CHAPTER V

TRENDS IN INPUT AND OUTPUT PRICES

Economic literature makes a distinction between two

types of price changes, one cost-determined and the otherdemand-determined. Generally speaking, changes in the pricesof raw materials inclusive of primary foodstuffs are believedto be demand-determined and changes in the prices of finishedgoods to be cost-determined (Kalecki, 1971). In recent yearspolicies designed to promote economic development have been

seriously considered by most developing countries and arecharacterised by the development of major sources of foreignexchange earning. A more stable price will reduce the riskand uncertainty costs and make the marketing system more effici­ent.

The pricing of raw materials have, however, to be seenexplicitly within the specific features of their market stru­cture and in the light of the condition on the demand andsupply side. In India supply conditions are identified asessential reasons for the difference in price changes (PanditSom Nath, 1982). The structure and behaviour of prices denote

the nature, composition and magnitude of prices. Price mechanismis the medium through which the desires of consumers are

127

transmitted to producers. If the commodity in question isdurable there is an added dimension in the pricing of it, viz.,the role played by inventories in explaining price movements.‘This factor has to be incorporated while defining or ratherspelling out the conditions on the demand and supply side.

The level of agricultural prices in an eaconomyinfluences a number of aspects of the economy. The relativeprices among individual commodities influence a shift from one

commodity to another. The relative price level between theagricultural and non-agricultural sectors determines the termsof trade between these sectors and hence influences the move­

ment of resources from one sector to the other. While analys­ing agricultural price it is also possible to analyse the changesin price levels at different levels of the market with a viewto understand the changes in market structure and marketingmargins Agricultural prices are quickly responsive to demandand supply conditions. Since agricultural output constituteshalf of the national product the general price level is mostlydetermined by the behaviour of agricultural prices. Due tomarket imperfections in underdeveloped countries the effect of

price signals gets considerably weakened, resulting in eithertime lags in response or differential magnitudes of responses.Price policy inevitably is a part of the overall economic policy.Price policy in conjunction with policies on other aspects such

128

as input supply, marketing of output, research and extension

influence the modernisation process, especially through theadoption of improved technology. The objective of agriculturalprice policy is to achieve price stability without destabilis­ing the total fievenue of the farmer and provide a price supportwhich would be economic to the farmers as well as to agro­based industries and at the same time safeguard the interestsof the consumers. While the influence of agricultural priceson allocation of resources between agricultural and non­agricultural sectors in an area like Kerala, characterisedby a large proportion of perennial crops, may not be large,its impact on the allocation of resources within the agricul­tural sector and on the modernisation process cannot be under­emphasized. The short term goal of price policy is stabilityin crop prices to create certainty. The medium term goal ofgrice policy is stability in terms of trade for agricultureand the focus of the long term goal is an agricultural adjust­ment of all prices towards their equilibrium level. Thus therole of agricultural price policy is to moderate short runprice fluctuations and to allow prices to perform their longrun allocative function. In short it may be emphasised thatthe aim of the price policy should be to effect a properstructure of production and distribution (Pandit Som Nath,1982}.

129

Economists often find it useful to think of the marketdemand as consisting of demand for current use or consumption

plus possible demand for addition to inventory; and the marketsupply , similarly, as consisting of supply from current pro­duction plus possible supply from inventory. Inventories mayhave either a stabilising or destabilising effect on the commo­dity's price depending on the conditions that permit or requirethe holding of inventories. However, traditionally, economistshave assumed that the effect of inventories is to stabilise

price, though the extent to which it will do so, of course,varies from one market to another. Agricultural price analysisis one of the most important and well developed parts of priceanalysis. The agricultural price analysis is not a mere exer­cise of academic curiosity but results of it are immediatelyput to work as bases for huge economic programmes. In thissection we will examine the behaviour of natural rubber and

synthetic rubber prices which are used as raw materials in therubber-based industry. Attempts were made to analyse both“e inter and intra year variations in natural rubber prices

after the 1970's and the role played by rubber stocks inexplaining it.

