“Opportunity Prices” Versus “Direct Payments”: The Culture Clash Between US and Canadian Agriculture

Opportunity prices.  Think about it for a minute.  What does that mean?  In the old days when I plied the economics halls at the University of Guelph, I delved in “opportunity cost” every day.  That meant the economic cost of something in terms of an opportunity forgone and the benefits, which could be received from that opportunity.  The new buzz phrase of Ontario’s risk management program (RMP) is “opportunity prices” or prices forgone, measured over time on what a farmer might have priced crop at.

The distinction between “opportunity prices” and target prices or average prices is very important.  The new RMP currently being debated at cabinet level in Ontario is all about these new “opportunity prices”.  It’s clever from an agricultural economic perspective, a first in agricultural stabilization policy.

How will “opportunity prices” be measured?  And how will farmers like it?  Those two questions are blowing in the wind as the new RMP is balanced before the Ontario provincial government officially goes to the polls starting September 12th.

From what I’ve learned “opportunity prices” will be an average of the cash prices farmers could price grain over a specific period. (Possibly six months)  However this may prove difficult in some commodities.  For example finding the right “opportunity price” for a bushel of corn will be tricky.  What do you measure, the elevator price, FOB bids, Western Ontario feed bids, or the ethanol bids?  At any one time the difference between these bids could easily be 50 cents/bushel.  So determining an “opportunity price” for corn largely depends not necessarily on price discovery but more the method of delivery to the end user.  It’ll be a tough task.

Confused?  Don’t be at this early stage.  One ingenious aspect of Ontario’s risk management proposal needs to be repeated in each province and all throughout the agricultural policy process.  That was that farmers took it upon themselves to develop the policy themselves.  Looking back this move was very prudent.  How many times have Canadian farmers waited in the wings for government to help solve their problems, only to be disappointed with what they got? (CAIS)  By putting together the RMP, Ontario farmers forced their will on the political discord.

That doesn’t mean what’s being proposed is perfect.  However, as I said last week it’s pretty solid from my perspective.  The role of “opportunity prices” might come back to haunt farmers.  Simply put, even the best commodity marketing minds don’t know what prices are going to do.  Also, many times especially in the era of our high dollar cash prices will not give producers a price for profit.  Making the assumption those farmers can swim against that tide by making savvy marketing decisions is one facet of RMP, which at the end of the day may not work.  However, at this early stage the wagon is clearly ahead of the horse.  Farm groups need some type of provincial approval before they can tweak the fine print.

It’s interesting stuff especially when you look at some of the goings on down south with our American friends.  A few weeks ago I wrote about the new 2007 US farm bill.  It’s still meandering its way through the Senate chamber.  Many analysts think its going to remain largely unchanged from the 2002 bill where producers who produced commodities like corn and soybeans received large direct government subsidy payments regardless of what prices are doing.  That’s 180 degrees opposite of what is being proposed with RMP’s “opportunity prices”.  It’s a totally different agricultural economic culture.

Take California Senator Barbara Boxer comments with regard to direct payments to cotton and rice producers for example.  Quoting from DTN Political Correspondent Jerry Hagstrom’s article “Significant Farm Bill Reform Unlikely”

“It’s not an easy issue for California,” Boxer told the San Francisco Chronicle. “We have our rice people and we have our cotton people. Besides the fact that it’s a huge business and a huge export, we also have the opportunity here if things go the way I think they will go for cellulosic fuels to be developed out of the rice straw. So I don’t want to give these crops a bad name, because they have some really great potential.”

Hello.  Could you imagine any Canadian political leader ever saying anything even close to that?  Hardly.  Sure it has something to do with their political system versus ours Vis a Vis the elected US Senate.  However, its obvious Americans respect their farmers much more than their Canadian counterparts.  Food is cheap and plentiful and if that means direct payments to American farmers, it’s a small price to pay.

The price has yet to be paid in Canada.  “Opportunity prices” are a far cry from direct payments.  In this country we’ll never have what the Americans have.  However, for every farmer in Canada, Ontario’s proposed RMP breaks new ground for future agricultural policy.  Yes, “opportunity prices” will set the bar high.  With Ontario set to possibly launch RMP with a three-year pilot program, you can bet everybody will be looking to measure its success.