Price fluctuations refer to the state of upward and downward movement of prices especially of agricultural products. There is greater oscillation in prices of these goods as compared to prices of manufactured goods.
THE CAUSES OF AGRICULTURAL PRICE FLUCTUATIONS:
- The long gestation period. The agricultural commodities have long gestation period and their supply cannot be increased in the short run which forces prices to rise. However in the long run after harvesting the supply increases which forces the prices to fall due excess supply on the market.
- Bulkiness of agricultural products hence difficult to transport. Most of the agricultural products are bulky and cannot easily be transported from areas of plenty to areas of scarcity. In areas of plenty prices reduce due to the excess supply and in areas of scarcity prices increase due to shortage.
- Natural factors which affect the level of output. Unfavourable natural such as poor soils, prolonged drought reduce the supply of agricultural products which forces the prices to rise. On the other hand favourable natural factors such reliable rainfall, fertile soils leads to increase in supply of agricultural products which forces the prices to fall due to excess supply.
- Perishability and thus difficulty of storage of agricultural products. Agricultural products are highly perishable and they cannot be stored for a long time and therefore producers are forced to sell them quickly because they cannot be stored for a long time which leads to a fall in their prices However after most of the produce is sold, the supply reduces which forces the prices to rise due to scarcity.
- Many producers hence planning is difficult/poor planning by the farmers. When farmers fetch high prices in one season, they plan to produce more in the following season which increases supply and thus forces the prices to fall, on the other hand if the prices are low in one season farmers plan to produce less and thus force the prices to rise because of the shortage.
- Weak bargaining position of LDCs on the world market/ External determination of prices of agricultural products. The major buyers of agricultural products from LDCs like Uganda dictate the prices of agricultural products, when they dictate low prices in the market; the local farmers are paid reduced prices for their produce. On the other hand when the buyers dictate the high price, the local farmers are also paid increased price for their products.
- Price inelastic demand for agricultural products. Farmers easily change price whenever output changes for example a reduction in output leads to an increase in price and an increase in output leads to a reduction in price since the farmers expect minimal or no change in demand.
- Income inelastic demand for agricultural products/low income elasticity of demand for agricultural products .There is a tendency for farmers to increase output in order to benefit from the increased incomes of the buyers, however the buyers do not demand for more which causes a surplus of agricultural output hence a fall price to clear the surplus. After sometime there is acute shortage on the market which forces the farmers to increase the price since the buyers continue demanding the same quantity.
- Poor surplus disposal system/ poor infrastructure. The poor infrastructure in developing countries limits accessibility to markets. In areas of plenty the prices fall due to excess supply of agricultural products. On the other hand in areas of scarcity prices rise since it is hard to acquire those products due to poor infrastructure.
- Divergence between planned and actual output. When actual output is greater than planned output, the prices of agricultural products fall because of flooded market and when the actual output is less than the planned output the prices rise because of the decrease in the output on the market.
THE COBWEB THOERREM/ MODEL:
The cobweb theorem is an economic model used to explain how small economic shocks can become amplified (strengthened) by the behaviour of producers. The amplification is, essentially the result of information failure, where producers base their current output on the average price they obtain in the market during the previous year/season.
This is to some extent, a non rational decision, given that a supply side shock between planting and harvesting can lead to an unexpectedly lower or higher price, this results in either higher output or a lower output in subsequent years/seasons and moves them into a long-term disequilibrium position.
ASSUMPTIONS OF THE COBWEB THEOREM/MODEL:
- It assumes that there is no quick adjustment of supply in the market therefore there is time lag within which supply changes.
- It assumes that there are two different parties i.e. suppliers and consumers and their plans differ.
- It assumes that the producers never learn from past mistakes and cannot anticipate price movement/price changes.
- It assumes that producers never keep old stock in a period of low prices to be sold in a period of higher prices.
- It assumes that there is no chance of hitting equilibrium with first unplanned supply.
