Monopoly Vs. Competition

Yesterday, we Blogged about Does SM create higher prices?
Today, we will look at compare and contrast monopoly vs. competition.  Does a competitive supply system really perform better than a monopoly?

First, I propose and assume that both monopolies and competitive suppliers must operate within a rules-based framework that retrains, guides, and enhances their performance.  Without that framework, the system will be worse for it, and has a high likelihood of spinning out of control, and becoming a disservice to its stakeholders and owners.  For example, selling addictive drugs can be highly profitable, but is not in the long term best interest of society, so it is made illegal, and becomes part of the rules-based framework.  If this was not part of the rules-based framework, short turn optimums can lead to long term dysfunction.

There is a 37 minute video on YouTube called "Sticky Prices Microfoundations in a Supply Chain Agent Based Model", by Ernesto Carrella, Dept. Computational Social Studies, George Mason University, Fairfax VA, USA. which explores the differences between a monopoly and a competitive market.  

Figure 1:  With zero knowledge of the rules, the computer simulation of a Monopoly
is able to discover the maximum profit point (22 units of production and 79
units of price) by adjusting production and price every 20 days.

Figure 2:   With zero knowledge of the rules, the computer simulation of a
competitive market is able to discover each supplier's maximum profit point.
Note that with the same market demand (ie. q= 101-p), the competitive market
with 5 suppliers has an optimum price at 58, instead of the optimum price
in a monopoly of 75. 

From this presentation, we get Figure 1, where we see the output from a computer simulation of one firm with 100% market share (ie. a monopoly) doing price discovery to maximize their profits by adjusting their quantity of production and selling price.  With no prior knowledge of the optimum (22 units of production at 75 units of price), the system is able to seek and discover the optimum (Marginal Benefit vs. Marginal Cost).  To help achieve stability, adjustments in production were assumed to occur every 20 days, allowing time for successfully seeking the optimum without excessive hunting, instability, overshoot, or noise.

In Figure 2, we see a similar computer simulation for a competitive market with 5 suppliers, all who compete for market share against each other by adjusting their prices and their production, each seeking to maximize their individual profits.

The wide, black line, fluctuating above and below the optimum value in Figure 2 is formed by the 5 suppliers continuously jostling for a better position in the market place.  There is never a feast or famine, the market is always well served.  There just needs to be a small amount of inventory in the system to cover this day to day fluctuation in the system.

Even though the competitive market simulation uses the same price-demand function as the monopoly (ie. q= 101-p where q= quantity produced, and p= price market is willing to pay), the optimum price in the competitive market place is 58, which is 29.3% cheaper than the monopoly market optimum price of 75.

This computer simulation, and many others like it, clearly show that monopolies cause or contribute to higher prices in the market place.

What are the reasons that justify the government purposely creating monopolies in supply management goods?  SM Mafia argue that this is a necessary evil so that farmers are protected from the foreign producers in low wage, low cost producing countries, thereby achieving domestic food security.

Unfortunately, this assumes that there is no other alternative than a monopoly.

In fact, that is an assumption that is un-necessary.

For example, the SM system could reward the most productive producers with additional quota, while the least productive are frozen with the quota they have already been given.  In this way, the system gets more and more efficient over time.  There are many other alternatives.  However, to say there is no other solution is false, mis-leading, and self-serving to the SM Mafia's special interest, and against the greater good that the public is owed.

Why, oh why is  this obvious error allowed to continue?

Does SM create higher prices?

In a recent posting on Better Farming, another person repeats the often made claims that Supply Management ("SM") doesn't create higher prices for the commodities that they control.  He provides the case of Australia and New Zealand as proof positive.

I assume he is referring to the removal of SM from their dairy industry in New Zealand.

For those interested, the Globe & Mail provides a good, short history on SM in New Zealand, why New Zealand developed the way it did, and then chose to abandoned SM, starting around the 1980.

I agree that doing away with, or modifying SM in Canada will not necessarily lower the price of previously SM commodities in Canada.  The world is complex, many factors interact to create the outcome.  Not all economists agree why there are "sticky prices" (also called nominal rigidity, market inertia, or market friction).

In 1998, Alan Blinder and others surveyed 100 corporations on how and why they made changes to their prices, so as to compare real-world actions against the 12 prominent theories economists have used to describe price stickiness.  Blinder wrote the book on price stickiness, called "Asking About Prices:   A New Approach to Understanding Price Stickiness", 400 pages, ISBN 978-0-87154-121-5, $34.95,

Alan Blinder is Gordon S. Rentschler Memorial Professor of Economics at Princeton University, where he has taught since 1971. He also founded and directs Princeton’s Center for Economic Policy Studies. He has served as vice chairman of the Board of Governors of the U.S. Federal Reserve System and as a member of the US President’s Council of Economic Advisers.  To me, it sounds like he might know what he is talking about.

Why don't companies change prices more frequently than they do?  The #1 reason provided was:

"It would antagonize or cause difficulties for our customers" which was 20.9% of all responses received (41 responses out of 196 total responses, from 151 firms.

Here is the survey answers received (click on graphs & tables for larger version):

Why don't you change your prices more often?, survey results from Blinder et al, for
151 US firms in various industries, 1998.

The top 6 reasons provided represent 81% of all answers received (ie. Pareto's "Vital Few").

Reasons for not changing prices more frequently.  Source:   Blinder et al.

