Market Failure and Middlemen

Long, long ago, in the early 1980s, a group of Western Australian farmers decided they had had enough of the growing spread in tractor prices between what was on offer at their local dealer and what American farmers were paying. So, they decided to bypass the local dealer network and order directly from the land of the free, thereby proving that middlemen exist only if you allow them.

But exist they do, and unfortunately, agriculture seems to be full of middlemen, be it grain traders, livestock agents, ag chemical suppliers, or even banks, all lining up to clip the ticket on a transaction. The fact that in this day and age their services may be largely redundant—due to the increasing centralisation of warehousing, improved overnight transport, and most importantly the internet—seems to have been ignored. Add the fact that there remains a large price differential on what are relatively simple transactions, and it tells me there is massive market failure out there.

For non-economists, market failure occurs when the allocation of goods and services is inefficient, allowing rent seekers (those who clip the ticket for little effort) to stand in the middle and make excessive profits. In this case, middlemen claim they are offering an essential service to farmers—be it convenience, parts, mechanics, advice, knowledge, or market insights—that only they can offer, but which can often be procured without talking to your local rep.

The brutal reality is that big corporate farms, operating far from any country town, seem able to function without supporting local reps, which tells me they have managed to bypass many of the middlemen ticket clippers. Now, I know this has helped kill off country towns, but that’s not the focus of this opinion—I will come back to corporates and country towns in a future article.

The big corporates will more often than not deal directly with Perth when they need services, or simply order online. Centralising sales and utilising the power of the internet is something some car manufacturers and non-bank financiers have taken to the extreme. Their mantra seems to be: "deal with us online and save."

Then there is the more sinister issue of price differential. Anyone familiar with the spread of prices—from the east-west sheep price differential, the global spread on grain prices, to the US vs Australia difference on machinery prices—knows that differential pricing is alive and well in the trading game. If a global or domestic manufacturer or trader can convince an isolated market like Australia or Western Australia that it’s normal for a farmer to pay a premium for machinery, fuel, fertiliser, grain, or livestock, or alternatively suffer a discount on the sale of their livestock or grain, then it's happy days for them. Not so happy for the farmer having to find the coin to cover the repayments or look at the impact on their bottom line.

Which raises the question: why don’t more farmers use the magic of the internet to take out the middlemen or at least force them to ensure parity of pricing or justify the premium for the service they are delivering? And to be clear, convenience is a massive service, so don’t get me wrong—I am a big supporter of those who are prepared to live in country towns and provide a service to farmers. The question I raise is one of transparency and whether the market is delivering good value to both parties.

We know few farmers have the time, energy, entrepreneurial skill, or risk capital to chase deals far from home, and having a local supplier in town is of great value—but at what cost? We all seem to have survived the loss of our local car dealership and hardware store, so what does that tell us?

We keep being told it’s hard for farmers to walk away from their local stock agents, ag agencies, machinery dealers, or even CBH—because we need them all. Or do we? Hasn’t the world changed? Drive-in, drive-out servicing, on-farm storage of grain, 24-hour delivery trucks direct from Perth to your farm, online marketplaces—this is no longer the 1980s, the world has indeed changed.

Since the emergence of the internet in the early 1990s, followed by social media in the early 2000s, and then global online marketplaces and auction houses from 2010, the world of trading and benchmarking has gone through a revolution. Want to trade stock or grain and don’t like talking to reps? You can tap into locally established online trading platforms like Clear Grain Exchange or Agora and trade away. Want the latest market information? Tune into an Episode 3 podcast or track live trades on your phone.

Want to buy a hay shed from China? Alibaba will give you no end of competitive quotes, and you don’t even have to speak Chinese or go there. Worried about the security of the trade? Your online freight forwarder will ensure it gets dropped to your farm and your money doesn’t disappear. Want the goods inspected in China? Then contract a compliance company you found online.

Anyone can buy fuel, fertiliser, parts, and tyres online—common farm purchases are now all online and relatively easy to source. But what about the big stuff, such as new tractors and headers?

If you ask your computer to find comparative quotes for the big toys, you’ll come away empty-handed. Sure, today you can jump on websites to get a feel for second-hand values or at least see what machines are being offered when posted online, but we are wandering in the dark when it comes to benchmarking new prices.

Which is strange when you consider that if you want a new ute or car, you can easily find the dealer-quoted price, or at least this month’s run-out deal, by looking at the ads or getting dealer quotes online. Try doing that with your next tractor! It seems the price is secret dealer business, only to be revealed if you come in, sit in the dealer’s office, and ask for a quote. The question is: why? Why can’t they at least advertise their list prices, or is it different prices for different farmers in different locations?

For some reason, the ag machinery world is stuck in the past and wants you to kick tyres and talk to your dealer. It’s so old-school, especially when global companies like Tesla, Honda, and Mercedes have moved to fixed online prices with no need to even walk into a dealership.

If you desperately want to test-drive one, then go hire one for a day—no need to do a lap around the block being upsold by a fast-talking sales rep. When you want to buy a new car, go online and do the deal without any sales pressure. Gone is the misallocation of endless dealers across the country with their expensive car yards.

