An Approach To Ensuring Efficient Price Setting By Global Dairy Company
6 April 2001
Strictly Confidential
1. Introduction
The proponents of the Global Dairy Company (GDC) have indicated that they are committed to retention of the co-operative form of business organisation. This means that farmers must invest capital in the "processing" operations of GDC in proportion to the milk that they expect to supply. Efficiency requires that farmers may enter or exit1 GDC at the fair market value of their investment but there is no external market mechanism to establish that value. A fair market value for the processing assets of GDC, and for the raw milk that farmers supply is necessary to ensure that the performance of investment in different assets can be assessed. Efficiency also requires that the milk supplied to and the capital invested in GDC earn competitive returns for farmers despite the absence of effective domestic competition in this market. The returns paid to farmers will provide a benchmark against which the pricing of wholesale milk contracts for processing companies may be benchmarked.2
In our view, an effective and efficient means of ensuring efficient pricing by GDC is to ensure that GDC has incentives to use that information that it has to establish fair market values, and that the management of GDC bear the consequences of the pricing decisions that they make. As we explain below, open entry to and exit from GDC is a necessary condition for GDC to have the incentives to set and make a market at the efficient prices.
1 By entry and exit we mean, unless otherwise
stated, expansions and contractions in supply by existing farmers as well as entry and
exit of farmers.
2 We note that the actual price paid by a purchaser or to a
seller of wholesale milk will be endogenous to other terms of the contract (such as the
allocation of risk-bearing relating to price fluctuations through time).
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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