Organizations tend to care about how customer's feel when they realize that angry or disrespected customers tend to get even by voting with their feet and/or wallets, leaving you for your competitors.  With a monopoly, that can't easily happen, so monopolists tend to be less concerned about what customers think or do.  This would mean that the top two reasons don't apply to monopolists, so they are ready to change prices much more easily, in both frequency and magnitude.

Blinder also provides data on the 4 major driving forces on those who change prices, and how long before a price change occurs after that exogenous event (ie. outside forces cause a change, then firm decides to change their prices in response):

How long after an exogenous trigger event does the firm change their prices?
Time lag in months.  As expected, it can be as fast as the same day for a firm
suffering cost increases (Mean - 3 Std. Deviations or zero, whichever is greater),
to as long as 15 months for a firm experiencing a decrease in their costs before
they pass those savings on to their customers (Mean + 3 Std. Deviations).
Source: Table 4.3, Blinder et al.

The firms were asked why they tend to avoid raising prices before their competitors do.  An overwhelming majority said,

"If we raised our prices first, we would lose too much business to low price competitors."

Obviously, not a concern when you're running a monopoly with 99.96% market share.  Guess why Canada's SM Mafia love raising prices on a consistent basis, like clock work?

Canada's Chicken Mafia are obviously not troubled by "Sticky Prices",
they make absolutely sure to raise prices almost continuously, rain or shine,
for the last 17 years and counting, 3.54%/yr price increase on average.
Graph from SFPFC's Blog posting on Feb. 28, 2013
Chicken Price Parity Will It Ever Come?

Flexible pricing is the opposite of sticky prices.  The most flexible pricing occurs when every trading opportunity is priced on a 1-off basis, without regard to any previous trades made.


Sticky prices serve a useful purpose in the marketplace.  In one simple model used to investigate sticky prices,

As I understand it, to get price reductions, there has to be:

1. a free market,
2. effective price discovery,
3. no or minimal collusion by the major players
4. a competitive marketplace, and
5. adequate slope on the price-volume supply curve
6. low or insignificant barriers or thresholds to the entry of new players
7. natural consequences (ie. bankruptcy, consumer shunning, etc.) for poor suppliers.

Without all of these and more factors, prices tend not to change for the better.
One of the biggest drivers of price changes are competitors.  If a competitor raises or lowers prices, other suppliers tend to follow the lead, or at least, it prompts them to reconsider their current strategy, and decide if they want to join, stand pat, or go in the opposite direction.  Witness the wave of retail gas price changes that often occur once one gas station bites the bullet, and changes their price.

The second biggest factor is the slope of a supplier's price-volume curve.  This means that there must be a significant difference to the total profits of the supplier if they are to go to the work and hassle of optimizing their price vs. volume factors (usually means low overhead cost suppliers are more motivated to change first in a competitive market).

There also must be low thresholds for new people to enter the marketplace.  Without this, the veterans often get sloppy and complacent over time, become less and less efficient over time, and don't take care of their customer's best interests.

When suppliers are saved from the natural consequences of poor service (ie. government grants, favors to "friends", regulatory entrapment and changing the rules in favor of status quo, etc.), the pain in the marketplace is allowed to continue a little longer, and to a greater degree.

Economists have found that price changes can occur second by second (ie. Chicago Board of Trade commodities), to as long as a 4 year cycle, but the median is around 1 year between price changes.  For more info, see Sticky Price Manifesto and Nominal Rigidity

To reach equilibrium, it usually takes between 3 to 7 time constants to get over 90% of the resulting price adjustment effect to have occurred.

We must therefore hold off in jumping to conclusions about price effects until 3 to 7 years have passed.

For example, someone who understands how the world works won't check the status every day on an acorn that they planted by digging it up to check for root development, then giving up in just seven days because nothing seems to have occurred as assumed.

It takes longer, you must have patience.

When SM is removed, either by government changing the laws, or by consumers bypassing the laws and SM's monopoly, we need to ensure that the new system meets the 7 requirements listed above, and we will soon enjoy the more affordable commodities Canadians deserve, and will enjoy more and more.

Canadian Chicken At Risk?

They signed my petition, but added that they support having Canadian chicken to feed Canadians.  They were afraid that my actions threatened to open the flood gates of foreign chicken into Canada, sweeping away Canadian farmers.

Good question.

Legitimate fear?

Is there any substance to this potential risk?

I have previously explained that under WTO (World Trade Organization) Treaties, Canada is required to allow 7.5% of the previous year's domestically produced kilograms of chicken  to enter Canada at a reduced import tariff, which is called TRQ (Tariff Rate Quota).

I have also previously Blogged about IREP chicken that is imported for the alleged purpose of processing that chicken in Canada, then re-exporting it out of Canada as a value-added product.  I say alleged, because many tonnes of that chicken gets "misplaced", mysteriously disappearing inside Canada, and is never exported.  This is cheap, US chicken (or other cheap chicken) that disappears; chicken that's 300% cheaper than domestic chicken.  The oppression and abuse of monopoly-priced chicken enforced by the Chicken Mafia ensures there is a white hot market for cheap US chicken in Canada, just like smuggled cigarettes.

Cheap chicken is the same as cash, a fungible asset. It's almost as good as cash, and easily disappeared for quick, un-traceable cash, if you know the right people.

