agricultural pricing and supply response
TRANSCRIPT
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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