5.1 Price Movement of Natural Rubber

Market price of indigenous natural rubber had increased

130

cosiderably over the last two decades. Interestingly wideintra year fluctuations are also noticed in the market priceof rubbery 'This.may be due to fluctuations in production andstock of natural rubber in different months. In 1969-70,price of natural rubber was as high as B.584.1O per quintalin April (Table 5.1). Upto September the market price ofnatural rubber was above the average price level of m.501 perquintal. During 1970-71 price or natural rubber per quintalwas lower than that in the previous year. In 1970-71 theprice is worked out to be $.464 per quintal. Price was lowerin the month of November. During 1971-72 also the averageprice of lot rubber showed a declining trend and stood at%.420.78 per quintal. During the year price of lot rubber waslower in the month of December and higher in the month ofMarch. In the next year 1972-73, price of natural rubberincreased marginally and it stood at b.459 per quintal. Thepercentage increase when compared to the preceding year isfound to be 9.03. During the next two years also averagemarket price of lot rubber showed an increasing trend. In1974-75 the average market price of lot rubber per quintal isworked out to be B.849 per quintal. This is 64.85 per centincrease when compared to the previous year. However, duringthe period 1975-76 and 1976-77 the average market price of

rubber showed a declining trend, mainly due to the fact that

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during these years the internal production was sufficientto meet the demand in the country. In 1976-77 average priceof lot rubber is worked out to bel.596 per quintal.This was29.80 per cent lower than that in 1974-75.

From 1976-77 to 1981-82 average market price of lot

rubber showed a remarkable increasing trend. In 1981-82 theaverage market price of natural rubber stood at %.1431 perquintal. During this year the price of lot rubber was higherin March and lower in July. It is to be noted that product­ion of natural rubber was lower during the month of March.

The percentage increase in prices during the period 1976-77 to1981-82 is estimated to be 140.10. Although there was somevariations in the price level, it showed an increasing trendafter the period 1981-82 also. In 1986-87 price of naturalrubber stood at 1591.83. The compound annual growth rate inprices during the period 1970-71 to 1986-87 is worked out tobe 9.98 per cent (Appendix 1). when we take three yearly mov­ing averages we can see that market price of natural rubber was462 in 1970-71-(Table 5.1). This has increased to 729.27 in1975-76. Except for the years 1976-77 and 1977-78 movingaverage showed an increasingtrend. These are the two yearswhere the import of natural rubber did not take place. It isalso to be noted that production of natural rubber tends to

Table ­ 5.2

Average Market Price of La Rubber at Kottayam

(B. per Quintal)

134

PriceAverage Market Three Yearly

moving average

1969-701970-711971-721972-731973-741974-751975-761976-771977-781978-791;/9-801980-811*" 1-821982-831983-841984-851985-861986-87

500.86463.60420.78458.71515.39849.24743.62595.96632.11953.43

1016.511212.201430.651408.831707.531587.291660.701591.83

461.75447.70464.96607.78702.75729.61657.23727.17867.35

1060.711219.791350.561515.671567.881651.841613.27

SOLIICCE Z1988.

Computed from Indian Rubber Statistics, Vol.18,Rubber Boar5f’Kottayam,

135

be higher during the period September to January. Interestinglymore than 50 per cent of the total production takes place duringthis period. Production of natural rubber is comparatively lowduring the months of February and March. Prices of naturalrubber tend to be high during this lean period.

Now let us examine the factors which are influencingthe price of natural rubber. we have developed two models forinter and intra year variations in prices. Our basic assumpt­ion regarding the determination of inter year price variationsis that it is governed by several factors viz.. production,consumption and total stock of natural rubber. In order toexamine whether international prices have any bearing on theIndian natural rubber prices we have taken price of naturalrubber in London as a proxy variable. As natural rubber is aprimary commodity with a derived demand concentrated in the

industrial countries. it is posited that the spot pricingprocess is dominated by stocks held in the consuming regions,the size of these stock holdings (nearly half of total stockholdings) and the operation of the spot market by consumer re­inforce this argument. Thus it is the London spot price thatexerts ultimate influence over natural rubber price formationin the producing areas in each period (Tan Suan. 1984). Inthe case of intra year price variations it is assumed that it

136

is influenced by the manufacturer's monthly purchase decisionsin relation to net availability. The manufacture's purchasedecisions are governed by purchase for current use or consumpt­ion and for addition to inventory or stocks. Monthly product­ion of natural rubber also exerts some influence on intrayear price variations. The estimated equations are givenbelow:

P = - 1l4.15904 + 0.27524 PLD +(15o.34482) (o.356o0)

*** ***0.01547 CNt- 0.01255 QNt

(0.00860) (0.00670)

+ 5;oo5s3 sNt(0.06628) R2 = 0.9.395

R-2 = 0.8986, F 36.448

*~k*

MP 798.517; - 0.00497 MQt(131.9520) (0.oo271)

SSTCMTS+ 0.07845 Mct — 1628.946?