When you add up all the imported chicken, we consume about 75% domestic chicken, and about 25% imported chicken.

As chicken prices drop with the Federal government's lowering of the non-TRQ import tariff, consumption of chicken will increase.  If the price of chicken in Canada falls, perhaps the chicken farmers, or the producers no longer want to participate to the same degree as they previously did (ie. it's no longer worth their while to produce chicken). This may mean that the amount of domestic chicken produced will drop, and the resulting shortage in chicken available will stabilize prices.  In the short term, this may increase chicken prices more than before the non-TRQ tariff reduction occurred.

In the alternative, the Chicken Mafia may have a change in heart, and support the non-TRQ tariff drop.  As market prices of chicken drops, they make it up on quantity sold.

If the government doesn't get scared and stop, but continues to lower the tariff on a steady basis, eventually it will become of greater and greater interest to Canada's chicken farmers to produce more chicken to feed the lowers prices and the greater demand.  If Canada's Chicken Mafia refuse to step up and serve the need, eventually the import tariff will attract foreign chicken to come to Canada and serve the domestic need.

I would prefer that Canada's Chicken Mafia choose to continue in their full participation, but it's a free country.  They're big boys.  They can make up their own mind.

If Canada's Chicken Mafia attempt a "work to rule" approach to frustrate the dropping non-TRQ tariff rate, eventually foreign chicken suppliers will be able to significantly with increased imports into Canada.  As a foreign brand, they need to gain consumer confidence and market share.  The incumbent brands have the advantage, so foreign brands will likely drop their price below the current market price.  Chicken price wars have just started.

Let's take a monopolistic price gouging example

Soon after Dupont invented nylon in  Feb. 1935 it soon became the most profitable product in the history of the company, totally changing the company's focus.  Dupont tightly controlled the market for nylon, and the market price.  Many felt Dupont was price gouging its customers.  For the next 15 years of the patent, Dupont gained between 33% to 50% of its profits from just one product:  nylon.  When the patent ran out, competitors started manufacturing nylon substitutes, and the price dropped sharply.  Realizing that all of DuPont's competitors had built their own nylon manufacturing plant in preparation for the ending of the patent, DuPont finally dropped the market price for nylon in the last few months before the patent ended.  By that time, it was too late.  The competitor's plants were built and ready to go, no matter what DuPont did to fiddle with the price at the last second.  Most customers were upset at having been gouged for 15 years, and defected in drove's to DuPont's competitors.  DuPont's monopoly and unlimited power on the nylon market came to an end within hours after the patent expired.

Perhaps the Chicken Mafia can learn a lesson from DuPont.  Price gouging of consumers creates many long memories, ready for revenge when the chance comes.

Who's the Boss?

The Chicken Mafia thinks they're running the show, the Kings of Canadian Chicken.  Whatever happened to "The Customer is King"?

In health care, a public service paid for by our tax dollars, virtually every Doctor, Nurse, PSW, and Administrator realize that the patients must be provided timely, accurate medical information so that they can make an informed medical decision.  Whether the health care provider agrees with the patient's decision, or the patient followed or ignored their expert medical advice, once the patient has made the decision, those health care providers are responsible to enable and facilitate that patient's decision, whether they agree or not.

The legislation and regulations of Supply Management created a monopoly for everyone in the Supply Management system.  Consumers now have the "privilege" to pay up to 300% for chicken so as to support this artificial monopoly.  Shouldn't that give the consumers some rights beyond "take it or leave it"?

I posted previously on this Blog about the 7 questions for which I seek answers by the Ministry of Agriculture's Appeal Tribunal (see "Tribunal Time" ).  Since then, the list has expanded to 8 questions. 

Today, let's take a detailed look at Question #3:

3.    Under Section 7.(2).(a) of Farm Products Agency Act and Section 12.(2) of Farm Products Marketing Act, the majority of producers for an agricultural commodity must agree for that commodity to come under Supply Management.  The Appellant alleges that the 13,000 Small Flockers in Ontario were never consulted on this question.  In spite of this, both the Federal and Ontario governments have approved the 1,400 member minority to enter Supply Management, and approved the minority to pass onerous regulations that favour the minority and oppress the majority.  In a free and democratic country, is there sufficient constitutional authority for a 1,400 member minority to be given unilateral authority to rule and control both the 1,400 minority and the 13,000 majority, thereby creating a Chicken Apartheid?

The governments of Canada have their powers limited to "peace, order, and good government" according to Section 91 of the Canadian Constitution.

Canada is a free and democratic country, as the Supreme Court of Canada likes to keep reminding us.  That means that government must work for the greater good of all (the majority, or as close to "all" as we can get), while protecting the rights of the minorities.

So how did their lobbyists slip this by everybody so as to construct a Chicken Apartheid where 1,400 chicken farmers rule the roost, and decide on what's best for them, at the expense of the other 13.5 Million people in Ontario?

Small Flockers weren't consulted on this choice of Supply Management for Ontario chicken.  Why were the  rights of the 13,000 majority of chicken farmers violated, contrary to the protections and safeguards in the Acts?

Like any good trick by a magician, you can watch him do the trick time and again, but may never figure out how he did it.

Fortunately, it's easy to figure out that the end result is just plain wrong.  It's like finding out that the magician includes a pick pocketing demonstration in his stage magical act.  The pick pocketing magician works the whole crowd, amassing a stolen fortune in watches, rings, and wallets.

