Title: The Economics of Grain Producer Cartels
Published in: Working Papers Series
Author/s: James Gleckler and Luther Tweeten*
Year: 1994
Number: 94-1
Summary:
The objective of this study is to measure economic payoffs from a grain cartel. Two basic approaches to extract economic rents are considered: (i) Mandatory supply controls to restrict production and raise grain price, and (2) export price discrimination using export taxes or subsidies. The economic impacts of different producer cartel scenarios were estimated using a long-term, nine-region world trade simulation model incorporating the assumptions of neoclassical trade theory. The SWOPSIM program was used to write the model equations. Economic Research Service trade data for 1989 were used to initialize the model. Results reflect long-run changes from 1989conditions and are at 1989 general price levels. The model simultaneously estimated outcomes in markets for nine commodities: beef, pork, poultry meat, wheat, corn, coarse grains (other than corn), oilseeds (soybeans, rapeseed, and sunflower seed), oilmeal, and sugar. Cross-effects among commodities and input-output relationships between field crop and livestock production are accounted for by substitution and complementary coefficients in behavioral equations. Countries and groups of countries included in the model are Australia, Canada, the European Community (EC), European Free Trade Association (EFTA), the United States (US), Japan, and the rest of the world (ROW). The simulation results report the consequences of restricting only US grain production (wheat, corn, and other coarse grains) from 5 to 20% below the 1989 production level. Grain supply restrictions were presumed to be mandatory, hence taxpayers incurred no additional outlays over those in 1989 . World price increases were modest for wheat, but greater for corn and other coarse grains in part because of differences in market share among grains. US consumers of grain and grain products buy less at higher prices and are worse off, as is the country as a whole. Consumer surplus falls nearly $2 billion when grain supply is reduced 20 %. Higher grain prices and lower costs more than compensate producers for less output, despite lower receipts attending an elastic demand. According to simulation results, cartel-like action restricting US supplies by 15% would most benefit American grain producers. Consumers in the US and the world lose more than producers gain from cartel action restricting production and lowering US exports of grain. Other competing exporters enjoy net benefits from higher world prices. However, because the rest of the world is a net consumer, net economic welfare of other countries is reduced. Also, overall world income is reduced by a cartel. As additional global production comes under the control of the cartel, more producer surplus can be extracted from consumers. Results were simulated for grain producers in four developed countries or regions (Australia, Canada, EC, and US) forming a cartel and simultaneously restricting production from 5 to 20%. As expected, world prices rise more with the comprehensive grain cartel than with the US acting alone. The more comprehensive international cartel helps producers extract greater rents from consumers. It is notable that none of the supply restriction schemes would benefit the US as a nation. Rest-of-the-world and total world welfare losses mount when supply restrictions are tightened from 5 to 20% of market output. When the US alone tightly restricts grain production, it loses more than ROW. When the US, Canada, Australia, and the EC jointly restrict production, ROW incurs greater welfare losses than the US. Turning next to support subsidies without supply controls, we estimated that net benefits to producers are greatest with export subsidies, expanding exports by 30% and with an attendant increase in domestic prices. The cartel can subsidize exports with collections from producers, leaving its members with some net gain. Results are even more favorable for producers if taxpayers pay the export subsidy as under the current Export Enhancement Program (EEP). However, because national welfare is reduced, a government truly representative of the nation’s economic welfare would not rationally choose to subsidize exports. Overall US welfare is modestly increased when domestic price is lowered with an export tariff and exports decline. In contrast, the rest of the world as a net importer benefits from plans increasing US exports and lowering the world price of grains. But, any form of market distortion lowers overall global welfare. Total numbers are smaller but patterns are similar when only US com producers attempt the optimal subsidy or tariff strategy. A US com-only producer cartel would choose an export subsidy because the producers’ benefits are positive even if they pay the export subsidy. Outcomes were simulated in which percentage increases in US exports were matched by equal percentage increases in exports of other major competitors (Canada, the European Community, and Australia). Retaliation causes the average cost of subsidizing US exports to nearly double to achieve any given percentage increase in exports. Retaliation by competing exporters removes much of the attractiveness of US export subsidies. If producers pay for export subsidies, their net gains are sharply eroded with retaliation. Welfare losses to the US as a nation and to the world enlarge with retaliation to subsidies. Thus the US and the world have a stake in successful multilateral negotiation reducing subsidies and attendant retaliation. It is conceivable that an effort by producers to form a cartel would so alienate the public that Congress would terminate current commodity programs, including export assistance on grain. Net benefits to producers from cartel activity never approached the $7 billion in rents they collect from current programs. It seems unlikely that a producer group would risk gains of this size for the prospect of cartel rents a sixth the size or less from international markets. Gains to US producers are less for a wheat cartel than for either the feed grain cartel or for the wheat-feed grain cartel included herein. The unfavorable outcomes originate from the export demand for US wheat made highly elastic by opportunities to substitute feed grain for wheat in production and consumption especially in the long run. That is, a high wheat price and controlled production of wheat encourages importers to produce wheat, cut back feed grain production, and import low-cost feed grains.