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Wednesday, 26 August 2015

Is the ongoing war for fair prices between farmers and large retailers the first signal of capitalism defaulting?

What does it matter to ya
When you got a job to do
You gotta do it well
You gotta give the other fellow hell

A few weeks ago French farmers were on strike… again. Their actions were targeted against the end of the milk quota and in particular against the lacking minimum price for dairy, which makes it almost impossible for French and all other European farmers to produce milk profitably.

As the French in general and French farmers in particular showed a certain preference for striking in the past, this strike did not sound so alarming initially. Especially many Dutch and German people will have thought: “Oh, my God. The French are on the loose again”.  

Nevertheless, their strike was alarming. Especially as Belgian farmers followed in the footsteps of their French peers soon and even Dutch farmers were spilling their guts in the media on the same topic.

This is the problem: In order to produce a metric ton of milk (i.e. 1000 kg), a farmer spends around €400 in expenses on food, housing, animal care, interest and other expenses connected to his farm and his animals. Yet, the yields for a ton of milk are currently around €350, as a consequence of the ongoing price wars between the large retailers all over Europe and the fact that the minimum price for milk has disappeared. The consequence is that a farmer loses in average €50 per 1000 kg of milk.

While most farmers can hang in there for a while, it is obvious that these farmers cannot outlast such low prices for their milk forever. On the other hand, it is obvious that the retail wars between the large supermarket chains in Europe will not be solved overnight.

Large producers of food and non-food products, like Coca Cola, Heineken, Proctor & Gamble and Unilever have the relative luxury of selling products that are indispensable for even the largest supermarket chains – except perhaps for German retail behemots Aldi and Lidl). This means that they can refuse to participate in all too outrageous price wars between the large retailers; consequently they are able to keep their prices more or less at a level, where healthy profits can be made.

No, it are the producers of farm products, housebrands and ‘brandless’  goods, like brandless daily household products, cheap dairy, bread, cheap meat, wheat flour, rice etc., who foot the bill eventually. Because they are easily replaceable and no large retailer will shed a tear when they leave, to be replaced by a dozen others.

These producers are forced at gunpoint to give even the most minute margins away for the sake of the latest price war, or else… “For you there are ten others, so you give us the price that we want, or you can get lost!”

In particular farmers have an extremely vulnerable position here: if they don’t sell their agricultural produce, meat or dairy, they won’t earn one cent of revenues, while their lifestock or farmland and produce require respectively expensive food or water, storage space and fertilizer every day.

When they don’t earn any money, they will default within a few months. So they have to follow the quirks of the large supermarket chains and offer their products at sales prices that lie below cost price, for as long as they can sustain these losses. In the meantime they try to raise their margins.

There are roughly two ways in which cattle farmers can raise their margin:
  • Using the cheapest possible cattle food in order to reduce the cost price of their meat and dairy to the bare minimum;
  • Creating a much bigger live stock in order to achieve economies of scale,  while keeping their cattle inside all year long and aiming at the most industrial way of farming from the cradle to the slaughterhouse.

Suffice it to say that both solutions are neither in the interest of the animals nor of the farmer himself. Most farmers care deeply for their cattle and their products and want their lifestock to live under optimal circumstances. Unfortunately, they are forced to produce their meat and dairy in a way that lies below their own lowest quality standards and violates all concepts and notions that these farmers had in the days that they decided to become farmer. They are simply struggling to survive and left their ambitions a long, long time ago.

For horticulturists and agricultural workers, the situation is hardly better. They are also forced to produce at absolute bottom prices, forced upon them by the large retail chains, in order to survive.

These are the reasons that the French dairy farmers went on strike and that their colleagues in other European countries already followed or might follow their example soon.

Especially in a country like France, where tradition and artisanial production is very important and where they generally dislike (or hate) the industrialized farms that become common in other countries like The Netherlands, this battle for the lowest possible price became a struggle for life and death.

And in my opinion it is even more. It seems almost that capitalism itself is on the line in this particular and many other situations.

In their war against cartels on behalf of the (perhaps utopian) ‘free market’, it seems that the EU and its member states have created a small number of ‘untouchable’ brands and retail store chains. Brands and store chains, equiped with almost absolute power in the market, who only play for keeps, while trying to obliterate their competition.  No more live and let live for these brands and store chains, but live and let die.

These are brands and store chains, who “enslave” their numerous, nameless suppliers at the price of expulsion and bankruptcy, in order to get the lowest price possible. Humans all over the world and animals suffer for their desire to annihilate the competition and offer the holy grail (i.e. absolute bottom prices) to their consumers, who – battlestruck from the enduring economic crisis – got used to the fact that many things are much cheaper now than in their childhood, twenty or more years ago.

What is this capitalism worth when it victimizes so many humans and animals in order to achieve a Pyrrhic victory for a few suppliers and retailers, “on behalf of the holy consumer”?! And what it is worth, when it puts the food supply for whole nations under jeopardy, as farmers who can’t survive the battle for the lowest price anymore ‘perish in their battle against the oligopolists’ and look for another profession of which they cán live eventually?!

