Friday, 5 June 2009

Buy British ... or not

Homepaddock has an interesting post on British dairy co-op in receivership. In part she writes
Dairying in Britain is not in a healthy state. Production and cow numbers have fallen prompting farming leaders to urge retailers to pay a fair price for milk.
Organisations including the NFU, NFU Scotland, NFU Cymru and the FUW have written to retailers and food service industry to call for action to secure Britain’s milk supplies.

In the letter, the organisations said retailers, discounters and the food industry need to help increase confidence among dairy farmers to stop them leaving the sector.

Everyone in the milk supply chain needs to make a fair profit and retailers needed to stop gambling with the security of milk supplies, it said.

“Our message is very simple. If you want to guarantee a supply of quality British milk, cheese and dairy products you must take steps to secure it,” it added.
New Zealand producers may be concerned that the industry-wide group asked retailers and food service companies to commit to sourcing British dairy products because that will be direct competition for our milk and cheese.

Anyone who thinks promoting Kiwi-made is still a good idea should take note of this because if we urge domestic consumers to buy local, we can’t argue when overseas competitors urge their domestic consumers to buy local too.
Homepaddock is right in that this is just a "Buy British" campaign, which is just as dumb as "Buy New Zealand" or "Buy American".

But what got me about the message quoted is the logic they seem to be using. Or rather the lack of logic. For a start they want retailers to pay a fair price for milk. And what is a "fair price"? I'm guessing they mean a higher price than they are paying now. But if retailers pay a higher price then consumers pay a higher price. But demand curves slope downwards. If the price goes up, the quantity demanded goes down. These two effects work against each other in determining revenues. Or do milk producers think the demand for milk is totally inelastic? Add to this the fact that if consumers pay more for milk they may end up buying less of other goods. How would this help the UK economy?

They also want "retailers and food service industry to call for action to secure Britain’s milk supplies". What actions? Retailers are there to provide what their customers want. What are they to do, force consumers to buy British milk at gun point? If consumer don't want to buy British, what are the retailers and food service industry to do?

And what is a "fair profit"? Profit is a residual, its what is left over, if anything, after costs have been subtracted from revenues. What is fair or unfair about this? Or it is believed that everyone in the milk supply chain can just specify this "fair profit" and all will be well. If it is the case that these business can specify a profit why don't they, and all other business, specify an infinite profit, that seems fair.

But there seems to be a more basic issue here, that of resource allocation. May be the fact that dairying in Britain is not in a healthy state is telling farmers that they do not have a comparative advantage in dairying, that other countries, like New Zealand, can do the job better and that consumers will gain if dairy products are imported. The message being sent to dairy farmers is that they have misallocated resources, the resources they are using in this form of farming would be better used in some other activity.

I guess the basic question is, Why should anyone take actions to secure Britain’s milk supplies? The best suppliers may be foreigners. That's what the gains from trade are all about.

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