Unfortunately, this particular magician refuses to return anything to their rightful owners.  At what point does the crowd stop applauding the slight of hand, and start demanding to get their property back?

You can only let that kleptocracy (ie. a bureaucracy that steals) go on for so long before it's no longer funny.

Perhaps a similar moment is soon to arrive in Canada for the Chicken Mafia.

Lesson #2: Assumptions and Constraints in Designing a Supply Management System

Continuing with our #ChickenMafia History Lesson series (see Lesson #1 for the beginning), today we learn about the limitations and consequences of designing a Supply Management system.

Continuing from where we left off in Lesson #1, Mr. A.G. Wilson next said:

“The legislation has many ramifications for agriculture on the prairies and indeed for the nation as a whole."

It appears that he refers to "unforeseen consequences", the boogey man of all governmental intervention.  Best intentions are not enough.  Governments tend to have lack of forethought and planning.  Lack of participation by the majority forces the voice of lobbyists to dominate the discussions (if there are any discussions at all).

For many stakeholders who suffer and plead for relief, there is justifiable frustration with the status quo, unbearable inertia and delay by the bureaucrats, followed by a double scoop of neglect by the politicians in serial sequence after the bureaucrats finally agree that something must be done, followed by panic and a rush to respond by jumping upon an incomplete or jerry-built band wagon. Sometimes that rickety bandwagon doesn't survive the long and challenging process to achieve royal ascent.  More often the misguided legislation collapses soon after passing, or careens off the road and over the cliff, taking all those on board to their tragic fate.

If all that is true, then what should be done with the current disaster of SM legislation at both Federal and Provincial levels?

Will we make an even bigger mess by trying to fix the current mess?  For one thing is sure with government action, as bad as it is today, the government can always make it significantly worse.

Let's continue:

"These ramifications can be placed in perspective by a review of developments in this form of legislation over time and the underlying reasons for passage of such a bill.  Such a review will also serve to explain the intent of particular sections of the bill which provides for the regulation of the marketing of farm products in interprovincial and export trade."

It always helps to understand the history behind how we got to today's disaster.  It helps to sooth the wounds, making our suffering more bearable.  Alternatively, it rubs salt into the wound, raising us up to a crescendo of pain that motivates us to cry out for immediate change. That urgency then reinforces government's hasty action and resulting folly, thereby repeating our downward spiral.

In spite of all this, we go on:

"Historical Background
Producers have long been concerned with their lack of bargaining power as individuals when marketing their products.  Early attempts to obtain bargaining power through the formation of “voluntary” cooperative marketing organizations met with limited success.  It was discovered that if bargaining was to be effective in raising price, control of supply was essential.  When members of a voluntary organization restricted marketings and raised price, the benefits accrued to those individuals outside the organization."

This speaks of unintended and non-obvious consequences.  It is not clear to me all the intricate mechanisms at work here.

To me, this is similar to taking the back off a mechanical watch.  I see the intricate mechanism of gears and levers actuating and turning.  I see the second, minute, and hour hands progressing in their steady pace.  However, I am unable to fully understand how it works, or why it was designed as it is.  I have no understanding of the designer's compromises and constraints that they had to overcome, or that the designer failed to address with the final product of their efforts ticking before my eyes.  I can only trust.

Mr. A.G. Wilson, the author of these words, seems convinced that it is all or nothing for supply management to work.  Let us see if, as Albert Einstein suggests, we can do a thought experiment to better understand the mechanisms at work.

Let's say that we have 50% of the farmers for a particular commodity (say, for instance, broiler chickens) convinced to stick together, have a 1-desk marketing body, and share the benefit and pain equally amongst all their members.  That co-op decides that prices are below what is reasonable, so the economics of supply and demand say that the total production of chicken must go down, or the consumption of chicken must be driven up, which will subsequently raise prices, relieving the farmers' financial pain.

The farmers' co-op then decides that all member farmers will cut their chicken production by 10%, and this should balance the supply-demand.  The downstream chicken processors can no longer get all the chicken that they desire from their regular supplier.  The processors start calling around, looking for alternatives, for reduced production creates a small base upon which to fund their fixed overhead costs, which will result in significantly lower profits if no solution is found.  Each producer finds a non-ideal alternative supplier, who can supply an inferior chicken, or a more expensive chicken due to the added shipping costs or less efficient upstream growing process.  The producer's profits shrink, so they will attempt to raise prices downstream.  If all or most suppliers are in the same boat, the average retail price of chicken will increase.  If the processor is unsuccessful in getting a retail price increase, they will suffer the lower profits until they can find a solution.

Remember that just 50% of the broiler chicken farmers are part of the co-op.  The other 50% of the farmers are independent actors who are looking out for their personal best interest.  What is their response as they observe the rapidly changing dynamic caused by the co-op's 10% production cut?

The independent farmers can choose to:

• Do nothing different.  In this case, they will have the same production while the co-op cuts back, so they have automatically gained market share.  They will be getting phone calls from 1 or more processors asking if they can buy some chicken from the independent farmer to fill the supply gap.  The independent farmer will find it easier to sell all of his chickens, and it may fetch the same or higher price.  This encourages the independent farmer and provides him with more time on his hands (less time spent marketing), and possible a few extra dollars.  As the next growing period is planned, these independent farmers may choose to spend this extra time and/or money to grow some additional chicken.  This process continues again and again, until the co-op stops growing chicken, and the independent farmers have each doubled their chicken production.


