Danish online auction, potential in Canada?
Policy decisions in agriculture often beget other changes - be they in behaviour, in technology and/or in the way that things are organized and decisions are made. The Danish sugar industry is a good case in point.
In 2005, after succumbing to much pressure for reform, the European Common Market Organization introduced a new policy regime for sugar. After nearly two decades of price support through subsidies, levies and production contracts, EU sugar producers were faced with a 40 percent decrease in the sugar price over the four-year implementation period. This substantial price decrease meant Denmark's ability to retain large-scale sugar beet production was in jeopardy. Reallocation of production quota from less to more efficient producers was believed to be one of the responses necessary to maintain production.
In Denmark, sugar beet production prior to the reform was based on non-transferable contracts to meet a national quota; production in excess of this amount could be sold on the world market. In general, contract allocation was tied to the amount of land owned by a producer and was based on historical production levels. Minor quota shuffling occurred when a processing plant closed and when grower noncompliance resulted in quota being shifted to new entrants. While the ability to lease quota was introduced in 2004, overall there was little transferability of sugar contracts among producers, even though such transfers would have been profitable. Research at the University of Copenhagen indicates that, largely because of a lack of transferability, the Danish sugar industry gave up substantial profits due to inefficient quota allocation among producers.
In addition to price decreases under the EU reform, the ability to sell excess sugar production on the world market was also removed. Meeting a national quota via contract production, however, has remained. Profitability pressure resulting from lower guaranteed prices and lower production requirements made reallocation of sugar contracts more attractive in Denmark, as producers faced the need to either lower their costs or switch to other crops.
In 2006, an initial effort was made to reallocate production through bilateral exchanges. This strategy was fraught with problems that arose due to the uncertainty of the evolving regime - problems that included how to settle contract quantities and prices, which plant to deliver to, fair distribution of quality product and how to adjust to new EU productivity initiatives. The result was an inefficient reallocation of sugar beet contracts. In fact, as the new pricing regime unfolded, university researchers estimated that within four years Danish sugar beet production would drop to 25 per cent of the national quota.
The introduction of the Partisia Contract Exchange an online auction for quota reallocation - created an environment where buyers and sellers could be matched and the gains from reallocation could be optimized (e.g., the lowest overall cost - including production, transportation and processing - could be identified). Reallocating quota from less efficient growers to more efficient ones would retain sugar beet production at 75 per cent of national quota and the lower cost of production among the efficient growers would offset to some extent the lower price being received for sugar beets.
One of the key features of the auction was that it was based on software that encrypted information and provided what is referred to as 'deep confidentiality'. In the Danish industry, renegotiations take place between multiple interest groups and the result affects the division of the total profit among these groups. Differences in interests - not only between the processors and the growers, but also among different grower groups with different distances to the processing plants, different soil conditions, and so on - means that confidentiality protection in the contract exchange is important in the ongoing contract renegotiations. Since a bid on the contract exchange would reveal information about the individual growers' contract valuation if the bid were to become public knowledge, the high level of confidentiality built into the Partisia Exchange ensures that growers trust that their private information would never be shared, stored or aggregated for the purpose of future price discrimination. Encryption also significantly reduces transactions costs within the system since third party verification is no longer required.
In summary, the Partisia Exchange greatly enhanced the ability of the Danish sugar market to adjust to new policies by reallocating production to more efficient producers and by allocating product more efficiently to the production plants - without the need for third party verification, or for growers and buyers to interact other than through the exchange.
As global competitive pressures continue to increase and new policy initiatives are introduced, there are many other possibilities for the application of technologies like Partisia Exchange's online auction software. In the Canadian context this technology may have application to supply managed sectors such as dairy and poultry. For example, could this technology more efficiently allocate quota amongst producers in a given province, or even among provinces? Or, in the grains industry, would it be advantageous for the Canadian Wheat Board to implement an online auction to replace its current tendering practices for awarding cars to elevator companies?
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This blog entry was authored by Lynette Keyowski. To read additional Illative Blog entries or to leave comments on this entry, please visit www.illativeblog.ca. The Illative Blog is an initiative by the Knowledge Impact in Society (KIS) Project based out of the University of Saskatchewan. Email correspondence can be sent to kis.project@usask.ca
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