TYPES OF COBWEB:
1. CONVERGENT/DAMPED/STABLE COBWEB:
This where the supply curve is steeper(more inelastic) than the demand curve implying that a small price fluctuation leads to attainment of equilibrium, in other wards price fluctuation can be seen to steadily approach the equilibrium point.
2. DIVERGENT/EXPLOSIVE/UNSTABLE COBWEB
This is where price fluctuations tend to deviate far away from equilibrium over time. Demand is relatively more inelastic than supply.
3. REGULAR/PERFECT COBWEB:
This is when the slopes of both demand and supply curves are the same. In other wards the slope of supply and demand curves are identical. The price elasticity of demand and price elasticity of supply are equal. Price fluctuations will neither converge nor diverge.
An illustration of a convergent/damped/stable cobweb, divergent/explosive/unstable cobweb, regular/ perfect cobweb:
THE EFFECTS OF AGRICULTURAL PRICES FLUCTUATIONS:
- It leads to fluctuation/ unstable export earnings. In some seasons when export prices increase, earnings from exports increase and in seasons when export prices decrease, export earnings also fall.
- It makes projected planning based on export earnings from agricultural commodities difficult. This is because it is hard determine how much revenue the country will get from her exports because of the rising and falling prices of agricultural products.
- It leads to fluctuation/instabilities in the balance of payment position. Rising agricultural export prices leads to increased foreign exchange earnings which results into improvements in the balance of payment position On the other hand falling prices of agricultural exports leads to a fall in foreign exchange earnings which results into the worsening balance of payment position.
- It leads to fluctuation/unstable incomes of the farmers/producers. Rising prices of agricultural products leads an increase in the farmer’s income .On the other hand falling prices of agricultural products leads a fall in the farmer’s incomes.
- Leads to fluctuation/unstable terms of trade. Rising prices of agricultural products on the international market leads to improvement the terms of trade of the country. On the other hand falling prices of agricultural products lead to worsening terms of trade.
- It worsens the problem of income inequalities/disparity .Falling prices of agricultural products leads to a fall in the incomes of the farmers compared to the incomes of those in the industrial sector which are relatively stable, This worsen income inequality in the country.
- Investment in agriculture becomes uncertain and this causes speculation and irrational use of land. Since farmers’ earnings are unstable they lose interest in farming and some abandon agricultural production and this reduces agricultural output.
- It leads to fluctuation in employment levels. Rising prices of agricultural products leads to increased investment in the agricultural sector hence increased employment opportunities. On the other hand falling prices of agricultural products discourages investment in the sector hence reduced employment opportunities.
- It leads to rural urban migration with its associated evils/ negative consequences. This happens when farmers in rural areas become frustrated in agriculture and decides to move to urban areas with hope of getting better jobs, however majority of such people fail to get those jobs, resulting into open urban unemployment, development of slums, prostitution, robbery etc.
- Leads to fluctuation/unstable government revenue. Rising prices of agricultural products leads increased earnings of the farmers which widens the tax base. On the other hand falling prices of agricultural products leads to reduced earnings of the farmers, which leads reduced tax base and thus reduced government revenue.
- Leads to fluctuation/unstable exchange rates. Rising export prices leads to increased foreign exchange inflow which results to a fall in the exchange rate thus a rise in the value of the local currency. On the other hand falling export prices leads to reduction in foreign exchange inflow which leads to a rise in the exchange rate hence a fall in the value of the local currency.
STEPS/WAYS TO STABILISE PRICES OF AGRICULTURAL PRODUCTS:
- By use/ Operation of buffer stock. This is where the surplus output is bought by the marketing boards during bumper/rich harvest and sold during periods of scarcity. In this case the government builds stock during the time of plenty by buying from the farmer the surplus output to avoid price falling so low and sells or releases the stock to the market in time of shortage or scarcity to avoid prices rising so high.
- Use of stabilisation fund policy: This is the deliberate attempt by the government of paying producers less than the market price when prices and incomes are high, putting the realised difference into a fund and later using that fund to pay the producers high price than the market price when prices and incomes are low to avoid fluctuations in prices and incomes as would be dictated by market forces.
