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Pricing Policies & Marketing AAEC 3204 Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2009 Objectives • • Discuss nature of agricultural pricing policies in developing countries Discuss agricultural marketing systems in developing countries, including the role of government Pricing Policy Issues Developing countries frequently set agricultural prices below market levels • Why? Effects? Government can have role in stabilizing prices • How? How do we measure degree of price distortion? Price Ceiling and Price Support Price S Ps Pe Deadweight loss Pc D Qc Effects of: Price ceiling at Pc Price support at Ps Qe Qs Quantity Price ceiling and consumer subsidy Price S D Po Pw d c b a Subsidy per unit Pd h f g e 0 Q3 Q1 Q0 Q2 Q4 Quantity Export Tax Price D a Pw Pd P0 0 b c S d } Export tax per unit g h Q1 f Q3 Q0 Q4 e Q2 Quantity Government tendency to: • • Adopt low price policies for agricultural products in LDC’s Subsidize input prices for farmers with the subsidies going to a few Why do governments get involved in trying to affect prices? • There is often an “urban bias” because urban consumers have political power • Want low food prices as food is a big part of consumer budget • Low food prices help keep wages low • Sometimes want to tax agriculture to raise funds for roads, schools, etc. Examples of price policies Prices ceilings in urban areas but not rural areas. Result: May find that imported grain moves from urban to rural areas Uniform floor price over a wide geographic area. Result: Private traders buy the product close to the demand center but leave distant areas alone Measuring the Degree of Price Distortion: Nominal Rate of Protection NPRi = (Pid – PiwE0)/PiwE0 Where: NPRi = Nominal producer protection rate of the raw product at the farm gate Pid = Domestic farm gate price in local currency of the product in raw form Piw = Estimated border price of the raw product adjusted for (subtracting) the marketing margin E0 = Exchange rate. May be an official rate or an equilibrium exchange rate Direct short-run effects of price policies • • • Changes in consumer & producer prices Changes in quantities produced and consumed Changes in exports, imports, and foreign exchange earnings • Income transfers • Government budget effects • Price stability effects • Changes in marketing margins and their effects on resource allocation Indirect and long-run effects of price policies • Employment changes • Incentives for capital investment changed • Incentives for technical change affected • Changes in health and nutrition • • Misallocation of resources in production, storage, transportation, and processing Effects on land values Two major marketing functions Transform products in time, space, or form through storage, transport, or processing Communicate signals to producers and consumers about the costs of buying something or the benefits of selling it Links Between Food Price Policy and Food Marketing Price Policy Storage Transportation Processing Exchange ownership Food Price information Marketing * price level Activities * price stability * price margins Allocation of resources on the basis of price signals * supply (farm income) * demand (nutrition) * efficient resource allocation Deficiencies in agricultural marketing systems in developing countries • • • • Infrastructure – roads, storage, utilities Producers lack information Weak bargaining position of producers in some cases Government-induced distortions in some cases What is the legitimate role of government in marketing? • Provide infrastructure • Provide market information • Provide grades and standards • Provide needed regulations (health and safety, weighing practices, legal codes) Supermarkets Beginning to see some development of supermarkets in retail food marketing in large cities in developing countries. Conclusion • • Pricing and marketing institutions create incentives, positive and negative, for allocating production resources These institutions are essential but frequently require changes for agricultural development to occur.