Pricing Policies & Marketing Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Objectives Discuss nature of agricultural pricing policies in developing countries Discuss nature of agricultural pricing policies in developing countries Discuss agricultural marketing systems in developing countries, including the role of government Discuss agricultural marketing systems in developing countries, including the role of government

Pricing Policy Issues Developing countries frequently set agricultural prices below market levels Developing countries frequently set agricultural prices below market levels Why? Effects?Why? Effects? Government can have role in stabilizing prices Government can have role in stabilizing prices How?How? How do we measure degree of price distortion? How do we measure degree of price distortion?

Price Ceiling and Price Support Price Effects of: Price ceiling at P c Price support at P s S D Quantity PcPc PsPs PePe QsQs QeQe QcQc Deadweight loss

Price ceiling and consumer subsidy

Export Tax Price Quantity S D PwPw PdPd P0P0 } Export tax per unit a bcd h g f e Q1Q1 Q3Q3 0 Q0Q0 Q4Q4 Q2Q2

Government tendency to: Adopt low price policies for agricultural products in LDCs Adopt low price policies for agricultural products in LDCs Subsidize input prices for farmers with the subsidies going to a few 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 There is often an urban bias because urban consumers have political power Want low food prices as food is a big part of consumer budgetWant low food prices as food is a big part of consumer budget Low food prices help keep wages lowLow food prices help keep wages low Sometimes want to tax agriculture to raise funds for roads, schools, etc. 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. 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. 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 NPR i = (P i d – P i w E 0 )/P i w E 0 Where: NPR i = Nominal producer protection rate of the raw product at the farm gate P i d = Domestic farm gate price in local currency of the product in raw form P i w = Estimated border price of the raw product adjusted for (subtracting) the marketing margin E 0 = 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 consumer & producer prices Changes in quantities produced and consumed Changes in quantities produced and consumed Changes in exports, imports, and foreign exchange earnings Changes in exports, imports, and foreign exchange earnings Income transfers Income transfers Government budget effects Government budget effects Price stability effects Price stability effects Changes in marketing margins and their effects on resource allocation Changes in marketing margins and their effects on resource allocation

Indirect and long-run effects of price policies Employment changes Employment changes Incentives for capital investment changed Incentives for capital investment changed Incentives for technical change affected Incentives for technical change affected Changes in health and nutrition Changes in health and nutrition Misallocation of resources in production, storage, transportation, and processing Misallocation of resources in production, storage, transportation, and processing Effects on land values Effects on land values

Two major marketing functions Transform products in time, space, or form through storage, transport, or processing 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 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 StorageTransportationProcessing Exchange ownership Price information * price level * price stability * price margins Allocation of resources on the basis of price signals * supply (farm income) * demand (nutrition) * efficient resource allocation Food Marketing Activities Price Policy

Deficiencies in agricultural marketing systems in developing countries Infrastructure – roads, storage, utilities Infrastructure – roads, storage, utilities Producers lack information Producers lack information Weak bargaining position of producers in some cases Weak bargaining position of producers in some cases Government-induced distortions in some cases Government-induced distortions in some cases

What is the legitimate role of government in marketing? Provide infrastructure Provide infrastructure Provide market information Provide market information Provide grades and standards Provide grades and standards Provide needed regulations (health and safety, weighing practices, legal codes) 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. 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 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. These institutions are essential but frequently require changes for agricultural development to occur.