In what looks to be a confusion between process and outcome, Federated Farmers wants an economist to inspect Fonterra’s dairy auction (HT: RNZHerald).
Commodity auctions are pretty straight-forward. They are not like a spectrum auction, where the value I attach to one chunk can depend on what other chunks I own. You’d have to be pretty incompetent to screw up the design of a commodity auction.
It looks to me as though the Feds mainly don’t like the fact that dairy prices have been falling since the auction started (apart from the last round when the price went up). They are not alone; the Europeans have a similar complaint.
There must be a fair chance that the market is working properly and demand is just weak (GFC anyone?). While it would be excellent economist-geek fun to get an inside look at the dairy auction process, I would not be holding my breath when looking for poor design.
It would also be interesting to compare with whatever process FF thinks would work better. I don’t know the structure of the market well but an auction can achieve greater revenue than price-posting if there are many buyers competing. Revenues could have been even lower if an auction was not used.
is it possible that FF percieve some form of tacit collusion is occurring when Fonterra and others post prices? whereas running an auction removes or reduces that collusion and brings the market closer to perfect competition.
Therefore by announcing higher prices Fonterra can influence the posted prices of its competitors and they all make more $, OR running an auction signals lower prices to competitors bringing prices closer to true costs and perfect competition.
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