- Undertake agricultural diversification: the farmers should be encouraged to undertake several economic activities within the agricultural sector in order to avoid depending on a single activity whose price may fall or rise so as to stabilise their incomes.
- Improve on the infrastructure/improve the transport facilities/ the disposal system. This will enable the easy transportation of agricultural products from areas of plenty to areas where prices are low to areas of scarcity where prices are high in order to keep prices stable in all the areas.
- Promote industrialisation within the agricultural sector. The established industries buy the excess supply of agricultural products to use them as raw materials which would have caused a fall in their prices, thus helping to stabilise the prices of agricultural products. In addition agro-processing helps to add value to them and therefore enabling agricultural exports to fetch more earnings.
- Strengthen/Join international commodity agreements. This will help to improve the bargaining power of the exporting countries of a given commodity, through such agreements the exporting countries are in position to bargain for high and fair prices for their commodities.
- Modernise agriculture in order to reduce dependence on nature: This is done through the use of irrigation farming, commercialisation/mechanisation of agriculture in order to ensure that agricultural production takes place throughout the year to reduce price fluctuations when the agricultural output rises or falls.
- Undertake market expansion through diversification. This is done through expanding the existing markets and finding new ones for the agricultural products. This helps to overcome flooding of the market. When the producers supply to different markets, the consumers compete for the products and this helps to stabilise the prices of the agricultural products.
- The government may set minimum price. This helps to protect producers/ farmers against exploitation by the buyers because the agricultural commodities are sold at the price fixed by the government controlling price fluctuations.
- Adopt a strict quota system. This is done by regulating the amount to be supplied on the international market of the agricultural products which may help to control excess supply and subsequent price fluctuations.
- Use contract farming/ Future market arrangement; the farmers should be encouraged to sign contracts with the consumers before production takes place e.g. a poultry farmer can sign a contract with a hotel manager to supply chicken and eggs at an agreed price before production takes place.
- Encourage producer cooperatives to regulate supply. Cooperative helps to bring producers of a given commodity together. This enables them to regulate the supply of their product, look for the market jointly and all these help to stabilise prices.
- Improve on the Storage system. This helps to stabilise supply of agricultural products on the market, through storing the excess supply during bumper harvest to avoid over flooding the market thus stabilising prices.
- Encourage proper planning of production: This is done through sensitising the farmers about the importance of regulating supply so as to avoid over flooding the market, thus help to stabilise prices.
THE INTERNATIONAL COMMODITY AGREEMENTS:
The international commodity agreements are arrangements between the producing and Consuming countries to stabilise markets and raise the average prices. Such markets include markets for coffee, Tea, Sugar, Cocoa, Cotton etc.
Examples of international commodity agreements include;
- Internal coffee organisation (I.C.O)
- International cocoa organisation ( I.C.C.O)
- International Cotton Advisory organisation( I.C.A.O)
- International Sugar Origination (I.S.O) • International Tea organisation (I.T.O)
OBJECTIVES OF INTERNATIONAL COMMODITY AGREEMENTS:
- To facilitate inter-governmental consultations and coordination regarding commodity prices and priorities
- To encourage sustainability in the production and supply of a particular commodity by initiating development projects aimed at adding value to the commodity.
- To improve the marketing by increasing the consumption of the commodity through innovative market development activities.
- To improve the quality of the commodity by working closely with the producing and consuming countries.
- To develop innovative and capacity building among the producing country .
- To ensure transparency in the commodity market through providing comprehensive information by means of statistics and market studies.
THE ROLE OF INTERNATIONAL COMMODITY AGREEMENTS:
- Promoting the consumption and production of the commodity on the world market.
- Stabilising the price the commodity on the world market.
- Ensuring production of better quality products by the producing/exporting countries.
- Improving the marketing of the product through innovative market development activities e.g. advertising in the world business journals, on different business websites.
- Facilitating inter-governmental consultations and coordination regarding commodity policies and priorities.