Executive Summary

This paper considers evidence on whether deregulation of single-buyer Producer Boards is likely to yield net benefits to producers, relevant industries and the New Zealand economy. It focuses on the static and dynamic effects of the statutory single buyer powers of the Dairy, Apple & Pear and Kiwifruit Boards, and concludes that on balance, the benefits of deregulation are expected to significantly outweigh the risks posed.

New Zealand dairy exports account for less than 2% of world dairy production; apple exports 1.7% (11% in season) and kiwifruit exports approximately 25% (63% in season). The Dairy, Apple & Pear and Kiwifruit Boards are not single sellers in the world market, but are the sole buyers of New Zealand products intended for export. There are static and dynamic effects of statutory single buyer status:

Static effects:

• The hypothesis that has been advanced by the Producer Boards is that single buyer status allows them to exercise market power, influencing price received by varying the quantity of supply. The paper notes that:
• there is no compelling evidence that New Zealand can exercise market power in world food markets;
• even if New Zealand had a large market share, it is unlikely we would be able to charge a price premium for quality products because our competitors would undercut us and we would lose market share; and
• price premiums do not necessarily indicate market power, but can reflect differences in product quality, reliability of service and the relationships that New Zealand marketers have built up with customers over time.
• If the market power hypothesis is accepted:
1. The evidence suggests that any market power can be exercised – even to a greater degree – without statutory enforcement of the single buyer status.
2. There are offsetting static costs of the statutory single buyer status:
• There is widespread evidence that statutory monopolies become inefficient and ineffective because they do not have to compete;
• Single buyer Producer Boards do not have to compete for supply; therefore any inefficiencies come directly out of producer returns;
• Some evidence suggests that alternative exporters (and, indeed, the Boards) could export more effectively, at lower cost, and with higher producer returns, without statutory single buyer status.

• Deregulation will also encourage greater transparency and accountability and is likely to lead to better terms of payment being offered to producers;
• “Weak selling” refers to the possibility that New Zealand exporters will compete against each other in world markets; thereby bargaining away any gains from market power. However:
• it is unlikely that New Zealand can exercise market power;
• weak selling is commercially irrational (and therefore probably temporary), and may be less likely due to trends in supply chain management; and
• the static benefits of deregulation – including better incentives for efficiency and effectiveness, better accountability, better terms for producers and the ability to diversify risk – are likely to outweigh any risk of weak selling.

Dynamic effects:

• The dynamic benefits of a competitive market are likely to be significantly greater than the static benefits. These include:
  • greater opportunities and incentives to innovate;
  • more flexibility and responsiveness to markets;
  • more investment and use of technology;
  • more efficient capital utilisation, leading (over time) to better returns on producers’ investments (both on-farm and off-farm);
  • an ability for producers to access their off-farm capital; and
  • more opportunities to add value to primary produce.

• Although it is not possible to definitively prove the case for or against statutory single buyers of agricultural and horticultural produce, a balanced assessment of the evidence is that the risks of maintaining statutory enforcement of Boards’ single buyer status are likely to significantly outweigh the risks of liberalisation.

Compulsory cooperatives

• There is mixed evidence as to whether cooperatives perform as well as standard corporates. The inability of the Producer Boards to choose alternate corporate forms is likely to blunt performance and accentuate several inherent potential disadvantages of the cooperative form.

• The evidence suggests that the cooperative payment systems of Producer Boards impose an economic cost. This cost is likely to be diminished over time by deregulation.