Monday, November 8, 2010

Price Discrimination - Is this really single desk power?

The CWB and single desk supporters often cite “price discrimination” as the foundation of single desk market power.  Price discrimination is the ability to sell into different markets at different prices at the same time.  Supposedly, the CWB has this ability through the single desk.  A search of the CWB website for the phrase “price discrimination” ironically provides only one reference (in a description of a 1997 barley study):
“The key difference between the CWB system and a multiple-seller system is the ability to price discriminate.” 

In theory, competing multiple sellers offer the price lower in the high priced markets until they equate to the prices in the lower priced markets.  The CWB refers to this as the Law of One Price.

But the CWB competes in the global market which is a “multiple seller” market.  So, according to the CWB’s theory of the Law of One Price, the various markets within the global market should be all at one price.  And yet, they are not.  The CWB mentions premium markets in the 2008-09 CWB Annual Report (page 33):

“The global market for wheat, durum and barley is highly competitive.  …all competitors are seeking ways to sustain and expand their share of the global market, particularly in premium markets.”

Why have “premium markets” kept their premiums, even with multiple sellers competing?

There are many reasons why different buyers will pay different prices on the same day.  In fact, the same buyer may pay two different prices on the same day from two different suppliers.  Mostly it comes down to buyers have different needs (quality, risk diversification, political or strategic needs) and sellers have different offerings (quality, consistency, timing, available freight). 

CWB Studies

The CWB has studied price discrimination in barley markets.  The studies looked at all the CWB sales over a period of time and categorized them by destination country.  They showed that, on average, Japan paid more than the US market, and the US market paid more than the rest of the world (ROW).  This was perceived to show that the CWB was able to price discriminate into the Japanese premium market without pressing its price lower.

But the Japanese buy barley from Australia too, making Japan a multiple seller market.  Using the CWB’s logic about multiple sellers, we would expect to see the price in Japan pushed lower to equate to prices in non-premium countries.  But we don’t.

Now consider the canola market.  Japan buys Canadian canola year round, through all the peaks and valleys in price.  Other markets like China, Mexico and Bangladesh typically buy Canadian canola only if the price moves low enough to generate interest.  In fact, open market traders will sell to these other markets at a lower price than they will sell to Japan – on the same day.  (I want to keep these commentaries short; if you want a more detailed explanation as to why they would do this, drop me a line at )

In just about any year, Japan’s average purchase price for Canadian canola will, on average, be higher than other destinations.  However, this occurs in a multiple-seller environment and does not mean any marketer discriminated on price.

Can the CWB price discriminate?  Sure – but so does the private trade.  Grain markets may be "commodity" markets, but in reality, they often trade on the basis of the "product" being offered which includes, service, quality, timing, and other aspects of the offering. And the CWB does not have a monopoly on those.

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