Agricultural Pricing and Supply Response

Types of Pricings Inter-temporal Behavior of Pricing Demand and Supply, Price Analysis Government Intervention in Pricing Pakistan agricultural Pricing

Inter-temporal Behavior of Pricing

Changes in prices associated with the passage of time Price changes occur from hour to hour, day to day, week to week, month to month, season to season and year to year, and one decade to another Changes in the factors affecting demand and supply of various commodities occur continuously but their effect on demand and supply and resultant effect on prices require various length of time Some factors exert upward and some downward pressure Price movements and adjustments are like the surface of an ocean, with an infinite number of multi-directional movements, never coming to standstill Diagram

A time series of prices is a set of observations taken at specified times, usually at equal intervals Pt = f (t) Major time elements in prices are given as: 1. Secular or long-term price movements (tendency of movement in prices over a long period of time, 10-15 years data) 2. Cyclical Price movements (regularly occurring phenomena in prices, swings around a trend line) Regularly occurring upswings and downswings or oscillations in prices termed as cyclical fluctuation in prices 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 cyclical movements

Cob - Web Model A theoretical explanation of the existence of price cycles in agricultural products is provided by CobWeb 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 to the 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 in year t+1. Higher production has dampening effect on its price in year t +1 via demand relation. This lower price in year t+1has dampening effect on production in year t+2 and so on. whether price level return to its previous level depends on slope of demand and supply or the elasticities Movements are not predictable

3. Year to Year Price Movements Changes in prices from one year to another Area under and yield of crop fluctuate from year to year due to change in weather Total rainfall during a year, distribution of rainfall during the year, variation in minimum and maximum temperature during various stages of crop growth, relative humidity, extent of sunshine Agriculture policies are formulated on yearly basis Marketing policies and price movements are interrelated and affect each other infrastructural facilities matter over year Demand plays little role in year-to-year price fluctuations Large fluctuations arises in prices over year due to non-predictable behavior of weather

4. Seasonal Price Movements Intra-year price variations are regularly occurring upswings and downswings in prices Regularity in occurrence General pattern of seasonal variations are: lower prices during the post-harvest months and higher prices during the pre-harvest or off-season months Seasonality in supply and factors affecting the stocking decisions of the traders Production is confined to one season but demand is spread 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

5. Short period price movements Within a season fluctuations Hour, day, week, fortnight or month Result of negotiations between buyers and sellers at specific 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 of tax rise, else Episodic are those occur due to nature Random in nature

Government Intervention in pricing of Agricultural Commodities

Forces of demand and supply interact to determine the price of a commodity Fluctuations in farm prices are more than that in their output Level of farm product prices affects Allocation of productive resources between the agriculture and non-agriculture sector Distribution of income between farm and nonfarm sector Fluctuations in agricultural prices beyond a limit affect the standard of living both farmers and consumers adversely so also the viability of such agro-based industries as cotton, jute, sugar and edible oils Need to keep under check has remained a priority of governments Thus govt. intervention is required

During first world war, many countries introduced some form of regulation to prevent under food prices UK guaranteed a policy of minimum price for cereals since 1917 USA dual pricing system (keeping prices in the domestic market at high levels and disposing of excess production at low prices in the international market Quantitative restrictions on imports to provide protection to domestic agriculture were introduced as early as the twenties Support programmes in some form have been maintained since the thirties for most grains, cotton, tobacco, oilseeds, wool, sugar and milk Multiple exchange rate system as an alternative to import duty has been used in Latin America and other countries

Objectives of Government Intervention in the Pricing 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 DESIRED GROWTH IN AGRICULTURAL PRODUCTION TO MANITAIN TERMS OF TRADE BETWEEN THE FARM AND NON-FARM SECTOR TO PRVIDE FOOD GRAINS AND OTHER FARM GOODS AT REASONABLE PRICES TO PROVIDE REGULAR FLOW OF RAW MATERIAL TO AGRBASED INDUSTRIES AT REASONABLE PRICES TO ENSURE THAT THE GAINS OF TECHNOLOGICAL CHANGE ARE SHARED BY All society TO ENSURE THAT THE CROPPING PATTERNS AND PRODUCT MIX WHICH EMERGE OVER YEARS ARE CONSISTENT WITH THE PRINCIPLE OF COMPARATIVE ADVANTAGE

Objectives of government intervention differ according to the economic structure of the economy

In countries where average incomes are high, markets well developed, government revenue high, a small proportion of the population depends on agriculture and supply response to price changes is high, intervention lays emphasis on providing income support to the farmers On the other hand, in LDCs where agricultural sector accounts for the lions share of gross national product, a large proportion of population depends on agriculture and markets are not well developed, the emphasis is on encouraging production to meet the growing demand and making available basic food to all sections of society at affordable prices

Forms of Intervention

Price support, Procurement of farm products. Maintenance of buffer stock, restrictions on the movement of products, regulation of imports and exports and restrictions on the activities of traders
Administered Prices Influencing Demand and Supply Influencing the behavior of market functionaries Creation of market infrastructural facilities

Administered Prices
Wide fluctuations in agricultural output from year to year result in large variations in farm product prices, hurting the interests of producers when 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 the agricultural markets to bring about some degree of stability in prices and provide reasonable income to the farmers Excessively higher prices can soon become counter-productive, affecting demand adversely and thereby constraining the potency of the price instrument These prices affects the distribution of income not only between agricultural and non-agricultural sectors but also among small and large farmers and landless agricultural laborers Any unrestricted rise in agricultural price, while providing an incentive to producers, can adversely affect the quality of life of several sections of the population There is a need to balance and fix administered price levels, taking into account the interests of both producers and consumers For farmers its required for tempo of production while for consumers to safeguard against hunger and malnutrition

 There are 4 types; Minimum support price: give a guarantee that they will purchase the commodities offered by the farmers at the announced support price in case the price tends to fall in the open market due to bumper production Due to high production prices of food grains are such lower that farmers incentives loses because of non covering cost These prices enable farmers to pursue their efforts to increase production Assurance that price will not fall below the minimum level fixed by government in year of bumper production Price support price contributes to income stability by neutralizing the effect of price fluctuations Statutory minimum prices: Make it legally binding on the purchaser of a commodity to pay the announced price to the farmers Few buyers can generate monoposony To avoid exploitation from their side

Procurement or levy price: Make it legally binding to sell a part of the surplus to the government at the announced price even if the market price is higher for the 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 or other emergency purpose to maintain the public 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 announced price Issue price: Ensure availability of a reasonable quantity of food grains to consumers at the given price Providing certain specified commodities in the minimum needed quantity to the consumers Issue prices are generally lower than market price

Demand Procurement Imports and Exports

Influencing Supply and Demand

Liberal import policy for good that is short supply Exports are encouraged when domestic supply is 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 in domestic supply Purchases are made in year of bumper production Stocks are released in years of short supply

Public Distribution System

Specified goods is supplied to consumers at lower price even than economic cost through fair price shops Reduces demand in open market

Rationing
To control demand and thereby keep the rise in demand under check by allotting a limited quantity per capita for a specific time period To protect poor

Movement Restrictions
Bans on the movements of commodities from one area to another

Agricultural Price Policy

To maintain a reasonable relationship between the prices of agricultural and non-agricultural commodities so that TOT b/w two sectors do not change 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 do not 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

To stabilize the general price level in the face of an increase in public outlay to ensure eco. Development To ensure a proper price relationship b/w the commodities produced by farmers and inputs purchased 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 avoid disturbance in the economy To make commodities available to consumers At fair prices so that can maintain SOL