Why should a farmer have money deducted for rail freight when his grain will never see the inside of a rail car?
That’s the question at the core of a letter from one farmer describing his recent experience delivering wheat to a local mill. He said he received the wheat board initial payment, which reflected the freight deduction for that delivery point.
The farmer pursued the issue by telephoning the board, which he said told him that the freight deduction “went” into the pool for that grade of wheat.
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To this farmer, that means “in simple terms, I, by supporting ‘local’ value-added industry, am subsidizing my neighbors’ grain which is shipped to China, Ethiopia or the U.S.A.”
His perception is understandable, since almost everyone talks in terms of a “deduction” for rail costs. The reality, however, is that no such deduction exists. It is an administrative fiction.
The only thing that counts is the price that someone is willing to pay for grain. If a miller is willing to pay $6 and it costs $2 for middlemen to move the grain by rail from the farmer to the miller, then the farmgate price is $4.
If a second buyer, located closer to the farmer, also wants to get some grain, he will have to offer the farmer $4 to be competitive with the first buyer. The fact that it may cost the second buyer only $1 for moving the grain by truck is irrelevant – the farmgate price is still $4.
That would be the situation regardless of whether the wheat board exists, because it’s the way the market works. Whether it’s a giant corporation or a small mill, the business is not going to pay more for grain than it has to.
When supplies are tight, local value-added businesses might offer a slight premium to get supplies. But in periods when elevator space is tight, they might get grain at a discount by offering immediate delivery opportunity.
The basic problem is that grain prices are set by impersonal global market forces that are not concerned with whether farmers are getting a fair return on their investment and labor.
In general, those between the farmer and the consumer set rates to cover their costs and profit margins, but farmers don’t have that ability.
That doesn’t mean farmers are powerless. They can co-operate through farm organizations to push for government regulation in cases where there is not enough competition to keep down transportation or input charges.
Farmers have also done extremely well in building farmer-controlled agribusinesses. And the wheat board tries to reach higher-value markets.
But, ultimately, farmers are price takers, not price setters.