(0.00695) (227.4779)

SGDMTS

(323.9641) K

i— 914.1303

2 0.7090-2R = F

*: Significant at one per cent level.***: Significant at twenty per cent level­

where

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MP

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SSTC

SGD

SNt

PLD

QN

137

i— 645.8532 + 0.00055 MQt

(135.8387) (0.0o3o6)

*+ 0.08712 MC + 15o2.7219 _§§t HTS(0.00623) (228.6328)

R2 = 0.6882

R‘2 = 0.678. F = 67.6870

monthly price of natural rubber

monthly production of natural rubber

monthly consumption of natural rubber

monthly stock of natural rubber

stock of natural rubber with the State

Trading Corporation of India

stock of natural rubber with the growersand dealers

total stock of natural rubber in the year t

Price of natural rubber in London in the year

production of natural rubber in the year tconsumption of natural rubber in the year t

5.2

138

'0 II price of natural rubber in the year tMS monthly stock of natural rubber with the

manufacturers.

The regression estimates show that consumption of

natural rubber is influencing positive movements of prices.Production variable as expected showed a negative relation­ship. Although coefficient of stock variable and coefficientof PLD showed the right signs they are found to be statisti­cally not significant. In the case of intra year variationsconsumption and the ratio of the manufacturers stocks to total

stocks are found to be positive and statistically highly sig­nificant. Coefficient of the monthly production of naturalrubber turned out to be significant only in the first model.Coefficient of the ratio of the growers and state trading cor­poration's stocks to total stocks are found to be negativeand significant. The high value of the coefficient of theratio of the manufacturer's stocks and state trading corporat­ion's stocks to total stocks reveals the significance of bufferstocks for indirectly controlling prices rather than directprice control measures.

Movements of Prices of Svnthetic Rubber

During the last decade prices of synthetic rubber has

139

increased considerably. Price of styrene butadiene 1502 hasincreased from B. 4.4 per kilogram in 1970-71 to B. 25.17 perkilogram in 1986-87 (Table 5.3). The percentage increase isworked out to be 472.05. In 1970-71 price of styrene butadiene1712 was k.3.90 per kilogram. This has increased to 5.8.58per kilogram in 1978-79. In 1986-87 the price has increasedto %.22.85 per kilogram. The percentage increase when com­pared to 1970-71 is worked out to be 485.90. Similarly anincreasing trend was observed in the case of styrene butadiene1958 also. Its price stood at just B.6.8 per kilogram in1970-71. This increased to 5.29.15 per kilogram in 1986-87.The percentage increase is estimated to be 328.68.

Price of latex SC - 2000 also showed an increasing

trend during the last nine years. From just 3.6 per kilogramin 1976-77 price increased to %.14.78 per kilogram in 1986-87.A similar pattern in increase was seen in the case of other3ynthetic rubbers also. From $.18.70 per kilogram in 1976-77price of nitrile 3309 increased to B. 20.70 per kilogram in1978-79. After 1982 its price has increased alarmingly. Dur­ipd the period 1982-85 it has almost doubled. In 1986-87 itsprice stood at $.36 per kilogram. Same is the case withnitrile 3809/11 rubbers also. From m.20.70 per kilogram in1976-77 its price increased to B.39.50 per kilogram in 1986-87.The percentage increase is worked out to be 90.82.

140

Table - 5.3

Grade-wise Prices of Styrene Butadiene and Nitrile Rubber

(Ex~Barei11y — m/Kg.)