• Immediately raise prices.  When the co-op cuts production, the wise independent might assume that chicken will become a more scarce commodity, and therefore more valuable.  When the phone calls start to arrive, he is ready with a supply of chicken, but at higher prices.  The desperate producer negotiates as best they can, and possibly a sale occurs.  The independent farmer may have to adjust his price somewhat so as to be below the point of gouging the producers, but there are many more people interested in buying his chickens, so they eventually sell at the same or higher prices.


• Immediately increase production.  This is the most aggressive tactic, and has the greatest risk.  Some of the co-op may be bluffing, saying they cut production when in reality they stayed the same, or possibly increased production to take advantage of the "silly" co-op members who were good to their word.  In this case, lack of co-op disciple could cause more, not less, chicken being produced, so that the co-op members, who already have the relationship with their customers, fully meet the needs of their traditional customers, some of the needs of customers previously supplied by fellow co-op members, and the independent farmer has more chicken which nobody wants.  If however, the co-op discipline is almost perfect, then the independent farmer has more chicken just when a shortage is created by the co-op.  This tends to prevent a retail price increase, or softens the amount of the increase.  With each additional chicken grow period, more and more independent farmers will choose this option as the rewards will likely outweigh the risks.


• Reduce production in solidarity with the co-op.  It is unlikely that all of the independent farmers will make this choice.  Each independent farmer will eventually hear of the benefits accrued by those who raised prices or increased production to fill the gap created by the co-op.  If not in the first growing period, then eventually, virtually all of the independent farmers will learn what is in their best interest, and abandon this possibility over time.
  

So this mind experiment seems to indicate that the co-op farmers will loose big time no matter what the independent farmers choose to do in the short term.  In the long term, if the co-op is foolish enough to continue with its plan, each and every one of the co-op farmers will be driven out of the chicken business, or bankrupt (so that the former co-op farmer is out of all farming business ventures, not just chickens).

This mind experiment logic seems to confirm the statements by Mr. A.G. Wilson in his paper.

Let's continue:

"The experiences of the cooperative organizations formed under the influence of Aaron Sapiro in the 1920’s demonstrated the fallacy of attempting market control where the entire supply was not regulated."

It appears that Mr. Sapiro lead a group of farmers over the cliff in 1920's because of a poorly chosen strategy.  Game theory among 4 to 8 players around a table could have demonstrated the fallacy of his plan with just a few hours work, rather than destroying many farmers who were encouraged to "bet the farm" in real life as idealistic supporters of a cause.  Most unfortunate.

Continuing on:

  "Producers subsequently agitated for marketing legislation which would allow a majority to impose control over the total product."

Now here we have the tyranny of democracy.

One of the tests we have for such plans is to assume we have an independent country with just 3 citizens (A, B, and C).  Everybody gets 1 vote.  Mr. A by some random or skillful series of events, happens to have (or gain) more assets and/or skill and/or other valuable commodity than the other two citizens.  Human nature being what it is, Mr. B proposes that Mr. A will be nationalized and be taxed or have his property confiscated and divided equally amongst all citizens.  Of course, Mr. A will vote against this motion, but Mr. B and Mr. C have much to gain, so they vote in favor of the proposal, and it's 2 against 1, and the majority win in a democracy.  Perhaps there are even fewer scruples, and a motion is made to turn Mr. A into the slave of Mr. B and C.  Any minority can suffer terribly at the hands of the majority in an unconstrained democracy.

We can see that democracies must be tempered by the rights of the minority, or things get bad pretty quickly.

In our case, where a majority of farmers decide that all farmers no longer have the right to grow or sell their chickens as they please, violates the rights of those who do not voluntarily agree with this plan.  Even if there is just 1 farmer who disagrees, on what basis do all other farmers have the right to steal this one farmer's freedoms?

Tyranny of the majority, pure and simple.

Let's continue:

  "They considered that such legislation would enable them to obtain a higher price as a result of control of the total volume of product believing that higher prices were synonymous with higher incomes."

An interesting turn of the phrase, "believing that higher prices were synonymous with higher incomes."  It seems that Mr. A.G. Wilson suggests that this is an assumption that doesn't always (or never) comes true.

I can only think of one class of examples of this.  If there are alternatives to the controlled market, people who resent the control can go to these alternatives.  For example, if there is a monopoly on gasoline, prices could be increased more than what some people are willing to pay.  Fortunately, instead of using gasoline, people can use LNG, propane, diesel fuel, kerosene, fuel oil, wood gasification, electric, or other alternatives.  One or more of these alternatives will win as a result of people moving away from gasoline.

If a monopoly in domestic chicken is created, there is turkey, beef, pork, foreign chicken, or a number of other alternatives.

Perhaps there are additional assumptions in this sentence that all of you can suggest, in which case, make a comment below.

Continuing on:

  "Furthermore they believed that control of the product would allow the market environment to be influenced in a manner favourable to them.”

Ah yes, self interest.  The old saw, "What's good for GM, is also good for the nation." and all similar ones.  While this might be true in the short term, continuing too far down this road leads to arrogance and privilege, to the point that the organization loses its way, and a growing divergence of interest occurs.  Soon, what is good for the organization is totally opposite to the best interests of the nation.  What is the key moment where this policy should be stopped?  If it is only stopped when the interests are diametrically in opposition, there will be a huge shock to the systems (both inside the corporation, the shareholders, the customers, and the nation) when the switch is suddenly thrown.  Therefore it is best to never get started down this road.

