Farmers are milking it through state subsidies

Milk is now cheaper than bottled water in some UK supermarkets. So of course there is much wailing that our dairy industry is in terminal trouble and needs subsidy and protection from foreign imports. Wrong. One reason why milk is so cheap right now is that supermarkets are using it as a loss leader. They hope that while customers are buying cheap milk, they might be tempted by less cheap other stuff. They are not actually paying farmers any less.

The dairy industry is indeed in a sorry state, but not because of the lack of state support. Rather, the problem is too much of it. When you protect industries from foreign competition through tariffs (as EU countries like the UK do), and then go on to subsidise them, you kill off competition, both international and domestic. Subsidies and protections allow production to carry on in old, outdated, inefficient, expensive ways. The result is higher prices, lower quality and less choice for customers.

Cold, rainy Britain is not a good place to raise cattle. It's fine in the summer, but in the winter the cattle have to be brought into shelters and given heat, silage and hay, all of which adds to the cost. So other, warmer countries, inevitably have the competitive edge on us.

Dairy producers can compensate for this a bit by creating much larger farms, which can be sited in the sunnier parts of the country, and where large-scale winter housing can be run much more efficiently than countless small-farm cattle sheds. In large, modern facilities, new technology can be employed, such as dry bedding, using other farm by-products for feed, recycling heat, and recapturing methane. And while we are on the subject of greenhouse gases, how much more energy-efficient is it to collect milk from one 8,000-cow farm than from 100 with 80 cows?

But planning policy, that great UK obstacle to progress, is making it hard to build such facilities – a plan for one in Lincolnshire has recently been scrapped. And the existence of subsidies makes it less urgent for inefficient dairy farmers to leave the business, and for more efficient ones to replace them.

Some people argue that we should subsidise UK agriculture to cut down on 'food miles'. Tosh. 80% of food-related emissions are from production, only 4% from transport. So it is 20 times more important to make efficiencies in production. That means super-farms here, or importing products from countries where the climate is more suitable. We do that with wine, why not with other agricultural products? And in any case, domestic production is an environmental nightmare, what with the fertilisers, pesticides and heating that have to be used. DEFRA figured that the carbon footprint of Spanish-grown tomatoes is probably smaller than that of UK tomatoes grown under glass. Remember too that food is transported, efficiently, in bulk. Most 'food miles' are getting small quantities of the stuff from the supermarket to your fridge, which is not going to change even if it is grown locally.

If we scrapped the subsidies and protections, the market could do its stuff, weeding out inefficient production and diverting investment into something better. That would be good for the industry, good for customers in terms of lower prices, good for taxpayers in terms of lower taxes, and good for the planet.

So how does this work then?

It would appear that someone, somewhere, is confused. It could be us that is confused but we're a bit, umm, confused about that. For the claim is that if retailers are providing a subsidy to the consumption of milk then this could devastate the milk producing industry. Which is confusing:

The price of milk has fallen to just 22p a pint thanks to a fierce war between supermarkets. Farmers have warned the UK dairy industry faces extinction if retailers continue to drive down the price – now at its lowest level in seven years. Asda, Aldi, Lidl and Iceland are selling four pints of milk for just 89p, while Tesco, Sainsbury’s and Waitrose are not far behind at £1. Pint for pint, milk is now cheaper than mineral water in most supermarkets. Retailers insist they are funding the cost of the price reduction from their own profits, rather than paying farmers less. Many supermarkets have guaranteed the price farms receive will stay above the cost of production. But farmers say the price war is also devaluing milk as a product at a time when they are under unprecedented pressure.

It doesn't get any less confusing on consideration, does it? The retail price of milk is lower, given the supermarket subsidy to it, leading to higher consumption, while the producer price is "guaranteed" to be above production costs. And this is going to devastate the industry? We don't think it is us getting confused here. Of course, the real background to this is that, as has been happening for the past couple of centuries as farming techniques improve, milk has been getting cheaper and cheaper to produce. And as has been happening over that time the higher cost producers have been pushed out of the market by the lower cost ones. This is, after all, the universe's way of telling you to go do something else, when the price of what you produce is lower than the cost of producing it. That's what is devastating farming, we're in general becoming more efficient at it. And the supermarkets are, through their subsidy, restricting this process which is the very opposite of devastation, isn't it?

No, really, markets do sort themselves out

You'll recall the terrified bleating from the usual suspects over the way that the supermarkets were sitting on all that land that could be used? As we recall said bleating the first set of allegations were that they had the land banks to make sure that other supermarket chains couldn't build stores in an area. Our reaction to that was, well, issue more planning chittys then. More recently the story moved on to how the supermarkets were sitting on all that land that should be used for housing instead. To which our reaction was, well, issue more planning chittys then. We're really not short of land to build on in this country, we're only short of land someone is allowed to build upon.

And what is happening now?

Britain’s supermarkets are building on just 6pc of the land they control across the UK, underlining the problem they face with undeveloped sites as the industry battles tumbling sales.

New figures show that the pipeline of new grocery stores in the UK is 46.61m sq ft, the equivalent of more than 1,000 acres. However, just 2.8m sq ft of these new stores are actually under construction.