Year 1500/1502/ 1712/ 1958/ Latex ———§iE£i¥9——————1552x 1752 194lx sc - 3309/11 3809/112000

1970-71 4.40 3.90 6.80 -- -- -­1971-72 4.40 3.90 6.80 -- -- -­1972-73 4.40 3.90 6.80 -- -- -­1973-74 4.27 3.77 6.14 -- -- -­1974-75 9.02 7.32 12.26 -- -- -­1975-76 7.79 7.20 13.70 -- -- -­1976-77 8.13 7.63 13.78 6.00 18.70 20.701977-78 8.55 8.05 14.20 6.50 19.70 21.701978.79 9.09 8.58 14.40 7.80 20.70 21.701979-80 12.22 11.34 17.32 11.38 20.70 22.701980-81 15.07 13.17 20.19 11.75 20.70 22.701981.82 17.29 15.42 21.30 11.75 20.70 22.701982-83 18.33 16.34 22.10 11.75 24.00 24.351983-84 18.53 16.51 22.26 12.75 28.00 31.001984.85 20.86 18.08 23.82 13.15 31.50 38.001985-86 23.50 21.10 27.36 13.83 37.50 41.501986.87 25.17 22.85 29.15 14.78 36.00 39.50

Source: 1) Handbook of Rubber Statistics, AIRIA, Bombay, 1987.2) Ifidian Rubber Statistics, Vol. 18, Rubber Board,

Kottayam, 1988.

141

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142

Average Price of Polybutadiene Rubber (Ex—Baroda

Price B./Kg.)

__ Polybutadiene:25; """"""""" 7325“1978-79 8.53 8.531979-80 9.76 9.761980-81 12.24 12.241981-82 14.14 14.141982-83 14.77 14.771983-84 14.77 14.771984-85 16.98 16.751985-86 19.28 19.071986-87 20.72 20.72

Source: 1) M/S. synthetics & Chemicals Ltd. and Indian petro­chemical Corporation Ltd.

2) Indian Rubber Statistics, Vol.18, Rubber Board,Kottayam, I988.

143

Prices of polybutadiene rubber has also increasedconsiderably over the yea"s. From %.853 per kilogram in1978-79 price of polybutadiene 1203 has increased to M.20.72

per kilogram (Table 5.4). The percentage increase is esti­mated to be 142.91. Polybutadiene 1220 price has increasedfrom 3.8.53 per kilogram in 1978-79 to B.20.72 per kilogramin 1986-87. The percentage increase is worked out to be1é2.9l.

Thus the analysis reveals that prices of styrene buta­diene, nitrile rubber and polybutadiene have increased con­siderably during the last decade.

Analysis of wholesale Prices

As already mentioned rubber manufacturing industry

can be divided into tyre sector and the non—tyre sector.Besides natural rubber a large number of other raw materialsare also used in the manufacture of various tyre and non­tyre goods. The other major raw materials used in the manu­facture of rubber goods are synthetic rubber, carbon blackand rubber chemicals. It is also to be noted that most of

the above raw materials are manufactured by a small numberof large firms while natural rubber is §i}ng.produced by a

144

large number of small holders. Another factor which needs

to be mentioned is that majority of the non-tyre rubber goodsare manufactured by small scale units. Thus we can see thatan escalation in the prices of raw materials is going to affectthe unorganised non-tyre sector much more than that of theorganised tyre sector.

Now let us compare the growth rate in wholesale priceindex of natural rubber, synthetic rubber and rubber-chemicalsvis—a-vis the prices of rubber products. An analysis of whole­sale prices of natural rubber shows that from 1970-71 to1973-74 prices of natural rubber did not show any risingtendency (Table 5.5). But in 1974-75 wholesale price indexof natural rubber shot upto 166.3. Again upto 1977-78 pricesshowed a declining trend. In the subsequent years wholesaleprice index of natural rubber showed an upward trend. From199.4 in 1978-79 the wholesale price index climbed to 301.2in 1981-82. This is clearly a remarkable increase indeed.Wholesale price index of natural rubber reached an all timehigh of 359.4 in 1983-84. Thereafter it showed a fluctuatingtendency. In 1986-87 it stood at 336.5. The compound annualgrowth rate in prices during the period 1970 to1987 is worked

out to be 9.62. The coefficient of variaghpn of naturalrubber prices during the period is estima€%di£o‘be 44.44.

