Bert Kelly, The Bulletin, May 15, 1984, p. 118.
Before Eccles and I go out to examine in detail some of the sadder rural industries in our land, there is one more general heading which we should have in mind.
It is, “I was right anyway.” It originated when a chap was being rushed to the hospital in an ambulance after an accident, saying through his muffling bandages to his nurse, “Well, I was in the right anyway!” But he was still going to the hospital.
I think of that heading every time I hear some brave defender of some rural industry proclaiming in ringing tones that surely his producers are entitled at least to get their costs of production. He then usually hammers his point by saying that many secondary industries get tariff assistance so that they can get their costs of production, so surely his people are entitled to the same treatment.
But I have to warn him that, if he and his group are guaranteed the costs of production, then it will probably be bad for them in the end.
Why is this?
First, there is the difficulty of arriving at what is the cost of producing anything. My costs will certainly be different to Fred’s and our will be different yet again to most of the others in our district and different again to farmers in other districts and different yet again to farmers in other states. The plain truth is that there is clearly no single cost of production for any crop grown in widely separate areas.
The second danger is that this way of fixing prices always distorts the market signals.
It encourages farmers to keep on producing something for which the demand is falling or vice versa. It almost always works in opposition to the law of supply and demand which always wins in the end.
Thirdly, the cost of production philosophy is frequently used as the excuse for a muddled up social welfare system. Poignant pleas are made that some producers are in real trouble and are living below the poverty line and so on. To cure this, some people say that if all farmers were guaranteed the costs of production, then everyone would at least get enough to live on.
The trouble is that, under this system, most of the money would go to farmers who did not need it. I have a very competent farmer friend who has a big English farm. We always compare our farming figures and his are always better than mine. Not only is he a better farmer but he also gets very generous treatment from his government which seems frantic to keep the small EEC farmers happy. When I asked him rather quizzically for how long he could continue to get such generous treatment from his government, he replied, “Bert, as long as there are enough poor struggling farmers around me, I shall be all right!”
If prices are raised by the cost of production formula to protect the position of the small farmer, most of the money will end up in the pockets of big farmers.
If governments feel that they should help poor farmers for welfare reasons, it would be better to pay the money to farmers in proportion to their need, not their production.
The sad truth is that you can put off the day of reckoning for years by hiding the unpleasant facts of economic life behind cost of production schemes, but the law of supply and demand always wins in the end; and the longer the end is delayed, the more painful will be the inevitable shake-out.
I said after the January Agricultural Outlook Conference that now very few producer groups advocated the cost of production method of fixing prices compared with 14 years before, when the conferences began. But it lurks there all the same. For instance, I heard a sugar grower make a stirring appeal for sugar producers to have their home consumption price fixed in this way. Then he said that, if it was good enough for manufacturers of cars to have the cost of producing their cars subsidised by the government, then it was surely good enough for sugar growers too. I was glad to notice that almost all the sugar growers present had the grace to grow red behind the ears at the thought of the mess we had made of the car industry being taken as a model for anything except disaster. After all, the sugar industry stands on its own feet nearly all the time, while the car industry stands on ours.
If only prices were fixed by what is just and fair, the cost of production system would be excellent. But prices are, in the end, fixed by the law of supply and demand and nothing can stop this law working.
That is why the chap was going to hospital, even though he was in the right.
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