I find it interesting that the (Canadian Wheat Board) uses the argument that multiple sellers in a market will push the price lower.
In a radio interview Maureen Fitzhenry, a spokesperson for the CWB, states, “– in a pure open market, the law of economics is that there becomes a single price – things tend to arbitrage down to the lowest, sort of, possible value.”
Arbitrage is actually the market force that keeps markets from going too far in one direction or another. In an open market there are many buyers as well as many sellers. What Ms. Fitzhenry and the CWB fail to present is that there are many buyers as well, whose market activity would stop the drive of prices lower and would even drive prices higher when warranted.
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In the March 3 issue of theProducer,Glenn Tait responds to my letter about the Australian experience after deregulation as having the opposite effect.
His argument now is that since there are many buyers of wheat they try to “undercut each other to gain market share (and) are more likely to drive prices down.”
How is this possible? To gain market share a buyer will lower his price? I cannot remember this economic logic during my studies to complete my master’s degree in economics.
Buyers of grain are indifferent to the price of the grain they are purchasing since they hedge their purchases with a futures position. If they do not do this it can become very costly as the CWB, found out when trying to speculate on the futures market in the 2007-08 crop year.
Buyers of grain make a margin on the amount of grain they handle; the more they handle the more they make.
The price they pay is irrelevant as long as they can hedge the purchase with an offsetting sale, although they may offer a premium price to attract more tonnes to increase the amount of grain they handle.
It seems that the CWB would like you to believe many sellers will drive the price down and Mr. Tait would like you to believe that many buyers will drive the price down.
In an open market, many buyers and many sellers interact to find a point of equilibrium, a price where they transact. Nowhere in any economics textbook or journal does it say that prices in an open market are driven to their “lowest possible value”.
If that was the case the price for comparable wheat in the U.S. would be lower than the CWB’s price for wheat since the multiple sellers and buyers in the U.S. are ‘driving the price down.’
A simple phone call to an elevator just south of the border will confirm this is not the fact. The open market will increase the price we currently receive.
Greg Petryshyn,Foam Lake, Sask.
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