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148

During the period 1970-73 the wholesale price indexof synthetic rubber remained stagnant. In 1973-74 it declined ‘marginally to 99. Interestingly wholesale price index ofsynthetic rubber almost doubled in the year 1974-75 when com­

pared to the previous year. During the period 1975-80 pricesshowed wide variations. After 1980-81 wholesale price indexof synthetic rubber showed a steady increase in trend. In1985-87 wholesale price index of synthetic rubber remained

at 275.5. The compound annual growth rate in prices duringthe period is found to be 5.89 and the coefficient of variat­ion is worked out to be 30.19.

The wholesale price index of carbon black and rubberchemicals increased much more than that of natural rubber and

synthetic rubber. From 99.6 in 1971-72 the wholesale priceindex of carbon black increased to 826.4 in 1986-87. This is an

alarming increase by all means. Wholesale price index of rubberchemicals increased from 105.9 in 1971-72 to 651.5 in 1986-87.

The compound annual growth rate in the wholesale.price indexis found to be 16.31 and 12.71 respectively in the case ofcarbon black and rubber chemicals. Wholesale price index of

carbon black showed wide variability when compared to rubberchemicals. This can be understood from the coefficient ofvariation- Coefficient of variation of wholesale price indexof carbon black is 16.39, whereas that of rubber chemicals isonly 12.71.

149

Now let us analyse the changes in the wholesale priceindex of finished rubber products. wholesale price index oftyres and tubes was found to be 101.3 in 1971-72. This hasincreased to 155.1 in 1975-76. Although wholesale price indexof tyres and tubes marginally declined in 1977-78 it showed asteady increase in trend after 1977-78. In 1986-87 it stoodat 389.2. The compound annual growth rate is estimated to be10.16 and coefficient of variation in prices is found to be46.05. wholesale price index of camel back also increasedsubstantially over the years. From 100 in 1970-71, wholesaleprice index has gone upto 188 in 1975-76. During the period1976-79 wholesale price index of carbon black showed a fluct­uating tendency. However from 1978-79 onwards wholesale priceindex of camel back showed an increasing trend. In 1986-87wholesale price index of camel back stood at 308.9. The compound

annual growth rate during the period 1970-87 is worked out tobe 7.95 and the coefficient of variation is found to be 35.03.Among the finished rubber products rubber and plastic shoesshowed the least increase in prices. From 100 in 1970-71,wholesale price index of rubber and plastic shoes rose to 201.7in 1986-87. The compound annual growth rate and coefficient ofvariation is estimated to be 4.13 and 20.24 respectively. Thecomparatively smaller growth rate in prices is mainly due tothe lower increase in prices of plastics. The wholesale price

150

index of other rubber products has also increased considerablyover the years. In 1986-87 wholesale price index of other

rubber products stood at 381.6. The coefficient of variationin prices is estimated to be 44.49 and the compound annual

growth is found to be 9.83 during the period under study. Asin the case of rubber and plastic shoes wholesale price indexoF sponge rubber also showed a comparatively smaller growth rate.The compound annual growth rate in wholesale prices of spongerubber is 6.54 and its coefficient of variation is worked outto be 29.32. Wholesale price index of rubber belting and hosesalso showed considerable increase during the last decade. Thecompound annual growth rate is estimated to be 9.71 and 12.53respectively in the case of rubber belting and hoses. Pricesof hoses sh wed wider variations than that of rubber belting.Coefficient of variation of rubber belting and hoses are workedout to be 43.24 and 52.52 respectively during the period.

Thus the foregoing discussion shows that wholesaleprice index of raw materials and finished products has increasedconsiderably in the rubber manufacturing industry. From theanalysis emerges that among the raw materials carbon blackshowed the highest variability followed by rubber chemicalsand natural rubber. Synthetic rubber prices showed the leastvariability among the raw material prices. Among the finished

151

rubber productslhoses has shown the highest variability andrubber and plastic shoes showed the least. Tyres and tubesshowed a higher variability in prices than natural rubberprices. The study reveals that synthetic rubber has shownthe lowest growth rate followed by natural rubber among theraw materials. In the case of finished rubber products hoseshas shown the highest growth rate followed by tyres and tubesand other rubber products sector. The lowest growth rate inprices was shown by rubber and plastic shoes. Thus it emergesthat growth rate in prices of raw materials is almost similarto theguowthrate in prices of finished rubber goods. There­fore we can infer that increase in prices of inputs are mainlyresponsible for the increase in prices of finished rubberproducts.