Agricultural Pricing and Supply Response

7/29/2019 Agricultural Pricing and Supply Response

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Agricultural Pricing

and Supply Response Types of Pricings

Inter-temporal Behavior of Pricing

Demand and Supply, PriceAnalysis

Government Intervention inPricing

Pakistan agricultural Pricing


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Inter-temporal Behavior of Pricing

Changes in prices associated with the passage oftime

Price changes occur from hour to hour, day today, week to week, month to month, season toseason and year to year, and one decade toanother

Changes in the factors affecting demand and

supply of various commodities occur continuouslybut their effect on demand and supply andresultant effect on prices require various lengthof time

Some factors exert upward and some downwardpressure

Price movements and adjustments are like thesurface of an ocean, with an infinite number ofmulti-directional movements, never coming to

standstill Dia ram


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A time series of prices is a set of observations taken atspecified times, usually at equal intervals

Pt =f(t)

Major time elements in prices are given as:

1. Secular or long-term price movements (tendency ofmovement in prices over a long period of time, 10-15years data)

2. Cyclical Price movements (regularly occurringphenomena in prices, swings around a trend line)

Regularly occurring upswings and downswings oroscillations in prices termed as cyclical fluctuation inprices

Prices of farm product decreases during harvest

season and rise during the rest of year Movements within a year termed as seasonal

movements

For more than one year these are called cyclicalmovements


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Cob - Web Model A theoretical explanation of the existence of price

cycles in agricultural products is provided by Cob-Web theorem

Effect of price change on production is with a lag Length of lag varies from commodity to commodity

lag is at least of one year Price-supply relationship is given as:

St = f1(Pt 1)

S refers to area, production in year t and p refers tothe last year price Price-demand relationship is given as:

Dt = g2 (Pt) Pt = f2 (Dt)

Diagram Process of adjustment; an increase in the price of

commodity in year t will affect positively the production inyear t+1. Higher production has dampening effect on itsprice in year t +1 via demand relation. This lower price inyear t+1has dampening effect on production in year t+2and so on. whether price level return to its previous level

depends on slope of demand and supply or the elasticities Movements are not predictable


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3. Year to Year Price Movements

Changes in prices from one year to another

Area under and yield of crop fluctuate from year toyear due to change in weather

Total rainfall during a year, distribution of rainfallduring the year, variation in minimum and maximumtemperature during various stages of crop growth,

relative humidity, extent of sunshine Agriculture policies are formulated on yearly basis

Marketing policies and price movements areinterrelated and affect each other infrastructuralfacilities matter over year

Demand plays little role in year-to-year pricefluctuations

Large fluctuations arises in prices over year due tonon-predictable behavior of weather


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4. Seasonal Price Movements

Intra-year price variations are regularly occurringupswings and downswings in prices

Regularity in occurrence

General pattern of seasonal variations are: lower pricesduring the post-harvest months and higher prices duringthe pre-harvest or off-season months

Seasonality in supply and factors affecting the stockingdecisions of the traders

Production is confined to one season but demand isspread over the year

Storage becomes important and cost involved create

price fluctuations Three seasons involved: harvest-season, post-harvest

season and pre-harvest season

Diagram


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5. Short period price movements

Within a season fluctuations

Hour, day, week, fortnight or month

Result of negotiations between buyers and sellers atspecific time

Three reasons Market arrivals

Temporary changes in demand for product

Lack of proper and correct market information

6. Irregular price movements

Not systematic

May not occur in future

Wars, drought, floods, earthquakes, elections, fear oftax rise, else

Episodic are those occur due to nature

Random in nature


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Government Intervention in pricing ofAgricultural Commodities

Forces of demand and supply interact todetermine the price of a commodity

Fluctuations in farm prices are more than that intheir output

Level of farm product prices affects

Allocation of productive resources between theagriculture and non-agriculture sector Distribution of income between farm and non-

farm sector Fluctuations in agricultural prices beyond a limit

affect the standard of living both farmers andconsumers adversely so also the viability of suchagro-based industries as cotton, jute, sugar andedible oils

Need to keep under check has remained apriority of governments

Thus govt. intervention is required

f ld d d


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During first world war, many countries introducedsome form of regulation to prevent under foodprices

UK guaranteed a policy of minimum price for cerealssince 1917

USA dual pricing system (keeping prices in thedomestic market at high levels and disposing ofexcess production at low prices in the internationalmarket

Quantitative restrictions on imports to provideprotection to domestic agriculture were introducedas early as the twenties

Support programmes in some form have beenmaintained since the thirties for most grains, cotton,tobacco, oilseeds, wool, sugar and milk

Multiple exchange rate system as an alternative toimport duty has been used in Latin America andother countries


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Objectives of Government Intervention in thePricing of Agricultural Commodities

TO PROVIDE STABILITY TO THE PRICES OF FARM PRODUCTS TO MINIMISE UNCERTAINTY ABOUT THE INCOME OF

FARMERS TO MAINTAIN THE FLOW OF PRODUCTIVE RESOURCES IN

THE FARM SECTOR CONSISTENT WITH THE DESIREDGROWTH IN AGRICULTURAL PRODUCTION

TO MANITAIN TERMS OF TRADE BETWEEN THE FARM ANDNON-FARM SECTOR TO PRVIDE FOOD GRAINS AND OTHER FARM GOODS AT

REASONABLE PRICES TO PROVIDE REGULAR FLOW OF RAW MATERIAL TO AGR-

BASED INDUSTRIES AT REASONABLE PRICES

TO ENSURE THAT THE GAINS OF TECHNOLOGICAL CHANGEARE SHARED BY All society TO ENSURE THAT THE CROPPING PATTERNS AND PRODUCT

