Static effects of statutory single-buyer status

Market power

Market power enables a firm to exercise dominant influence over the production, acquisition, supply, or price of goods or services in a market. If Producer Board legislation allowed New Zealand to exercise market power in the relevant markets, and the exercise of the power resulted in an increase in returns to New Zealand (net of the costs imposed by the monopsony), the New Zealand economy would be better off. The points that need to be determined are therefore:

1. whether New Zealand has market power in offshore dairy, apple and pear, and kiwifruit markets;
2. if there is market power, whether the statutory single-buyer is the most efficient means of exercising that power (including whether it is necessary to do so); and
3. if market power is exercised, whether the benefits are returned to New Zealand.

Does New Zealand have market power?

Market power could be exercised either on the entire world market[6] or by allocating produce between different markets in accordance with conditions in those markets (thereby enabling supply restriction and exercise of market power in markets where it exists - Zwart and Martin (1987)). Until recently there have been few robust attempts at estimating whether New Zealand has market power in these markets, although the existence of market power has been widely claimed and questioned.

Market share is commonly used as an indicator of market power. As noted above, New Zealand dairy exports account for less than 2% of world dairy production[7]; apple exports 1.7% of the world total; and kiwifruit exports approximately 25%. Our share of in-season (ie Southern Hemisphere) production of apples and kiwifruit in 1996/97 was 11% and 62% respectively (Source: Decofrut, USDA). However, even if New Zealand had a very large (90% or over) market share, it does not necessarily follow that we are able to consistently exercise market power. Market power also depends on factors such as the behaviour of competitors (in the specific product and substitute products), the responsiveness of consumers to price changes, or barriers to entry (Goldberg and Knetter 1995)[8].

If New Zealand produce earns a price premium in some markets, this does not necessarily imply that we have market power. In some cases, an observed price premium may be offset by payment of promotion incentives to customers. In other cases, the price premium may be due to better quality produce, better customer service or a range of other factors unrelated to market power. We are therefore only concerned with whatever market premium exists solely due to the existence of market power, and how much of that is passed back to New Zealand.

In 1996, the Treasury commissioned agricultural economists Walter Thurman (North Carolina State University) and Frank Scrimgeour (Waikato University) to undertake an empirical study of some of the economic effects of single desk Producer Board regulation.[9]

The study used econometric models and large datasets to try to measure some of the costs and benefits of single desk regulation. It attempted to measure New Zealand’s market power by comparing movements over time in revenue per unit of dairy produce, apples, pears and kiwifruit with changes in New Zealand production. Price increases in a time of reduced production may indicate the existence of market power. The study found that:

1. New Zealand may have some market power in the dairy, apple and kiwifruit industries, although the amount of power is small;
2. Producer Board price pooling and return bundling impose a small cost on Producer Board industries and the New Zealand economy^; and
3. Although the effect of unbundling returns would be to decrease farmgate returns (and have separate dividends paid to shareholders), output of the dairy, apple and pear and kiwifruit industries, in the absence of single desk status, would be considerably higher due to improvements in overall efficiency.

The Thurman study found a weak statistical relationship along these lines for dairy products and kiwifruit, but the opposite relationship for apples (ie an increase in volume supplied is followed by an increase in price). The study estimates the potential benefits of exercising market power at $81-113 million per year[10]. This can also be viewed as the potential cost of weak selling. The Thurman study therefore tests some of the arguments for and against deregulation. However, it does not purport to be a complete analysis for the sake of informing policy analysis.

These results must be interpreted carefully because:

• the methodology does not provide a definitive measure of market power or weak selling. It indicates a relationship between supply and world prices, not the effects of changes in market structure;

• there were significant data problems which affect the validity of the market power finding, especially in light of the counter-intuitive results for apples;

• the study does not determine whether the Boards are actually capturing the benefits of any market power (through higher prices); nor whether they are passing them back to producers and New Zealand (benefits may be offset by inefficiencies within the board structures);

• the ability of the Boards to exercise market power is limited by the requirement for them to market all produce intended for export (once quality standards are set). The only counterbalancing factor is the ability to allocate product between different markets; and

• if the Boards currently exercised market power in individual markets, this could be expected to accelerate erosion of market share as producers from other countries entered New Zealand’s markets to capture the rents we were trying to exploit. The Apple and Pear and Kiwifruit Boards have been consistently losing market share to other Southern Hemisphere producers (and Northern Hemisphere produce stored under controlled atmosphere) (Deloitte 1996; Decofrut; USDA).

The Dairy Board has increased its share of the internationally traded dairy market, but this has been primarily due to the need to dispose of increased milk production in New Zealand rather than demand for New Zealand dairy produce.

On balance, the Thurman Study’s findings do not appear to provide substantial evidence that New Zealand can exercise, or even has, market power. Firstly, variations in production in New Zealand may reflect variations in Southern Hemisphere or World production due to, for example, the El Nino effect. This would cause variations in a much larger proportion of World production than just New Zealand’s (we are not aware of evidence on this issue). Secondly, even if New Zealand does have a large share of the market at a particular point in time, we may not be able to charge a higher price than our competitors for the same product as a result of it because those competitors (albeit small) would likely undercut[11]. Thirdly, the Thurman methodology, data limitations and counter-intuitive results produce a net effect so small (given the size of the industries) as to be almost trivial.