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  • Mathieu Provencher

UK Milk going sour?

(picure from Wix's library)

Hello everyone! Let’s talk about milk in the UK. You may have heard that UK dairy farmers have protested lately regarding the low price of milk. These farmers argue that the price is too low for them to continue doing business.

This is part of a global event in which many commodities have lost quite a lot of value. Oil, minerals, and a number of food products are now significantly cheaper than they were a year ago.

The UK dairy farmers are asking for two main strategies: first, the government should help their operations in some way (lower taxes, loan supports, force a minimum price); second, the supermarkets and dairy product producers should give them more money.

They ask supermarkets to create some sort of UK farmer-friendly brand for which farmers would receive more money per liter of milk (somewhat an equivalent of ‘fair trade’ brands) and dairy product producers to increase the amount of UK milk they use in their products (increasing demand for UK farmers).

As an Economist, I have very little sympathy for producers complaining that the price of their product is “too low”. In most cases, the price will be low because of over-supply or deficient demand. In both cases, most firms will try to recuperate some of their lost income by selling more quantity, which will reduce prices even more and thus lead to more firms being put in a difficult situation.

This goes on up until the more inefficient firms die out and the most efficient ones take over their market shares. We eventually get back to a new situation with higher prices (total production being lower when enough firms shut-down) and a more efficient industry that can resist shocks more easily.

I have seen time and time again the agriculture industries (in the most advanced economies) avoid such “reforms” by using their lobby power and complaining that their lifestyle is in peril. These firms tend to benefit from very high influence when compared to their share of our economies, again in the most developed countries.

As such, having the government impose a price floor (forcing higher prices than the market) or forcing supermarkets to charge an extra “farmer tax” in order to redistribute it towards farmers (with subsidies, tax benefits or just cash transfers for example) would be a mistake in my opinion.

However, I would be a lousy Economist (which I am definitely not) if I did not point out a few important exceptions to these simple rules. Although the price of milk might very well be ok, by which I mean be the price of equilibrium, the distribution of revenues may indeed be very unfair. The market price is efficient IF it is determined by free and competitive markets… by which we mean by perfect competition.

In this specific case, it would seem indeed that supermarkets and dairy product producers have what we call ‘market power’ over farmers. A redistribution of profits made from dairy products may indeed be something desirable in this case. Farmers may be receiving less than their fair share when dividing profits between them and the supermarkets. Farmers are already trying to deal with this in the UK, by asking for that farmer-friendly brand I mentioned.

Whatever the case, it seems clear to me that the government should not impose any restrictions on the price or provenance of milk. These types of policies are very likely to lead to more surpluses of production, uncompetitive prices, and lower quality… as they have done many many times in the past. One thing the UK government may want to do is to facilitate communication between farmers and help set up ‘communes’ or groups of farmers that can negotiate as a group.

There are two main ways to avoid the problems of having a group that has market power over another: (1) you break down the stronger group (quite costly and difficult to do); or (2) you give more power to the weaker group.

The second option is both cheaper and better for the future of this industry (in this case).

I hope you guys enjoyed!

See you around.

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