By Hugh Maginnis, International Economist, Foreign Agricultural Service
U.S. Department of Agriculture
Agricultural state trading enterprises (STEs), used by some countries to control imports and encourage exports for noncommercial reasons, no longer have a place in global agriculture, says Hugh Maginnis, who helps develop U.S. agricultural negotiation positions for the Agriculture Department. STEs not only diminish benefits that other exporters expect in third-country markets, Maginnis says, but they may create additional costs for producers, prompt predatory pricing practices that drive other exporters out of particular markets, and keep more producers in business and more land in production than would otherwise be the case.
The new disciplines on agricultural trade established in the Uruguay Round and the globalization of international agricultural trade raise important questions about the role of state trading enterprises. Traditional reasons for maintaining STEs have included controlling imports, encouraging exports for noncommercial reasons (such as obtaining foreign exchange or removing surplus production), or establishing emergency food stockpiles.
However, rules prohibiting the maintenance of nontariff barriers through STEs and disciplines on export subsidies have eliminated most of their traditional purposes. As a consequence, agricultural STEs are a concern among many World Trade Organization (WTO) members because of their potential to distort trade. Much of the concern arises from the substantial market power wielded by monopoly STE exporters and importers, commonly referred to as single-desk sellers and buyers. Some of the common characteristics of single-desk sellers and buyers are described here, along with some of the potential trade distortions that may result from the operation of the single-desk system.
Single-Desk Sellers
Single-desk sellers have common characteristics that may give them advantages in international trade and may lead to trade distortions. These include a lack of price transparency; government financial backing that may insulate them from the financial risks normally faced by other exporters; an ability to control procurement costs by maintaining monopsony control over purchases for domestic and export sales; an ability to "price discriminate" using cross-subsidization, either between the domestic and export markets or between different buyers; and the ability to insulate producers from market prices through price-pooling schemes. These characteristics and the distortions that they cause may diminish benefits that other exporters expect in third-country markets. Besides their potential to distort trade, single-desk sellers may create additional costs for producers or allocative inefficiencies caused by production driven by nonmarket price signals.
Monopoly authority and the lack of transparency in export pricing may provide single-desk sellers with greater pricing flexibility relative to private traders. In the private export trade, commodity prices, which are in effect "replacement values" for exported products, are quoted daily on various market exchanges. Private exporters have no choice but to buy their export supplies at a given market price, which is widely known in the trade and to governments. Single-desk sellers, in contrast, are not required to reveal their transaction prices. This may put them in a position to disguise procurement costs and subsequent export prices, particularly when export sales are subsidized through direct or indirect government subsidies.
Many single-desk sellers benefit from the financial backing of the central government, either through direct subsidies or from government guarantees. Because single-desk sellers are quasi-governmental entities or direct government agencies, their operational losses, which generally have been caused by pooling account deficits, are in most cases reimbursed by the federal government. The actual intervention by the government, or the functional equivalent afforded through the assurance of government intervention, shields producers from risk and encourages production because producers can rely on support when faced with reduced revenue from declining prices. This encourages higher levels of production than otherwise would occur.
Single-desk sellers are monopsony buyers for export and frequently monopolists for resales in the domestic market. As such, they can force producers to accept lower prices than might otherwise be possible under more competitive conditions. This is particularly important when a country exports a substantial share of total production. Producers, who frequently have no alternative crops to cultivate for geographic reasons, have no alternative but to sell to the single-desk exporter and take whatever price is offered, giving the single-desk seller wide flexibility in export pricing. Additionally, this control leaves open the opportunity for the single-desk seller to reduce, delay, or otherwise manipulate the price it pays producers to acquire supplies. This pricing power may be behind a host of many other practices that can lead to trade distortions, including price discrimination.
