Horizons #63: Organisational competition

09 December, 2021

by Professor Ross Kingwell, AEGIC Chief Economist

Competition is not just about price.

Often in introductory economics courses, diagrams are drawn of downward sloping demand curves and upward sloping supply curves and their intersection is known as the market clearing price. Implicit in these diagrams are a range of assumptions not always made evident to students. One of the key assumptions is the homogeneity of the good being produced and demanded.

Take the case of wheat. It’s often assumed that wheat is completely homogeneous. There are no quality differences between supply sources of wheat. It’s assumed that consumers are solely motivated by the affordability of the wheat available. The risk of timely supply, the end-use suitability of the wheat, the marketing and technical services that might accompany the purchase of the wheat are all ignored as potential influences over consumer purchases.

However, the reality in grain trading is that there are quality differences in wheat supplies and not only is there price competition among suppliers but there is also, perhaps less visible, organisational competition. It’s the role of organisational competition that I want to highlight in this blog post. Take the example of the US Wheat Associates. It has 15 offices, 13 outside the USA of which 7 are located in Asia. Through the US Department of Agriculture (USDA), the US government funds about 73% of the US Wheat Associates’ annual budget of approximately USD15.4 million (or AUD21.4 million). The remaining 27% comes from levy payments (called checkoff payments in the USA) paid by US wheat producers. About 12% of all levies paid by wheat producers in the USA are invested in US Wheat Associates.

It’s not only the US Wheat Associates that is part of the organisational competition faced by Australian grain exporters. There is also an even larger organisation; the US Grains Council (USGC).

The forerunner of the USGC was first established in 1957 and since then the USGC has maintained its focus on developing export markets for US barley, corn, sorghum and related products including distiller’s dried grains with solubles (DDGS) and more recently, ethanol. It has a full-time presence in 28 locations and operates programs in more than 50 countries.

The USGC is funded by member contributions and matched funding from the US government via two long-term government programs – the Market Access Program and the Foreign Market Development Program – both funded through the US Farm Bill. For example, in 2018, the USGC received USD13.4 million from member funds and USD12.8 million from government programs. This is equivalent to annual funding of just over AUD35 million.

USGC members include a wide range of feed grain-based companies who pay between USD5000 and USD8000 per year to be part of USGC. The geographical spread of the USGC staff and offices not only facilitates access to a wide range of potential buyers but also enables the USGC members to gain access to market intelligence to facilitate market trades. USGC staff, by being in the regions, can quickly identify market and technical opportunities and problems that can be remedied by the actions of USGC members and US government agencies.

Hence in the USA, over AUD56 million is annually invested in its grain organisations to engage with overseas users of US grains to enlarge and support their demand for US grains. By comparison, Australian investments in equivalent organisations to the USGC and US Wheat Associates are relatively minor. The combined annual core support for Grains Australia, AEGIC and the Australian Oilseed Federation is less than $11 million, one fifth spent by US competitors. However, the USA often produces over 5 times the volume of grain produced by Australia so the ratio of funding to production is similar between the two countries. It does mean, however, that in key Asian markets into which Australian grains are sold, Australia is more like a string of local hardware stores competing against the giant of Bunnings.

In summary, besides price competition, Australian farmers will also face organisational competition when exporting their grain to overseas markets.

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Horizons: the AEGIC Economics and Market Insights blog

Expert grains industry analysis and commentary from AEGIC’s Economics and Market Insight Team on a range of big-picture topics that affect Australia’s export grains sector.

 

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