So please let us not dismiss the French and Belgian farmers and look with disdain at them… for simply being “strike-hungry” French and Belgian farmers. Let us instead support them in their battle for fair prices for produce, meat and dairy.

And let us not follow the Utopian free market, as if it is a divine power that must be worshipped at all costs. Let us use our minds and stop the mindless price wars in the retail industry. And let us consumers pay fair prices for our daily groceries, clothes and other daily consumer products. If we refuse to do so, this could be the beginning of the end for capitalism as we know it! 

Sometimes, the price of having the lowest price at all costs, is simply too high!

Saturday, 22 August 2015

Discussion about labour hoarding and government subsidies on employment with one of the macro economists of the Rabobank.

Today, after a hiatus of two-odd months, I want to make a new start with writing interesting articles for you on my blog. A few months ago, I was so fortunate to get a very interesting new assignment as business analyst at a leading bank in The Netherlands; a different one than the bank where I resided during the last six years.

Side-effect of this new assignment was nevertheless, that the learning period and hectics, as well as the fatigue caused by learning all those new things, was simply too much to maintain my usual pace of two or three articles per week. In other words: I needed a break from writing. However, after two months of rest, including a short, but yet very relaxing holiday, I hope to have built up a new source of energy.

A column in the Dutch financial newspaper Het Financieele Dagblad pointed me at an excellent research study report of the Centre of Knowledge and Economic Research of the Rabobank in The Netherlands (unfortunately this report is in Dutch, but it is definitely worth a read when you use Google Translate or another online translation tool).  

Here are the translated main conclusions of this report:

An analysis of the structural pillars under the economy of the Euro-zone:

  • The economic losses during the “Great Depression” in the Euro-zone almost totally landed upon the labour market. Unemployment will first and foremost decrease when elevated, steady growth will be combined with a reduction of the structural unemployment via reforms of the labour market. The reduction of the structural unemployment with 1% will yield more than 900,000 extra workers all over Europe.
  • A risk for recovery of the labour market is the flawed connection between demand and supply of labour – the so-called mismatch. Also the development of the so-called Total Factor Productivity (i.e. TFP), which measures the efficiency of an economy, is worrisome.
  • The decreased efficiency of many economies in the Euro-zone is declared by a.o. the lower corporate dynamics, lower investments in innovation and a decrease in the spread of innovation.  These developments obstruct renewal and cause that people stay in jobs in which they don’t contribute maximally to growth.
  • Besides that, a less effective monetary policy is a possible explanation for the disappointing growth during the last few years. In case this would be the consequence of an excess real interest rate (caused by the so-called 0 boundary on the official interest rate), this could be partially mitigated with the new Quantitative Easing policy of the ECB. Yet, we think that an excessively low interest rate, in combination with QE could also cause all kinds of disruptions, putting even more pressure upon innovation, investments in the real economy and long-term growth.
  • Measures that could improve the growth perspectives of the Euro-Zone are:
    • better coordination of the international monetary policy, 
    • stimulation of labour mobility and re-education, 
    • reforms of the labour market, 
    • stimulation of entrepreneurship, 
    • investment in renovation and renewal 
    • and last, but not least: striving for an level institutional playing field.
While reading through this interesting report, I was also pointed at an earlier publication of this Centre.

This publication argued that the disconnection between labour demand and supply in The Netherlands – the aforementioned mismatch – was in reality quite low and even among the lowest within the Euro-zone. This conclusion strongly contradicted with the ‘communio opinis’ among ‘Corporate The Netherlands’ that this mismatch is substantial in The Netherlands and was therefore quite surprising.

Combined with the conclusion in the aforementioned report about the lower corporate dynamics in the Euro-zone (see bullet three), this rather surprising conclusion urged me to ask a few questions to one of the people from the Centre of Knowledge….

One of my strong opinions during this depression-like crisis starting in 2008 has been that the part-time unemployment benefit measures introduced by the Dutch government in 2009 – in combination with a phenomenon called ‘labour hoarding’ (i.e. keeping improductive, excess personnel under contract, while hoping for the return of better times with again increased demand) have eventually increased the effects of the crisis, instead of dampening these effects.

The reason is that excess personnel is either working in an improductive role or at a position with already excess capacity, thus adding close to nought added value to the company’s results. When such an improductive person would have lost his job instead, and would have found a more productive new job at a position more suitable for his capacities, he would have added much more value to his new company’s results than that he could have added to the results of his old company. 

Especially in countries with a low mismatch between labour demand and supply, it is relatively easy for well-educated / well-trained people to find a new job, preconceived that there are indeed new jobs on offer. [Having said this, I understand the micro-economic implications for individual households of this macro-economic view - EL].

