PrefBlog

If you spend a lot of time arguing about Supply Management (I particularly enjoy trolling the comment sections of the Dairy Farmers’ of Ontario ads on Facebook) you will inevitably run up against the argument that US subsidies are higher than the effective subsidy supplied by quota. So I was pleased to find a paper by Peter Slade
and Getu Hailu of the University of Guelph titled Efficiency and Regulation: A Comparison of Dairy Farms in Ontario and New York State:

We study the efficiency of dairy farms operating under two different regulatory regimes. While neo-classical economic theory suggests that farms should maximize their efficiency regardless of their regulatory system, we find farms operating in a more regulated environment have, on average, a lower cost efficiency. In contrast to much of the previous literature on regulation and efficiency, we attribute the bulk of the difference in cost efficiency to the allocative decisions of farms. In particular, we find farms in the more regulated environment to be overcapitalized, and overly reliant on homegrown feed. To calculate efficiency we employ recent advancements in bootstrapped data envelopment analysis, and stochastic distance function estimation. We discuss the implications of these results for welfare and policy.

Fig. 1 Mean annual milk price in Ontario and New York (2000-2009)
Source: Authors’ calculations

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Fig. 2 Producer subsidy equivalent percentage for Canadian and United State dairy support programs (2000-2009)
Source: [OECD LINK]

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Figure 1 presents the farm-gate price of milk in Ontario and New York for the period 2000-2009. Throughout this period the price is significantly higher in Ontario than in New York. A simple price comparison is somewhat misleading however, as New York farms receive supports not captured in the price of milk. Figure 2 presents the producer subsidy equivalent percentage for the Canadian and US dairy industries. The producer subsidy equivalent percentage is calculated by the Organization for Economic Co-operation and Development. As its name suggests, this metric converts all government supports received by an average producer into a single \subsidy equivalent”, and divides this support by the total farm receipts. With the exception of 2001, Canadian farms enjoyed higher support than their American counterparts
between 2000 and 2009.

For aspiring FB Dairy Farmer Trolls, I also recommend the Ontario Dairy Farm Accounting Project, which demonstrates that small farms are less efficient than large ones (surprise, surpise) and has the advantage, from an advocacy perspective, of being published on the DFO’s own site and being one of the DFO’s own projects.

US education financing gets ever more ridiculous:

Laura Strong, a 29-year-old in suburban Chicago, owes $245,000 on student loans for the psychology Ph.D. she finished in 2013.
…
Strong pays about $100 a month on her federal loans, which she used to finance her graduate studies at Argosy University, a for-profit institution.
…
Income-based repayment was introduced under President Clinton, but the programs weren’t heavily promoted until late 2013, when the Obama administration began sending e-mails to borrowers, including Strong, telling them, “Your initial payment could be as low as $0 a month.” The number of people using these plans has quadrupled since 2012. About half of outstanding balances in the Department of Education’s Grad Plus loans, which finance advanced-degree studies, are in income-driven plans. Most borrowers in the programs have payments capped at 15 percent of income, with allowances for housing and other expenses. In December the Obama administration is expected to expand the number of borrowers eligible for a payment cap of 10 percent. In a July 27 speech at the University of Maryland’s Baltimore campus, Secretary of Education Arne Duncan said the plans protect people going into socially valuable but low-paying lines of work from crushing debt. “That’s good for them. That’s good for our economy. It’s good for our society,” he said.

Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt.

It’s a funny world when I don’t even understand what’s at issue in Google’s European anti-trust problems:

For example, when someone in a European city searched for the best restaurants, nearby dentists, or airplane flights, Google linked to its own maps and other services instead of displaying links to the best content from elsewhere on the Web.
…
On April 15, 2015, Almunia’s successor, Margrethe Vestager, a 47-year-old former finance minister from Denmark, approached the same Berlaymont podium in the same auditorium. “Dominant companies can’t abuse their dominant position to create advantage in related markets,” she said bluntly, formally accusing Google of exploiting its supremacy in general search to dominate the market for online product searches—the equivalent of an indictment, the very move that Almunia had sought to avoid through the private settlement at Davos.

That wasn’t all. Vestager (pronounced Vestayer) announced a new investigation into whether Google had abused its dominant position with the Android operating system for smartphones. She suggested other cases were possible, too—regarding Google’s expansion into the markets for local search, maps, images, travel, etc.

China has devalued the Yuan:

China devalued the yuan by the most in two decades, ending a de facto peg to the dollar that’s been in place since March and battered exports.

The People’s Bank of China cut its daily reference rate for the currency by a record 1.9 percent, triggering the yuan’s biggest one-day loss since China unified official and market exchange rates in January 1994. The change was a one-time adjustment, the central bank said in a statement, adding that it plans to keep the yuan stable at a “reasonable” level and will strengthen the market’s role in determining the fixing.
…
The PBOC had been supporting the yuan to deter capital outflows and encourage greater global usage as China pushes for official reserve status at the International Monetary Fund. The intervention contributed to a $300 billion slide in the nation’s foreign-exchange reserves over the last four quarters and made the yuan the best performer in emerging markets, eroding the competitiveness of Chinese exports.

The currency dropped 1.4 percent to 6.2980 per dollar as of 11:12 a.m. in Shanghai, and slid 1.6 percent in Hong Kong’s offshore trading. The onshore spot rate was 1.1 percent weaker than the reference rate of 6.2298, within the 2 percent limit allowed by the central bank.

It will be interesting to see how China’s neighbors and competitors react!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets gaining 19bp and DeemedRetractibles down 12bp. The good side of the Performance Highlights table is comprised entirely of FixedResets, with a notable ENB contingent. Volume was very low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.96 to be $0.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.67 cheap at its bid price of 14.60.

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Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.62 to be 0.45 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.19 to be $0.49 cheap.

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The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.95 to be $1.11 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.29 and appears to be $1.44 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 16.41, looks $0.43 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.13 and is $0.83 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.16%, with one outlier above 1.00%. There is one junk outlier below -1.00%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

This entry was posted on Monday, August 10th, 2015 at 11:40 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.