Any time somebody proposes shared interests, run for your life, or ensure systems are built in to detect these future divergences, and immediately throw the switch as the slightest difference in interests.

Unfortunately, that wasn't done with Supply Management.

That is why a SM system that may have been in the best interest of Canada at one point in time, is no longer so, but it has the power and inertia to force a continuation of their monopolistic system as if it was still in Canada's best interest.

Lack of foresight by the government allowed for inadequate protection of Canada's consumers and Small Flockers.  Now, consumers and Small Flockers are suffering terribly at the hands of the monster created by the government.

It is the government's responsibility to reign in the SM monster they created, so as to relieve the oppression and tyranny against consumers and Small Flockers.

Let it be so.

Food Factory For Fowl

If you want to raise chicken, you have to feed them.  At my farm, I do free range.  The girls get let out of the chicken coop most days by 1:00 PM so they can make their appointments as the dust bath beauty parlors all around the coop.  When they come out, they are free to grab a fly, worm, or bug to supplement their diet.

If you have a chicken factory with an average size flock of 29,000 birds, you don't have that option.  If you were silly enough to open a really big door, by the time they all got out of the barn, coffee break would be over, and they'd all have to come right back in again.  There wouldn't be time to find a bug, let alone eat it.

Almost all of the commercial growers buy their feed from a feed mill, rather than growing and making their own feed.  So who do they go to to get chicken feed?

You may have seen some very fancy trucks going here, there, and everywhere in Ontario.  I understand they carry a lot of chicken feed.

Wallenstein Feed transport truck.
Photo courtesy of Doug McKenzie at http://www.hankstruckpictures.com/dm_fergus2004.htm

Five axle trailer, all aluminum body, aluminum wheels on the tractor, chrome everywhere, with the fancy light accessory package.  Nice!  How much do you think one of those babies is worth?  Obviously, profits are good to be able to afford an entire fleet of these kind of trucks.

Could this be a major factor in the high cost of chicken in Canada?  Note the previous posting on the mechanism for passing rising feed costs directly to the chicken consumer.

This one is owned by Wallenstein Feed & Supply.  Wallenstein is a family-owned local feed mill, unlike those big nasty trans-national competitors like Cargill, Nutreco, Ridley, and Viterra.  Wallenstein claims to be the #1 feed mill in Ontario for chicken feed, with 25% market share.

Source:   2013 Alltech Global Feed Report
http://www.alltech.com/sites/default/files/2013-feed-tonnage-report.pdf

According to their annual financial report, Animal Nutrition Canada claims 23% of the overall Canadian feed market share.

Broiler feed is about 0.96 Million MT/yr for Canada.  In 2011, Ontario produced 3333.236 Million kg eviscerated chicken, while Canada produced 1,023 Million kg, so Ontario did 32.57% of the Canadian total.  Assuming the FCR is the same across Canada, ON broiler feed consumption is 0.3257 * 0.96 * 10^6= 0.3127 million MT of broiler feed for ON.  With a Wallenstein market share of 25% in ON, they would have produced about 78,168 MT of broiler feed in 2011.

Rule of Three & Four
A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest.

This means that market shares of these 3 market leaders tend to be in a ratio of 4:2:1.  Generally, all of the other competitors beyond the top 3, will hold between 0% to 10% of the total market share.  Based on this heuristic, the following graph shows the resulting market share:

This would predict that the market leader should have a market share of 51.2%, not the 25% that Wallenstein currently claims.  Why the difference?

The Rule of Three and Four applies to stable, competitive markets.  It generally does not predict when these two pre-conditions do not exist.

There is a huge consolidation going on around the world.  Most feed companies are using every dollar of profit, and every dollar they can borrow to buy their competitors.  One example is Parrish & Heimbecker (P+H) with head office in Cambridge, with 11 sites across Canada, who has been on a buying spree as well.

I would suggest that the mergers and acquisitions will continue at an ever increasing pace until the 51% is achieved or exceeded.  It will only be stopped when Canada's Competition Bureau steps in to stop it from further consolidation until there is just one feed gorilla left who owns all of the market.

Supply Management monopoly attracts the formation of surrounding monopolies, the feed mills being one of them.

I'm taking bets as to whether the winner will be Wallenstein, P+H, Cargill, or a foreign invader.  Place your bets.

Will Wallenstein eat its competitors?  Will a competitor eat Wallenstein?

It's only a matter of time, as the sharks circle their victims.

Fair Feed For Farmers?

A total of 19.642 Million metric tonnes of animal feed were produced in Canada in 2012.

The Dairy industry is the biggest consumer of compounded feeds, approximately 50% of the total feed tonnage.  Broilers are 4.9%, layers are 4.1%, so together the chicken fed consumption is 9.0% of the total feed consumed in Canada.

The animal feed industry in Canada is going through many changes.  Mergers and acquisitions are the name of the game today.

Animal Nutrition Canada claims to have the largest share of the feed production market, 23% of the Canadian total.  They sell under the brands Shurgain, Landmark, Nutreco, Mapleleaf.

