Trampling Price Signals

When we were kids in Oklahoma checking cattle with my dad, he would always ask us, “What do you think of that steer?” or “Which of those heifers do you like better?”  We acquired the ability to judge the physical traits of cattle that way.

Stockers on winter rye grass pasture in SE Oklahoma

But it was not until we were allowed to buy cattle ourselves that the concept of price was thrown into the equation.  All of a sudden, that steer that we liked the most was not necessarily the steer we would buy.  Price came into the decision-making process…when it was our own money at stake!

When my husband, Matt, and I operated our feedyard in Australia, Japanese customers wanted our beef.  And we were happy to sell it to them, of course.  But we didn’t give the beef away.  We had to cover our costs of production and make some profit to justify our time, risk, and investment.

About four times a year, we would get a call from one of our Japanese customers asking us to provide hormone-free, antibiotic-free beef.  Matt and I would work up the numbers, call them back and say, “Yes, we can do it.  And the price will be $X.XX per kilogram (significantly higher than the good-quality product we were providing already).  Every time, the Japanese buyer would call back and say, “We’ll just stick with your normal 150-day feed beef, Mateo-San!”

Matt in Japan with one of our lovely customers.

We were happy to give the customer what he wanted.  He then had to choose what he wanted given a certain price.

This is how things work in a free market.  Consumer preferences are exhibited every minute of every hour of every day through price.  Producers respond accordingly.  This is as it should be.

But what happens when the critical link between producer and consumer is broken?  Imagine all beef producers being forced to contribute to one organization that then speaks on behalf of everyone in the beef supply chain. The treasured “single voice” is achieved.  This organization is now “The Beef Industry.”

Imagine now that “Industry,” on behalf of all beef producers, commits to stopping the use of implants (hormone growth promotants, or HGPs) in response to media and activist campaigns against the use of HGPs in beef production.  The campaign claims that this is what the customer wants.  And of course, we must always give the customer what he wants.  The customer, after all, is always right.

In this case, both consumer and producer will suffer, because choice is removed from the equation.  (Ironically, the “environment” suffers, too, because we are foregoing a technology that allows us to produce more food using fewer natural resources.)  No more do consumers get to choose between non-HGP-treated higher-cost beef and HGP-treated lower cost beef.  This, of course, hurts beef customers.

But because those customers will then cut back on beef consumption due to the higher cost, producers will see a decrease in the quantity of beef demanded.  This will effectively bring the market price back down.  Producers will end up with higher production costs and lower market prices.  That means decreased profitability.

The customer IS always right.  But in order for the market to work, he must have all of the information – product and price – free of bastardization by government or outside pressure groups, in order to express his preferences.

Under the guise of “protecting the industry,” though, top-down mandates on how (not) to produce take away consumers’ choice and producers’ ability to adapt to true market demand.

Contra our goal of “win-win,” this is wholly a lose-lose scenario.  Unfortunately, it seems to be the scenario playing out.

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