The Wheat Industry as a Common Pool Resource


The Wheat Industry as a Common Pool Resource.

Summary

This paper is a direct response to an appeal for data on stocks of
wheat held by Farmers, as the Government wants to decide as to whether
to allow the Milling Industry to import wheat, to cover a perceived
shortfall.

It recommends that the Government takes a longer term view of the
Development of this Country and only makes this decision with the
active participation of the Wheat Farmers, Millers and Bakers. This
participation between the different parties should be built around the
principles of good Common Pool Resource Management.

Introduction

We are all familiar with the phrase “The Tragedy of the Commons”. I
don’t know who coined the phrase, but I was certainly a believer.
Until that is, I read the work of Elinor Olstrom, certainly the first
(and possibly the only) woman to ever receive a Nobel Prize for
Economics.

She spent her career studying Common Pool Resources (CPRs) and, far
from confirming that they are doomed to suffer from the Tragedy of the
Commons, she has found many examples (pastures, fishing, forests,
underground water) where communities have found ways of sharing these
resources sustainably. My favourite is a 400 year old irrigation
scheme in Spain. Being that old it has no pumps or pipes, but is
entirely dependent on canals; they have rules to make sure the people
at the ends of the canals get their fair share; cheats are announced
in Church on Sundays!

Once you think about it, CPRs are everywhere – roads, national grids,
town water supplies (Cape Town please note) and. . . wheat markets. Us
farmers all want to be able to produce as much wheat as possible (but
still be paid top dollar). Each farmer feels (s)he has a right to
produce as much as possible, without appreciating that this will
reduce the price. Millers want as much wheat as possible (but at
bottom dollar). They also want to be able to sell as much flour as
possible, but still maintain a decent margin. So the Wheat/Flour/Bread
industry has all the characteristics of a CPR.

We face a choice: we can suffer the Tragedy of the Commons, or we can
use the insights of Elinor Olstrom to learn how to manage a CPR and we
can build a Wheat/Flour/Bread (WFB) industry that is beneficial to all
of us, including the Consumer.

Goal

There are five major players in this WFB CPR – The Government, the
Consumers, the Bakers, the Millers and the Farmers. Some individuals
or corporations are actually several of these at the same time, and
mostly manage to handle the conflicting wishes of each sector. At the
same time, there are (what has become known as the Chicago School of)
Economists who argue that the most efficient way of reconciling these
conflicts is to leave it to the markets – and the markets will provide
the most efficient solution. There is now increasing evidence around
the world that “Free” markets have failed – UK Rail and Water, to name
but two. Few of these free-market economists would advocate a total
lack of city planning – leaving all urban development to a free
market. Therefore, I think there is a strong case for sitting around a
table and actually trying to PLAN a wheat industry that is satisfying
to all sectors within the WFB CPR – and indeed outside of this sector.
(See Elinor Olstrom’s Nested Rules below.)

The Government (and Consumers) would like to see a steady supply of
the cheapest possible, highest quality bread. Government would also
like to see as many local jobs as possible, to help reduce
unemployment.

The Bakers, Millers and Farmers would all like their sector to be
profitable in most years.
Government should also like to see the amount of wheat produced in
this country expanding – to not only keep up with population growth,
but also to meet increasing demand. They ought to want that the wheat
is produced at a lower total foreign exchange cost, than the cost of
importing wheat from outside of Zambia.

There IS a significant price differential between our (generally high
quality) wheat that is produced in Zambia, and the world market price,
landed in Zambia. This imported wheat is generally of significantly
lower quality, so Government ought to want to see this differential
coming down. (Some of it may be sourced from regions where the wheat
has enjoyed significant subsidy.) They also ought to want to be
certain that the higher quality wheat is of benefit to the consumers –
that the quality fraction is not removed in some way, and used in
stock-feed (say).