Other major feed players are:

• Ridley, with Masterfeeds, AGP Co-op
   
• La Coop Federee
   
• Cargill, with Provimi, Hi-Pro, Purina, Nutrena
   
• Viterra
   
• Glencore

I understand that Wallenstein is one of the largest chicken feed suppliers in Canada, but have been unable to confirm this as of yet.

Typical feed cost for chickens is about $384 per metric tonnes ("MT").  As calculated previously on this Blog, if chicken feed has increased by 60% during the same period that cat & dog food increased 20%, that means that there is an excess charge for chicken feed of  $96/MT.

With poultry eating a total of 2.12 Million MT per year, that is a total gouging of $203.52 Million per year.  The farmers gladly pass those excess costs onto their suppliers, who mark it up further as it works its way down to the lowly consumer.  Assuming 40% markup at the producers level, and another 40% at the wholesale/distribution level, the gouging approaches a total of $398.9 Million per year.

Poor consumer.  When will we get relief from all of this economic sludge being poured down our throats?

A Monopoly on top of Monopolies

Is this a tale of chicken success for a young entrepreneur, or a tale of woe for the Canadian public who want and need affordable, high quality chicken?

In 1994, a 27 yr old was interested in changing careers by becoming a chicken farmer. This wanna-be farmer eventually spoke with a large, successful feed mill who happens to sell chicken feed as one of its products. An employee of that feed mill advised the budding farmer that a current customer of the feed mill was interested in selling their chicken quota for $175,000

 Not having that kind of money to buy quota, and only able to borrow enough for land, barns, and equipment, the budding farmer, like many others would-be farmers, was in an impossible situation. The feed mill was interested in higher profits through continuing to sell its chicken feed, and also wanted to reduce competition that kept their feed prices low and competitive.

"What could be done?", thought the owner of the feed mill.


 The feed mill came up with a scheme that seemed in everybody's best interest. The budding farmer put up 10% of the purchase price for the chicken quota. The feed dealer offered to loan 90% of the chicken quota purchase price to the new farmer, provided they sign a promissory note in favour of the feed dealer, and that this new farmer must buy all of their chicken feed from this feed dealer.

 The deal was done. The farmer purchased the chicken quota with only 10% down, bought the land, built the barns, became a new chicken farmer, and slowly paid off the loan from the feed mill. The retiring farmer got his financial nest egg from selling his quota (most likely it was gifted to him by CFO for free). The feed dealer got a guaranteed customer for its chicken feed for more than 11 years with no competition, no matter what price those pesky competitors could offer.

All well that ends well?  Maybe.

I'm not inclined to throw gasoline onto a bonfire, but here goes.

Perhaps somebody should complain to the Competition Bureau.  Perhaps not just one, but many feed mill in Ontario are doing prohibited acts, contrary to Canada's Competition Act, Section 77(2) for tied-selling or exclusive dealing, and Section 79 for anti-competitive acts.

Canada's Competition Act

77. (1) For the purposes of this section,

“exclusive dealing”

« exclusivité »

“exclusive dealing” means

• (a) any practice whereby a supplier of a product, as a condition of supplying the product to a customer, requires that customer to
  • (i) deal only or primarily in products supplied by or designated by the supplier or the supplier’s nominee, or
  • (ii) refrain from dealing in a specified class or kind of product except as supplied by the supplier or the nominee, and
• (b) any practice whereby a supplier of a product induces a customer to meet a condition set out in subparagraph (a)(i) or (ii) by offering to supply the product to the customer on more favourable terms or conditions if the customer agrees to meet the condition set out in either of those subparagraphs;

When you have an exclusive agreement, you aren't under the market pressures to keep prices low, and service high.  Therefore the feed prices tend to be higher in a monopoly, than in a competitive marketplace.

Remember, CFO uses feed prices to compute the "fair & reasonable" selling prices for live chicken.  Feed prices represent about 60% of the cost to produce chicken.  If those feed prices are artificially boosted, then 100% of the chicken sold in Ontario suffer an unjustified price increase.

Maybe the feed mills think, "The chicken farmers have a monopoly, as do the dairy and the egg producers.  All of our customers have a monopoly.  We should have a monopoly for ourselves, too."  So they create a monopoly for themselves.

I have also heard that feed mills are one of the first ones who learn that quota might be for sale.  That could be considered "inside information".  They then use that inside information to extract an unfair advantage by purchasing the quota before anybody else has a chance to even know it is for sale. Next, the feed mill re-sell the quota to new customers at elevated prices and under exclusive dealing contracts, building themselves a monopoly step-by-step.

Canada’s Competition Act sets out a number of prohibited business practices such as cartels, monopolies, undue market influence, abuse of market dominance, and similar acts.  All of these prohibited trade practices abuse the the customer-supplier relationship, or the public in general; all of which cause higher prices, less selection, and other negative aspects for competitors and/or the public.  The 1986 amendments to the Competition Act were to infuse Canadian competition law with a market-oriented focus, and to shift the remedial approach from punishing “illegal” conduct to correcting market distortions.

The Competition Bureau investigates complaints of prohibited trade practices, and if they feel a strong enough case exists, will refer the case to the Competition Tribunal.  Private enforcement under the Competition Act is not permitted (ie. John Q. Public can't start a Court Proceeding under the Competition Act, only the government can do that). 