MIX WHICH EMERGE OVER YEARS ARE CONSISTENT WITHTHE PRINCIPLE OF COMPARATIVE ADVANTAGE


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Objectives of government interventiondiffer according to the economic structureof the economy

In countries where average incomes are high,markets well developed, government revenuehigh, a small proportion of the populationdepends on agriculture and supply response toprice changes is high, intervention laysemphasis on providing income support to thefarmers

On the other hand, in LDCs where agriculturalsector accounts for the lions share of grossnational product, a large proportion ofpopulation depends on agriculture and markets

are not well developed, the emphasis is onencouraging production to meet the growingdemand and making available basic food to allsections of society at affordable prices


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Forms of Intervention

Price support, Procurement of farm

products. Maintenance of bufferstock, restrictions on the movementof products, regulation of importsand exports and restrictions on the

activities of traders Administered Prices

Influencing Demand and Supply

Influencing the behavior of marketfunctionaries

Creation of market infrastructuralfacilities


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Administered Prices Wide fluctuations in agricultural output from year to year result in large

variations in farm product prices, hurting the interests of producerswhen prices fall following good harvest and those of the consumers

during poor crop years when prices rise To protect the interest of producers and to promote the growth of

agricultural output, it is necessary for govt. to intervene in theagricultural markets to bring about some degree of stability in pricesand provide reasonable income to the farmers

Excessively higher prices can soon become counter-productive,affecting demand adversely and thereby constraining the potency of theprice instrument

These prices affects the distribution of income not only betweenagricultural and non-agricultural sectors but also among small and largefarmers and landless agricultural laborers

Any unrestricted rise in agricultural price, while providing an incentiveto producers, can adversely affect the quality of life of several sectionsof the population

There is a need to balance and fix administered price levels, taking intoaccount the interests of both producers and consumers

For farmers its required for tempo of production while for consumers tosafeguard against hunger and malnutrition


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There are 4 types;

Minimum support price: give a guarantee thatthey will purchase the commodities offered by thefarmers at the announced support price in case the

price tends to fall in the open market due to bumperproduction Due to high production prices of food grains are

such lower that farmers incentives loses becauseof non covering cost

These prices enable farmers to pursue theirefforts to increase production

Assurance that price will not fall below theminimum level fixed by government in year ofbumper production

Price support price contributes to income stabilityby neutralizing the effect of price fluctuations

Statutory minimum prices: Make it legally bindingon the purchaser of a commodity to pay theannounced price to the farmers Few buyers can generate monoposony To avoid exploitation from their side


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Procurement or levy price: Make it legally bindingto sell a part of the surplus to the government at theannounced price even if the market price is higher forthe maintenance of buffer stock and to feed the

public distribution system Enable govt. to purchase food grain or industrial

raw material for maintenance of buffer stock orother emergency purpose to maintain thepublic distribution system

To acquire targeted stock from producers, traders

and millers This reduces the quantity available for free

market Maximum or ceiling price: Make it legally binding

on sellers not to sell commodity above announcedprice

Issue price: Ensure availability of a reasonablequantity of food grains to consumers at the givenprice Providing certain specified commodities in the

minimum needed quantity to the consumers Issue prices are generally lower than market price


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Influencing Supply and Demand Demand Procurement

Imports and Exports

Liberal import policy for good that is shortsupply

Exports are encouraged when domestic supplyis comfortable and there is need to earn

foreign exchange Imports suppress domestic prices

Exports raise domestic price level

Maintenance of a Buffer Stock

To even out weather-induced fluctuations indomestic supply

Purchases are made in year of bumperproduction

Stocks are released in years of short supply


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Public Distribution System

Specified goods is supplied to consumers at

lower price even than economic cost throughfair price shops

Reduces demand in open market

Rationing

To control demand and thereby keep the risein demand under check by allotting a limitedquantity per capita for a specific time period

To protect poor

Movement Restrictions Bans on the movements of commodities from

one area to another


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Agricultural Price Policy

To maintain a reasonable relationship betweenthe prices of agricultural and non-agriculturalcommodities so that TOT b/w two sectors do notchange

To maintain appropriate r/s b/w prices of food

and non-food crops and b/w competing crops To minimize the margin b/w producer prices and

consumer prices so that these major groups donot suffer a loss

To minimize seasonal and cyclical fluctuations in

the prices of agricultural commodities To bring about greater price integration in

various regions of the country


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To stabilize the general price level in the face ofan increase in public outlay to ensure eco.

Development To ensure a proper price relationship b/w the

commodities produced by farmers and inputspurchased by them to have high investment

To encourage the production of various goods

needed by the country To maintain equilibrium b/w demand and supply

of different agricultural commodities to avoiddisturbance in the economy

To make commodities available to consumers Atfair prices so that can maintain SOL

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Agricultural Pricing and Supply Response