With these different aspirations in mind, I think we can summarize the
wishes as follows:
An expanding Wheat industry, that produces good quality wheat, at a
Foreign Exchange cost that is lower than the current cost of importing
wheat (100% Foreign Cost) at a price (averaged over the long term)
that slowly closes the gap between locally grown and Import Parity
Price; with all sectors of the Economy sharing reasonable profit
margins.

One other point we should bear in mind – made by Adam Smith over 100
year’s ago. “That the aims of the Miller and of the Consumer are
IDENTICAL: to make this year’s harvest last until next year’s
harvest.”

Discussion

With those goals (and the Adam Smith observation) in mind, and,
sitting around a table together, we ought to be able to formulate a
Policy that might meet these aspirations. Such a Policy, although not
written in stone, would be recognized by all players as being the
basis for the wheat industry, and therefore, all players could act
accordingly, and make the long term decisions that are required, to
grow particular parts of the WFB industry to meet those aspirations.
(Elinor Olstrom emphasizes that rules need to evolve over time, as the
situation changes in the longer term.)

At this point I should introduce Elinor Olstrom’s Eight Principles for
a successful CPR.
1. There must be well defined Boundaries.
2. The Rules of the Resource should be developed and respected by all
members of the Community.
3. Monitoring must be transparent and effective.
4. That there should be a graduated system of punishment for offences.
5. The system of punishment should be quick and transparent.
6. Any conflicts should be resolved quickly and openly.
7. The rules of one community should be “nested” within the rules of
the surrounding communities.
8. The rules and wishes of the community MUST be recognized, supported
and defended by Government

Going through those 8 rules, we need to apply them to the WFB sector.

Rule 1 – Well defined boundaries.
In this case, we would need all Wheat Growers to be registered, and
their production targets listed – the data to be open to all.
Similarly, all Millers of wheat and all significant Bakers. Only
participants in this scheme may benefit from it, and we most certainly
do NOT need any government body to ‘regulate’ it! No WARMA (Wheat and
Rice Management Authority!) If, under the special circumstances that
are provided for under these rules, it is decided to allow an
importation of wheat, then ONLY millers, registered in the WFB sector
may do so.

Rule 2 – Agreed Rules.
I cannot predict all the rules that the WFB sector will deem
necessary, and there will be many, but I will propose a sample, just
to give readers an idea.

General: No importation of flour or bread – i.e. wheat to which value
has been added outside of Zambia. I know this flies in the face of the
Chicago School and the WTO rules, but, I fervently believe that our
Government has a responsibility to create and protect as much Zambian
employment as possible.
No importation of wheat allowed if it results in a carry-over of stock
beyond the START of the next harvest.
The gross margin of each branch of the sector – Wheat, Milling,
Baking, should be based on some established Costs of Production. Each
sector can develop their own cost of production, but each sector is
committed to improving their efficiency over time.

Farmers: The farming community will commit to increase wheat
production by at least 3% a year – rolling average – to keep pace with
population growth. Faster if demand grows faster.
Half of the annual expanded production will first be offered to new
entrants, to prevent the establishment of an entrenched monopoly.
400,000 tonnes production 3% growth, 12,000 tonnes growth, 6,000
available to new farmers. All other farmers are free to expand at 1.5%
growth per annum – more if the demand grows faster.
The price of wheat should tend to fall against a fairly standard Cost
of Production model. This would put pressure on farmers to learn how
to become more efficient. (This fall could not be maintained
indefinitely at say 3% a year. A 3% improvement in the first 2 years
might be possible (there is always some low hanging fruit) but it will
become increasingly difficult.)

Millers:
All Millers who wish to participate within this scheme must be
registered. No Miller outside the scheme will be allowed to import
wheat. Ever.
Millers will also work within a fairly standard Cost of Production. If
there is so much production of wheat that the market cleared at the
lower end of the scale, Millers will drop their price of flour
accordingly – the two move in unison.
The FIRST reaction to a perceived shortfall, is an INCREASE in the
price of flour – which should slow demand. It is only if a 20% (say

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