In world markets, where prices are normally outside the control of sellers in a particular country, the ability to price discriminate may represent a significant advantage for a single-desk seller. It may also lead to higher levels of imports into particular WTO member countries than would occur under perfectly competitive conditions. Price discrimination occurs when a single-desk seller can differentiate its sales prices for comparable quality commodities between different destinations according to a buyer's ability to pay. The ability to discriminate allows a single-desk seller to maximize returns among a range of purchasers with different price elasticities by lowering prices to certain buyers without affecting its higher sales price in premium markets. Since single-desk sellers control their procurement costs, they have more power to raise and lower prices across different markets. If single-desk sellers are obliged to purchase all domestic production, the ability to price discriminate allows them to lower costs to whatever level is necessary to unload the product in foreign markets. Similarly, when single-desk sellers are driven by government policy objectives, such as maximizing production or exports rather than profits, sales in high-price markets can underwrite the sale of surplus products at uneconomical prices. Additionally, price discrimination encourages the use of predatory pricing practices, whereby a monopoly seller lowers its prices to drive other exporters out of a particular market. If successful, the single-desk seller can raise prices once the competition has been eliminated.
Price-pooling arrangements that are operated by single-desk sellers are intended to equalize payments to producers while minimizing the risk inherent in marketing their products. Under a pooling system, farmers deliver their product to a pool controlled by the single-desk seller in return for an initial payment. At the end of a marketing year, the single-desk seller tallies its total sales revenues and deducts marketing and other operational costs. The net revenue is then distributed to the producers. Under this system, each farmer, in effect, receives a blended price based on all sales for the year. Diversifying sales reduces the risk borne by producers, but it also leaves all export-pricing decisions to the single-desk seller, which may set prices based on a range of government policy objectives. Although pooling helps reduce market risk for producers by acting to stabilize prices received during the marketing year, costs are inherent in the pooling system. For example, producers of higher-quality products, those that have achieved marketing efficiencies, or those that deliver products to the pool during a period of higher world prices are effectively penalized because they may receive a blended price derived from a lower-quality grade or from revenue generated by lower-priced sales. As a consequence, wealth is transferred from high-quality producers to lower-quality producers, which may keep more producers in business and more land in production than otherwise would be the case.
Single-Desk Buyers
Single-desk buyers may be able to restrict or otherwise distort trade in several ways -- lack of transparency, interference with end-users, enforcement of burdensome requirements on imported products, and procurement of emergency stockpiles. These and other purchasing and marketing practices may raise domestic prices and impair market access opportunities for exporters. Monopoly control over imports and the resulting market power of single-desk buyers may allow them to restrict access for imported products based on government-determined criteria, not on commercial considerations. This decision can be made without regard to prevailing world market conditions or domestic demand considerations. Ultimately, this control gives the single-desk buyer the flexibility to support internal prices and to otherwise regulate demand for imports.
Single-desk buyers generally provide insufficient transparency regarding their purchases and sales. Information on import pricing, resale pricing, requested grades and quality, and purchase quantities are not available to traders or the public. Lack of this information makes it difficult for exporters and domestic end-users to do business and may allow the single-desk buyer to disguise trade restrictions.
State control of marketing and distribution may interfere with end-user purchasing decisions -- in contrast to direct contact between exporters and end-users, which allows the specification of grade and quality and leads to increased value of imported products to the end-user. This benefits end-users and consumers, but it can also benefit exporters who develop marketing relationships and receive higher prices by dealing with end-users who value the grade and quality of their products. However, when these decisions must go through single-desk importers, the importer can enforce other government policy objectives, such as discouraging imports of competitive grades and qualities or "luxury" imports, that restrict imports.
Single-desk buyers may be empowered to enforce burdensome requirements on imported products. Marketing control, including control of internal marketing and distribution of imports, also gives the single-desk seller the ability to direct imports of inferior quality products that may be less competitive than domestically produced products. Retail pricing, promotion, and distribution of imported products are often controlled by the single-desk buyer. This may interfere with consumer preferences and efficient resource allocation, especially when marketing strategy is formulated by a state-controlled entity rather than a private firm that is subject to market competition.
Economic Perspectives
USIA Electronic Journal, Vol. 4, No. 2, May 1999