Thursday, July 16, 2009

How to increase the price of milk (and get away with it!)

Imagine if we treated a basic daily commodity like milk, in the same way we're treating housing? Adam Smith would have argued they both have something in common - the law of supply and demand. Does this sound like a familiar story? ...



Step 1. Introduce legislation which restricts the number of dairy cows any farmer can have, and don't allow any more dairy pasture for pasture expansion. Do this on the basis that your economic planners have told you that their economic modelling shows we have sufficient cows and anyway, cows fart a lot which creates methane which is bad for the environment and would lead to global warming which could ruin dairy farms. The legislation is promoted as being all about creating a sustainable future and it's actually a good plan for the dairy farmers - even if they say it isn't. The fact that the economic planners have never milked a cow themselves is immaterial, and anyone who suggests they’re not living in the real world is obviously just a red neck without any concern for the long sustainability of dairying.



Step 2. Tax all the remaining cows. A new levy is brought in which charges farmers a large upfront tax for each Daisy and Annabelle in their herd. This is done because obviously as we know cows fart a lot and we need to save the planet so taxing cows for their methane is only equitable. Plus it's a handy new line of revenue and the consumer can't see how that tax affects them - it's only those wealthy farmers paying it after all.



Step 3. Hold a lengthy parliamentary inquiry which includes several parliamentary missions to overseas destinations which preferably bear no resemblance to our own geographic or population circumstance, to discover how they have legislated to limit the number of cows and how they have discovered innovative ways to charge farmers for the tax on these cows. It's all justified in order to save the environment and, obviously, because you're concerned about the long term viability of the dairy farming industry should global warming lead to a degradation of pastures. This inquiry will lead to a lengthy white paper, a green paper, then red tape and probably a black hole of regulation from which no dairy farmer can escape unless aided and supported by a bevy of consultants and lawyers acting on behalf of the farmer - and Daisy the cow. The cost of all this red tape and the compliance cost that goes with it make no improvement whatever to the quality of the milk bought by consumers but can be justified on countless grounds by the many hundreds of public sector spin doctors or by independent consultants who have been engaged - and paid for - by the government to look at the situation and who (totally unconnected to the fact that the government has paid for their services) conclude that the policy settings are appropriate.



The result?



The consumer finds long queues in their supermarket for milk because it's in short supply. We really don't have enough milking cows to go around but no one in government seems to be prepared to acknowledge the elephant in the room (or cow in the supermarket in this case). The price of milk, driven by a shortage of supply and combined with the new and high taxes paid by the farmer, and worsened by a black hole of regulatory complexity for the farmer which seems to suck money in without ever showing any sign of spitting anything out, rockets to the point that many consumers simply stop drinking milk. Only wealthy people can now afford milk. The working families who used to enjoy milk at reasonable prices now save it for special occasions. Or just do without. The producers see this happening so begin packaging milk in smaller and smaller containers – from 2 litres to 1 litre to 600 ml and finally the 250ml tetra pak, which costs a family roughly what a 2 litre container used to.



Many dairy farmers switch to growing something else or just leave their farms. This worsens the supply shortage. The government then spends huge sums of money on further studies and industry summits looking at how to make milk more affordable for families, without ever changing any of the three key factors which led to its price rise in the first place.



The government can't increase the number of cows or permit more dairy farms because the environmental lobby would howl them down for destroying the environment and would threaten to withdraw their preferences in the next election. They can't reduce the taxes on the cows because they've now got a budget that relies on milk taxes to pay for a wide range of services - like studies into how to make milk affordable and also their “affordable milk for working families” program which has become a cornerstone of their election platform. And as for less red tape ... well let's face it, what government ever in the history of this nation left its term of office with fewer rules and regulations and expensive compliance programs in place, than when they entered? Nope, that isn't going to happen either.



Some of the remaining dairy farmers begin to suggest that the solution really does lie in allowing them to grow more pastures and increase their herds, and to lower taxes and red tape, but this is attacked by a bevy of academics and government officials, who point out that a return to the days of the “Mc Milk urn” are simply not sustainable and that the farmers are only motivated by farm profits and don’t care about a sustainable future.



What if?



Now, what if we did the same thing to housing? Or have we done so already?


1 comment:

  1. Jack, your observations are spot on as usual. Look forward to seeing you late in August.
    Torn Blazer

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