The Lithuanian Parliament and the Ministry of Agriculture are destroying competition in the dairy sector through the egregious regulation of raw milk purchases. Much noise has been made over this new law, which places onerous restrictions on the dairy market of dubious constitutionality. Our supreme law is hardly the only casualty; the legislation flies in the face of EU legislation and economic logic in general. Though some of the most controversial draft provisions have been eliminated, the statute remains a huge mess.
Explaining this tangled web of regulation requires a glimpse into the inner-workings of the dairy sector. The industry consists of two key players: the farmer and the dairy processor. The farmer owns the cattle, milks the bovines, and sells the resulting raw milk. Subsequently, dairy processors purchase the raw milk and use it to produce cheese, curd, sour cream, and other dairy products.
The recently-adopted law mandates equal raw milk purchase rates to the farmers of the same group. But what are the implications of this policy?
Inevitably, the new law entails the categorization of farmers according to the quantity of milk sold. Purchasers, in turn, will have to pay the same price to the farmers of the same category. Consequently, those willing to pay more will be prohibited from doing so. As a result, farmers will be prevented from boosting efficiency and developing more production at lower prices, with disastrous implications for competition.
Moreover, the method of price negotiation under the new rules remains unclear. Here, a “if you snooze, you lose” principle potentially applies, as the price negotiated by the first farmer may bind everyone else. But what if prices suddenly plunge? Will farmers demand exemptions from the law that they themselves have pushed for?
Unfortunately, other odious scenarios may arise from the law. A farmers’ cartel may gather around the table, for instance, to collude upon the price to be hoisted onto purchasers. Such an agreement, however, would severely curtail the competitive forces that propel our economy. Surely, if this hypothetical cartel were proposed by any other group of Lithuanian entrepreneurs, they’d be referred to the Competition Council and forced to pay millions in fines.
Although the protection of the farmers’ interests compels them to form cartels, purchasers’ negotiating position remains superior due to their continued ability to import raw milk. According to 2013 data, a quarter of raw milk was imported from Lithuania’s neighbours. Clearly, when farmers demand hefty prices, raw milk processors readily resort to import. Consequently, an increase in prices may prove disastrous to Lithuanian farmers.
The new statute governing dairy markets forbids long-sale price negotiations. Since milk is a perishable good, protracted purchasing negotiations may result in spoiled milk and businesses trapped in negotiations-to-nowhere. Purchasers, all the while, will remain unaffected due to the aforementioned possibility of raw milk importation.
Additionally, the law’s requirement of a state overseer will prevent any attempts to compete due to the mandated obligation on the purchaser’s part to submit to the Lithuanian Agricultural and Food Market Regulation Agency. Agency approval must be granted if the purchase price is to be changed by an amount exceeding three percent. The Soviet commissars are surely laughing in their graves. Price negotiation, a fundamental bedrock of economic activity, will now be left to the whims of a government bureaucrat.
However, such surveillance is nothing more than a mere misunderstanding. How, after all, can the price be changed if the law provides an obligation to apply equal purchase rates to farmers of the same cartel?
Does a different price, negotiated between a seller and a purchaser and approved by the agency, mean an exemption from the cartel? This will not, after all, be legal – everyone should be paid equally in the eyes of the Parliament. Will this different price then apply to everyone? The example illustrates the complete unworkability of the law. Therefore, we must ask ourselves whether the authors of the law themselves have fully thought through the stated rationale.
There is a silver lining to this mess; some of the more ridiculous provisions of the bill have been amended away. But the bill’s ascendancy into law should raise the ire of anyone committed to the principles of a market economy. We can describe our system as “market-based” all we want, but is this really so with the establishment of dairy farmers’ cartels? But even this unintended consequence is not enough for policymakers. The monitoring of cartels and prices will be subject to yet another layering of regulatory plaque. In restoring fairness and sound economic principles to a system that has given us so much, we must put dairy choices in the hands of customers instead of bureaucrats.
