Sunday, February 27, 2011

Government to Guide Milk Price

The Ministry of Agriculture is preparing to announce a new system for setting government guidance prices for milk. No details have been announced, but the intent is to establish a mechanism for setting a reasonable milk price. The mechanism will be used in major milk production areas. The article's langugage is vague, but it refers to "closely tracking the price of imports," strengthening analysis and preventing events that impact the industry's analysis.

Fluctuations in milk prices--both ups and downs--in 2007-08 led to build-up and culls of dairy herds that contributed to the melamine crisis. Since then imports of dairy products have been robust since consumers who can afford to do so now buy imported milk. There is also a lot of concern about whether farmers are getting a "fair" price--the farm price is just a fraction of the retail milk price.

An article from August 2010 describes how Heilongjiang Province has been trying out a similar milk-pricing system. Heilongjiang has a dual "reference price" and "government guidance price" mechanism for setting "scientific, reasonable" prices. A reference price is determined in each region based on market prices. Then the government sets a guidance price based on the reference price. It's not clear how they do this, but probably the price is set at a "reasonable" level above the reference price. The article describes the guidance price as a kind of minimum support price that guarantees that farmers can make a profit. The price is set "to ensure that all participants in the supply chain benefit."

Heilongjiang implemented the dual-price system July 1, 2010. Before that, the article describes the province's dairy industry in dire terms. Farmers had suffered 20 months of losses, milk prices had fallen, farmers had no confidence and they had culled dairy cattle (following the melamine crisis in the fall of 2008). Raw milk prices had fallen and feed costs were rising. After the guidance price was put in place, the average price rose, farmers started making profits again, and they began adding cows and applying for loans.

This is another example of China's imitation of agricultural policy mechanisms that Americans and others tried out in the 20th century. Chinese policy advisors are eager to adopt 20th-century-style market orders, support prices, target prices with they have convoluted formulas that appear "scientific" and "fair" to farmers.

The basic approach of these policies is a type of "cost-plus" pricing that guarantees farmers a profit as costs go up.

For hundreds of year farm prices have risen more slowly than industrial prices. Are we now in a new era where farm prices will rise as fast as industrial prices?

Historically, farmers made a profit by increasing their productivity and expanding the scale of production to reduce unit costs. If prices are guaranteed to rise whenever costs rise, farmers lack incentives to find ways to cut costs.

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