August 2, 2001

U.S.-Canadian Grain Pool Could Benefit Producers

A voluntary grain marketing pool for durum and hard red spring (HRS) wheat produced in the United States and Canada could increase returns for both U.S. and Canadian producers, according to a game theory model developed by agricultural economists at North Dakota State University.

Results of the study were presented at the annual meeting of the Western Agricultural Economics Association held in Vancouver, B.C., Canada by William E. Nganje of NDSU’s Department of Agribusiness and Applied Economics.

In 1998, North Dakota farmers proposed a marketing pool for durum and HRS to enhance farm income of wheat growers facing declining prices, decreasing net farm income and increasing reliance on government payments. Supply management by U.S. farmers to raise prices has not been effective, as declining price trends have continued despite lower wheat acreage and production in the U.S.

Supply management as a strategy to raise prices has been limited by the problem of fringe producers. When a wheat-producing area like North Dakota cuts production to reduce supply and raise prices, international competitors increase their supply and exports, and prices decrease.

Nganje says previous studies on grain pooling have not considered strategies to manage fringe suppliers (or free riders), focusing mainly on market power. The NDSU research hypothesized that farmers would increase income through a U.S./Canadian wheat pool by mitigating free rider tendencies and taking advantage of efficiency gains that have increasingly been going to marketers and processors.

In theory, says Nganje, a pool can increase net income if it controls a significant share of the market. In practice, however, it may be unrealistic to rely entirely on market power.

The game theory model created by the NDSU researchers estimated theoretical solutions for U.S. and Canadian farmers who decide to join or not join the wheat pool: payoffs when farmers decide to join the pool, payoffs when the decide not to join, and payoffs for free riders who attempt to benefit from price gains created by the pool without sharing in its costs.

Advantages to pool members that free riders would not benefit from are efficiency gains offered by the pool. Nganje says areas where the pool could develop comparative advantages include grain blending, logistics and quality management.

Blending wheat for grade or other factors based on premium and discount schedules is a major source of profits for grain merchandisers. A grain pool with an assured supply could also have advantages in transportation and logistics, with the ability to obtain favorable shipping rates and the flexibility to assemble large shipments in response to emerging market conditions.

The theoretical model assumed that free riders do not benefit from these advantages.

Results suggest that the best strategy for U.S. and Canadian farmers is to market their grain through the proposed wheat pool. Benefits from pooling were greatest for durum because a durum pool offers greater blending and logistic opportunities compared to HRS.

Nganje says suggestions that a voluntary wheat pool would be infeasible because of free rider problems were not supported by the results because the benefits were largely from efficiency gains rather than market power.

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Source: William Nganje, (701) 231-7459, wnganje@ndsuext.nodak.edu
Editor: Gary Moran, (701) 231-7865, gmoran@ndsuext.nodak.edu