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Pricing Policies &
Marketing
AAEC 3204
Dr. George Norton
Agricultural and
Applied Economics
Virginia Tech
Copyright 2009
Objectives
•
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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
•
•
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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
•
•
•
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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
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•
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.