Funny enough, when all the other car manufacturers tried to go down this path in Australia, dealerships fought tooth and nail against fixed-price, non-negotiation pricing. Why? Because it hits their bottom line. They make more money having salesmen do the deals for them, which means you end up paying more.

So where are the ag machinery manufacturers in this brave new world of online deals and having one central yard in each state, plus more mobile mechanics? (Why do we even have four field days—but that’s for another story.)

Let’s face it, most farmers who buy new, buy the same colour as their last machine and don’t do much more than sit in the cab, if one is available, before they open their cheque book.

Why aren’t these big manufacturers offering fixed-price, non-negotiation totally transparent deals? We all know the big, well-established brands offer limited pricing flexibility for dealers in the same area, but that’s not the same as a national fixed price, or better yet, a global fixed price plus transport, leaving just the haggle over the trade-in value as the only reason to talk turkey.

Which raises the question of old gear sitting in dealers' yards. Why hasn’t any country town come together to set up a display yard to replace the dealers' second-hand yards? In fact, I suspect most dealers would be happy not to have half the old gear sitting around on their block.

If a centrally located, energised community like Corrigin or Kulin rented a paddock on the edge of town for farmers to display their trade-in tractors, headers, sprayers, etc. (not junk), which they know is worth far more than the dealer is offering, it would become a magnet for those in the second-hand market.

This way, their machines would be available for inspection while they market them on-line via Facebook Marketplace or FarmMachinerySales. Such a yard would help fund the footy club and facilitate online deals without wasting time on tyre-kickers coming out to the farm or forcing farmers to accept the dealer’s deep-discounted trade-in price. It would also be the place to send high-value equipment before risking it at a clearing sale.

Hint for the country town that runs with this: charge $100 a week and set a minimum price of $20,000 so the site doesn’t become a dumping ground for old ploughs. Then run an online auction every month and clip 5%. As a value-add, the community could offer a free transport/piloting service to the site, keeping retirees busy while the younger generation handles the Facebook ads for those not so tech-savvy. Obviously, we still need the Farm Weekly to runs machinery ads as life would not be the same without it.

But back to the middlemen and market failure.

Want to buy a new John Deere 300HP 8R Series tractor? Expect to see the price vary between those manufactured in the US, German, Brazilian, or Chinese factories. What’s the difference? Nothing—except the price.

How much is the difference? Well, that’s an interesting question that John Deere doesn’t want you to think about, let alone know. But from what I can find, the spread is about 25%, with the American-made one selling in Australia for around A$600,000, while the exact same Chinese-made one is marketed to Asia and Russia for around $450,000.

Why the price difference? It’s not just China vs USA labour costs at A$15/hr vs A$60/hr. It’s the simple fact that John Deere charges what the market will bear. So, why aren’t we importing Chinese-made ones? The answer you’ll hear is obvious: "Chinese stuff is all rubbish." Which is fine—just don’t look too carefully at where half the components in your new tractor, header, or car come from, and that includes engines and transmissions.

The reality is, we’ve all swallowed the idea that Chinese-made products are subpar, yet it’s not only Teslas that are made in China and assembled in the US and Europe. Every car and farm machinery manufacturer has multiple factories following the same formula.

Still, we all say Chinese-made products are rubbish, while Japanese products are brilliant, and we buy Toyota HiLuxes that are made in Thailand from components manufactured in China. Go figure.

How long will this hang-up with China continue? Well, how long did it take for us to go from calling Japanese cars "Jap crap" to saying "Oh What a Feeling"? Answer: from the Datsun 120 Y in 1973 to 1981, and the Landcruiser HJ45 from 1972 to 1981, plus 10 years—so about 1990. My guess is that China quality issues are already turning, otherwise John Deere and others have a massive problem, since they’ve all invested heavily in Chinese manufacturing.

It’s time to forget about helping Trump "Make America Great Again" by reconsidering equipment coming from outside the US and EU. We should no longer accept the price premium demanded for buying US or EU-designed equipment made in those regions. It’s not our job to secure jobs for first-world, unionised employees.

If we don’t change, we will continue allowing middlemen and global manufacturers to extract rent for loyalty. The internet shows us the game is wide open to importing directly from the global plant that makes the cheapest of the big green, yellow, or red machines—or any other colour for that matter—wherever it’s located.

In summary, while the big farm machinery manufacturers and dealers continue to hide their prices in smoke and mirrors, and the rest of the world moves toward transparent pricing, it’s time farmers opened their eyes to where equipment is manufactured, stopped being loyal price-takers, and became smart, competitive buyers.

As for your local dealer or farm chemical agency, they’ll no doubt be unhappy if some pressure is applied to their model. But we all live in a competitive world. If their service justifies their price, they will prosper; if not, they’ll go the way of the country holden dealer went.

So maybe its time for the next generation of Australian farmers to get on a plane and take out the middlemen or at least go and have a look what’s out there.

Anyone interested in scoping out a Chinese 300hp John Deere tractors, new chaser bins, header tyres etc direct from China, contact Thomas and have a chat he helps farmers buy out of china www.phantomagriculture.com.au/.