Building work on stores has fallen by 20pc compared to a year ago as the “big four” supermarket chains – Tesco, Asda, J Sainsbury and Wm Morrison – suffer from tumbling sales and profits.

This means that 43.81m sq ft of land across the country is sitting unutilised by grocery retailers according to property agent CBRE. This land is either subject to a proposal for a new food store, or planning permission has already been granted.

The supermarkets simply do not want to build more stores on that land that they own. That land will, therefore, in the fullness of time (given the time and effort it will take to change said planning chittys, this system is not known for its efficiency) be developed to some other purpose, most likely that housing that was being called for.

And all being done without a politician or a bureaucrat making a plan, without considering social usefulness and entirely cocking a snook at the desires of our betters in the Great and the Good.

We the peasantry have decided that we're not all that interested in more supermarkets. So, therefore, there won't be that many more supermarkets. Markets really do just sort themselves out, we get supplied with what we actually want for that's what we spend our money on, what we want.

Well, markets do sort themselves out if they're allowed to. Who's willing to bet on the campaigns against those now won't be supermarket sites being turned into the housing that people insist we need?

Hey, sometimes the lefty lot are actually correct

Galling though it may be to have to admit it there are times when those over on the left side of the political aisle are correct. Take, for example, the case of supermarkets. They've been telling us for the past couple of decades that they're wrong,. That they rip the heart out of the High Street and that something must be done to stop them. And it even looks like they might have been right:

Supermarkets in Britain could start to close as the grocery industry struggles to cope with an unprecedented slide in sales and profits, the head of Waitrose has warned.

Mark Price, the managing director of the upmarket grocer, said it was “incredibly hard to call” whether all of Britain’s food retailers would survive tumultuous shifts in shopping habits.

The “Big Four” supermarket groups have been forced to dramatically rein in plans to open new stores in UK in order to save cash to shore up their balance sheet. In recent weeks Tesco has scrapped two supermarket openings despite actually building the stores.

However, Mr Price warned that food retailers could be forced to go a step further and close existing stores, just as non-food retailers have done in Britain since the onset of recession.

He was speaking in the week that rival J Sainsbury slumped to a £290m pre-tax loss, scrapped plans to open new stores, and warned that sales in supermarkets will be falling “for the next few years”.

However, let's not go overboard in our appreciation of their perspicacity here. For all those years they were complaining they were in fact wrong. For we, the consumers, by the very fact that we went shopping at the supermarkets, showed that we liked shopping at supermarkets. Further, said supermarkets aren't about to be replaced by the High Street of old. Instead they're being outcompeted by online shopping and the budget retailers. Meaning that we value convenience and low prices even more than we all thought we did.

And the other point that we really must make about this is that, of course, nothing at all "needed to be done". Whether we think this is as a result of changing consumer tastes, or merely as a revelation of extant tastes now that we can sample these alternatives, no one at all has had to intervene in the shopping market in order to overturn those supermarkets. The market itself has done all of that for us: the aggregate effect of us spending our own pounds in our own manner has led to the results that obviously we all, in aggregate, prefer.

So those lefties, those campaigners, might well have been right, correct, in their insistence that there was something better than supermarkets. But they were obviously entirely wrong in whether anyone needed to do anything about it for one thing that markets really are very good indeed at is reflecting consumer preferences.

My word, you mean competition actually works?

Well, would you look at that! Apparently competition works to the benefit of consumers! Who could have possibly predicted that outcome?

Shop prices fell at the steepest rate for at least eight years last month as the popularity of discount stores among the middle classes helped to drive down the cost of clothing and consumer goods.

The overall price of items at the till fell by 1.8 per cent compared with June last year, with the price of clothes down by 13.7 per cent year-on-year.

The figures, compiled by the British Retail Consortium/Nielsen shop price index, show the fastest drop in prices since the trade association began compiling data in 2006.

It was also the 14th month in a row in which shop prices fell, easing the pressure on households where wage-earners have suffered pay freezes.

Yes, of course, the capitalists are straining every sinew to increase the profits that they make from our need for basic necessities such as food and drink. But in doing so they find themselves competing with other capitalists who would also like to like that pelf from our pockets. That competition then limiting the amount any one shop can charge and finally leading to falling prices for consumers.

Of course, a number of people have pointed this out before, starting with Adam Smith, Bastiat had things to say on the point and even Karl Marx got it. Monopoly capitalism is to be avoided for it is without that competition, for it is that market choice that makes such a system work to the benefit of consumers.

This is all obvious to us, the initiates, of course. But we need to continue to make a song and dance about it. Yes, there really are things that governments must do that cannot be done by other actors. Yes, there really are times that said government must intervene in the economy. But for the most part that intervention necessary is simply to ensure that competition is possible.

It's not necessary to ensure that competition is happening, only that it can. For a monopolist in possession of a contestable monopoly is unable to exploit that monopoly for fear of competition arising to contest it. It's not even necessary to have a level or even playing field, only to have an open one.

Worth noting the next time someone starts to complain about the monopoly of the supermarkets (as they do every few years, prompting yet another enquiry). Precisely because competition is forcing prices down we've obviously not got an exploitable monopoly here.