The  Competition Tribunal is a quasi-judicial administrative body with jurisdiction to hear complaints, producing verdicts and fines. The responsibility for investigating cases and bringing proceedings under the new provisions remained that of the Competition Bureau.  Unfortunately, almost all cases end in mutually agreed plea bargaining.

There has been an ongoing struggle over the application of competition law to regulated markets in Canada (eg. trucking, telecommunications, Farm Supply Management, etc.). The current Commissioner of Competition has made regulated markets one of their top priorities, and has restated on several occasions the bureau’s position that regulation should oust competition law in only very limited circumstances.

Some feel that when regulations and regulatory bodies collide with the Competition Act, a broader “public interest” review should be performed, rather than just looking at the undue effect on competition.

Millionaire monopolists like to point out the good thinks that happen in the economy when they spend their millions (ie. land speculation, building million dollar mansions with pools & tennis courts, yachts, sports cars, summer castles, expensive parties, diamonds & jewellery, the list goes on).

For more information on this unfair trade practice disclosed by Ontario Court records, see:

Olszowka v. Olszowka, 2012 ONSC 5564, http://canlii.ca/t/ft53t, 2012/10/05

$10.8 Billion of Fascist Chicken in Canada

Small Flockers have taken the position that the greater good of the public trumps the wishes of everybody else.  Where did we get such a crazy idea?

Under Section 95 of the Canadian Constitution Acts (1867 – 1982), Provincial Parliaments are empowered over agriculture, provided that their provincial acts and regulations are not repugnant to any Acts of Canada’s Parliament.  Both the Federal Government and the Provincial Governments are empowered to pass legislation on agriculture.

The Federal Government passed a number of laws and regulations to set up a Canada-wide Supply Management system back in the 1960's.  In 2001, the Feds finished negotiations to resolve the egg and chicken wars between Provinces, and an agreement was signed by all the parties, the 2001 Federal-Provincial Agreement for Chicken.

I'm sure that CFO must have heard about this agreement, because they were one of the signatories on the documents, as was the Government of Ontario.

Excerpt from 2001 Federal-Provincial Agreement on Chicken

In that agreement, it states that everybody will get along and play nicely together.  The recent skirmishes over chicken between Ontario and Quebec, and between Quebec and New Brunswick don't seem to meet that expectation, but that is another story for another day.

Under Section 1.01 of that agreement (see at right), all the parties are supposed to work is a Supply Management system that must have a number of very important characteristics. If we have something imposed upon us that doesn't meet these minimum requirements, then they aren't following the rules.  If they don't follow the rules, than we don't have to follow these made-up rules either, for what they ended up doing is ultra vires.  They have no legal basis for doing what they are currently doing.

Especially note Section 1.01 d) where we are required to have a system that works in the balanced interest of producers, industry stakeholders and consumers.  To me that means the decisions have to be equally good (or equally bad) for all three of these groups.

Is that what is occurring?  Raube Beureman just posted a comment on this website that Walmart USA chicken was $4.38/kg, while Walmart Canada offered the same chicken for $13.54/kg at the same time, in neighbouring cities.  That's 3.09 times more expensive in Canada for the same chicken.  Does that sound like "balanced interest"?

Where does all that money go?

CFO reports that in 2011 they produced 452 million kg. of live chicken at a price of $1.596/kg.  Typically the eviscerated weight is 73.72% of the live weight, so we got 333.236 million kg of eviscerated meat.  Add to that about 159 million kg of eviscerated chicken imported into Canada in a year, of which Ontario gets about 33%, so we have a grand total of 385.75 million kg per year of eviscerated chicken.  Now charge Canadians a premium price of $9.16/kg extra for that chicken (ie. $13.54 - 4.38= $9.16/kg).  That price premium for chicken that we are forced to pay sucks out $3.53 Billion per year from the Ontario pocketbook.

According to Ontario's Ministry of Finance in 2012 the total spending for the Ontario Ministry of Agriculture and Food will be $1.546 Billion (operating, assets, and capital expenditure).  So our premium chicken prices could pay for running the entire OMAF for a year, and put $1.98 Billion towards reducing the provincial deficit.

What about Canada-wide?  Chicken Farmers of Canada report in their 2012 Chicken Databook that 1.023 Billion kg of eviscerated chicken were produced in Canada during 2011 (latest stats available).  Adding the same imports of 159 Million kg stated above, we have a total of 1.182 Billion kg. of chicken.  At the price premium pricing over US chicken of $9.16/kg, that is a chicken tax of $10.827 Billion per year which consumers are forced to pay.  With 13.3 million households in Canada, that is a chicken tax of $814.00 per year per Canadian household.

I wonder who got those extra Billions.  What would consumers have spent their money on if they didn't have to pay those premium chicken prices?  If the government got the money instead, would they have reduced our taxes, paid down the deficit, or provided us $10.8 Billion of additional services?  If we are forced to pay an extra $10.8 Billion per year for premium prices on chicken, we can't spent it on something else.

We hear about Banana Republics where the dictator is smuggling plane loads of diamonds and gold out of the country, as the infrastructure crumbles and the people are starved.  Should we be placing observers at Toronto International Airport watching as our Canadian tyrants take $10.8 billion per year of hard-earned money away from Canadians and spirit it off to parts unknown?

Fascism is defined as when government and business are co-conspirators for their special interests by controlling and repressing the people.  Do we have a $10.8 Billion/yr. case of fascism here in Canada?