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Why would farmers want to leave a successful cartel?

The economics behind the controversy surrounding the Conservative government's decision to remove the Canadian Wheat Board's (CWB) legal monopsony in wheat and barley are somewhat opaque at first glance.

The raison d'être of the CWB is the market power of the single desk: by operating as a large, single actor, farmers can obtain higher prices than what they could individually get on the open market. Producer cartels are generally illegal in Canada, and the usual arguments for dismantling legal exemptions such as the CWB are based on obtaining lower prices for consumers. But that case isn't the one that's being made here.

The government and what appears to be a significant minority of farmers are claiming that removing the single desk for wheat and barley will increase the prices the farmers receive for the output. This is a puzzling claim on the face of it; available evidence seems to suggest that the CWB is indeed able to use its market power to obtain higher prices. So why would anyone want to leave a profitable cartel?

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One way of looking at the issue is as an example of a principal-agent problem. As 'principals', farmers want to obtain the highest possible farmgate price they can. But as 'agents', the people hired to run the CWB may have their own interests to consider. This sort of problem is fairly common: think of the relationship between the shareholders and the managers of a corporation.

A study published in the American Journal of Agricultural Economics notes that in addition to being a monopsonist in Canadian wheat and barley markets, the CWB is also a monopolist in the provision of marketing services to farmers. The costs of these services are deducted from the prices farmers receive, and there are no competitive pressures to keep those marketing costs down. The authors calculate the prices farmers receive after these costs are deducted and conclude that "if the CWB does somehow earn a large premium in world markets it does not show up in the farmgate price."

Each farmer's situation is unique, so it may well be that for a majority of producers, the higher prices provided by the CWB offsets its costs. But this story does offer an explanation for why some farmers may find it in their interest to leave what appears to be a successful cartel.

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About the Author

Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative. More

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