

The Law of Supply & Demand would tend to match demand to supply by price adjustments.  Also, we tend to use the best resource first (ie.  increasing demand will bring less productive farms, farmers, and land into production once all the best resources are fully occupied; see Best First Principle).  Less productive resources will tend to require higher prices to keep them engaged.  On the basis of just these two isolated factors, this wayward anonymous poster with their many simplifying assumptions is partially right.

However, there is the possibility of productivity improvements.

For example, I bought an Apple II+ computer in 1979 for about $2,500.00 which was an 8 bit 6502 processor running at 1 MHz with 48 kB of RAM memory and no hard drive, and one 5 1/4" floppy drive, and only rudimentary software.  It cost me more than 2 months salary at that time.  I was determined to join the digital age, and paid a huge price to do so.
Apple II+ computer with dual floppy drives and monitor
purchased for $2,500 in 1978

A few months ago, I bought a new notebook computer with a 64 bit Intel i5 processor with 2 cores and 4 threads running at 1.8 GHz, 4 MB of ram, 0.5 Terrabyte hard drive, loaded with MS Office professional software etc., for $750.00  This computer is about 4,000 times more powerful than the Apple II+ of the 1970's.

The Consumer Price Index ("CPI") was ~35 in 1978 and is ~125 today.  That means the $2,500.00 Apple II+ in 1977 is equivalent to $8,928 today (ie. 125/35*$2,500= $8,928).  If we assume today's notebook is 4,000 faster & better than the Apple II+ based on the microprocessor speed, cores and threads, then the equivalent price for today's notebook is $35.72 Million if we use hedonics (see ) to compare computers of equivalent power (apples vs. apples, not apples vs. oranges).

How is it that I bought the new notebook for $750 rather than the equivalent Apple II+ price in 2014 of $35.72 Million?

From 1978 to 2014 is 36 years.  Assuming a steady rate of CPI inflation over these 36 years, the equivalent Apple II+ computer price would have inflated by 30.44% per year.  However, it actually deflated by 3.4% per year.  This price differential  is because of competition and continuous improvement in the computer industry.

Throughout those 36 years from 1978 to 2014, the computer industry faced inflating expectations from raw material suppliers, staff wages, energy, taxes, changing technology and re-investment, and everything else.  The various computer companies either improved their operation, or were subject to dying an early death.  Apple Computers almost went bankrupt due to numerous mistakes and loss of focus.  Many other computer suppliers were unwilling or unable to compete, so they went out of business.

Unfortunately, Canada's Supply Management system for chicken, eggs, turkey, & dairy doesn't have to improve, nor compete.  They get to charge whatever they like, regularly putting through price increases; price increases for themselves, or by enabling their SM coattail riding "friends" to do so.  Canadian consumers are forced to pay these price increases for SM foods.  As the rest of the world improves, and suppliers and raw materials increase their prices, SM margins get squeezed, so SM puts through another price increase to Canadian consumers so that SM players are insulated and protected.

SM always protects itself, but who insulates and protects Canadian consumers?  Nobody! Canadians pay and pay again for SM's growing inefficiencies.

For example, Ontario's FCR (Feed Conversion Ratio) is 1.72 but Tegel Poultry in New Zealand has an FCR of just 1.38 or lower (see ); 24.6% better than Ontario.

If SM were to change their focus today, it might take them 2 decades to regain the competitive ground they have lost to the rest of the world during SM's ineffective reign.

Until SM changes their ineffective system, Canadians are forced to slowly sink in the SM swamp, unable to be rescued from their terrible fate.

Glenn Black
Small Flock Poultry Farmers of Canada

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