It seemed that this old opinion of mine was founded by some of the conclusions in these two reports, so I wanted to check this through a few questions to people involved in writing these reports. As my email conversation with the Centre of Knowledge representative was ‘off the record’ and perhaps more frank than an official statement would have been, we agreed that I would not disclose the name of my contact person. I will therefore refer to him as ‘contact’.

Ernst: One of the intriguing conclusions about the disappointing growth in the Euro-zone was, that the productivity in Europe (and The Netherlands?) had also developed disappointingly, due to the circumstance that people had been working in positions in which they offered little added value to the productivity of their corporate or civil service employer.

Could it be that the Part-Time Unemployment Benefit from 2009 and beyond, as well as other supportive measures from the (Dutch) government aimed at the preservation of employment, have caused that companies with excess capacity did not fire their excess personnel? And that such “social” plans to keep people at work have eventually added to a less competitive and weaker Dutch economy at the moment?

Contact: Generally, I think that the corporate dynamics and innovative force in The Netherlands are less problematic than in especially the Southern European countries (i.e. the former PIIGS Portugal, Italy, Greece and Spain), Belgium and France. To put it even stronger, where the share of either new or improved products in the sales figures has been rather disappointing for quite a long time in The Netherlands, Dutch entrepreneurs made much improvement lately, according to the most recent Community Innovation Survey (CIS) of Eurostat. Also the share of innovative companies has increased (see the following chart).

Percentage of change in the number of innovative companies
among the total company base
Chart courtesy of: Rabobank.
Click to enlarge
Nevertheless, your question, whether the Dutch Part-Time Unemployment Benefit (PUB) had a hampering effect on growth, is a very justified one. This was a measure which indeed enabled unprofitable companies to keep their personnel much longer in service, as it gave a substantial subsidy on wage expenses. Yet, in The Netherlands this PUB was very limited in size, so it only added to a lower economic dynamics in The Netherlands to a limited extent.

However, this hampering effect could have been much more in play in Germany, where there have been very little restrictions to the usage of the German equivalent of the PUB, the so-called 'Kurzarbeit'. During the crisis, this Kurzarbeit has been widely used by companies to mitigate loss of demand. Especially in Germany one sees that the innovative dynamics have indeed decreased, even though the country still resides at the top of the Euro-zone, when it comes to the level of innovative companies and its share in the European sales.

Ernst: And would it not have been better, when the labour market in The Netherlands would have caught the blows of the crisis ‘cold turkey’ – that is, without dampening interventions of the government – in order to make it stand at its own two feet sooner? So that the newly unemployeds could have started at companies where their labour would have added more to the company's productivity, as well as to the national productivity?!

When we look at the very limited mismatch between labour demand and supply in The Netherlands, mentioned in your report from July (see the second link in this article), this could have been a genuine possibility.

Contact: You also make a valid point here. Nevertheless, I don’t think that the PUB and other government interventions have been the real problem here – even though you can blame the Dutch government for maintaining a strong procyclical policy, by enforcing €50 billion in austerity measures on top of the economic downturn, during this crisis time. 

Companies in The Netherlands themselves have ubiquitously kept personnel in service during 2009 and 2010, even though there was no work available for them. This behaviour is called ‘labour hoarding’ and it was partially stimulated by the scarcity at the Dutch labour market in the years before the crisis.

Companies simply did not want to say goodbye to people and resources that took them so much pain and effort to acquire in earlier years. In the process, these companies anticipated upon a quick economic recovery. 

This recovery never really happened (except for the successful first half of 2011) and soon we were firmly in a double dip. This was one of the conclusions of the mismatch investigation: there were simply too little jobs to make a match at all!

Only recently we notice that the employment in the Dutch market is recovering and that the number of unemployeds is decreasing proportionately.

On top of that, it doesn’t help that the Dutch government effectuated all kinds of measures recently, which increased the supply of labour:
  • The gradual raise of the legal retirement age to 67 from 65
  • The abolishment of the partner subsidies within the Common Old-Age Pension law (i.e. AOW) in The Netherlands.
  • The Participation Law etc.
The same government, on the other hand, is carrying through substantial budget cuts at the demand side of the labour market. Especially in healthcare, which has traditionally been a strong engine for employment, these cuts have been felt badly. With this statement, I don’t want to state that a new VUT (an official Early Retirement arrangement from the Dutch past) or another similar arrangement would be a good idea. Such arrangements destroy labour supply and wealth in the long run.

The best idea would have been to reduce the taxes and levies on labour in a much earlier stage. From recent estimates we know that when the development of wage expenses is lower than the structural growth of productivity, companies can much quicker increase their production capabilities, causing even the long-term unemployment to drop. That the Dutch Cabinet starts only now with taking some of these measures within the new tax reforms, is too little too late, in my humble opinion.

I thank this macro economist and his colleagues for these thorough reports and for his revealing answers. Answers, which were generally in line with my views about the Partial Unemployment Benefit and other government measures to help the Dutch labour market, but especially pointed at the role of companies and employers themselves in years past.