26) Unstable Commodity Markets Flashcards
How is unpredictable supply a reason why prices are unstable in agricultural markets
➡️sudden change in whether
➡️have dramatic effect on supply
➡but ️bumper harvest of wheat
➡️would increase supply
➡️push down the price
➡️so prices fluctuates by large amounts
➡️due to elasticity of supply curve
➡️would be perfectly inelastic in short-run
➡️due to time taken for crops to go
Name Why are price unstable in agriculture commodity markets
⚫unpredictable supply
⚫️time-lags problems
How is time lags problem a reason why prices are unstable in agricultural markets
⚫️price of wheat high in current year
➡️farmers plant more wheat next year
➡️to gain high prices
⚫️but increased supply of wheat the following year
➡️reduces market prices
➡️lower price of wheat
⚫️encourage farmers to plant less wheat
➡️this will reduce supply the following year
➡️push prices back up
⚫️fluctuating prices bad for farmers
➡️leads to unstable income
➡️effecting their incentive to stay in the industry
⚫️bad for consumers
➡️who see these goods as necessities
➡e.g. Increase in price of wheat, increases price of goods derived from wheat
➡️such as bread, pasta
Why does government intervene in the agricultural market
⚫️problem of unstable prices leading to unstable farmers incomes
⚫️the problem of falling prices
⚫️the desire to preserve agriculture and maintain food supplies
⚫️imperfect competition in retail
Why does the government intervene when theres a problem of unstable prices leading to unstable farmers incomes
➡️sudden change in whether
➡️have dramatic effect on supply
➡️droughts in Russia and Ukraine in summer 2010
➡️pushed global wheat prices due to poor harvest
➡️shift supply curve from S to S1
➡but ️bumper harvest of wheat
➡️would increase supply
➡️push down the price
➡️so prices fluctuates by large amounts
➡️due to elasticity of supply curve
➡️would be perfectly inelastic in short-run
➡️due to time taken for crops to grow
Why does government intervene in the agricultural market when theres a problem of long - term falling prices
⚫️productivity and crop yields in agriculture
➡️have improved dramatically in recent years
➡️due to advances in technology and GM crops
➡️which have increased yields
➡️by eliminating resistance diseases
➡️increases supply lead to falling prices and farmers income
➡️demand curve for agricultural good becomes very inelastic
➡if ️price of basic foods falls
➡️consumer demand does not change much
➡️these factors may cause farmers leave industry
➡️can disrupt food supply
Why does government intervene in the agricultural market when the desire to preserve agriculture and maintain food supplies
➡️to protect rural way of life
➡️desire to maintain food supplies during periods of war
➡️encourages governments to intervene
➡️if country becomes over reliant on imported foods
➡️theres dangers in times of international tension
➡️that insufficient food will be available
➡️although Uk imports a lot of food
➡️also self-sufficient in agriculture
Why does government intervene in the agricultural market when imperfect competition in suppliers and retailers
⚫️farmers operate very small businesses
➡️trade with larger businesses
➡️seen as victims of big business
➡️farmers have to buy their inputs
➡️from powerful monopolists and large firms
➡️who able to increase prices that farmer must pay
➡️farmers sell their produce
➡️to large food processing firms
➡️and direct to supermarkets
➡️firms have huge bargaining powers due to size
➡️so able to force down the prices farmers receive
➡️through bulk buying power
Name the methods of government intervention in agriculture
⚫️guaranteed minimum price
⚫️buffer stocks
What does guaranteed minimum price mean
⚫️government sets a minimum price
➡️to prevent prices of goods
➡️falling below a certain level
➡️sometimes called floor prices
Explain the diagram showing a minimum price set above the equilibrium price
⚫️causes excess supply
➡️to maintain this guaranteed price
➡️government have to buy up the whole of excess
➡️between Qd and Qs
Whats an advantages of guaranteed minimum prices
⚫️help prevent extreme downwards fluctuations
➡️farmers always guaranteed a certain price
➡️no matter what happens in the market
➡️makes it easier for farmers to plan ahead
➡️as they know they’ll receive a certain level of income
⚫️encourages farmers to stay in industry
➡️so guarantees food supplies
⚫️scheme can be self-financing
➡️if combined wi a buffer stock scheme
Whats a disadvantage of guaranteed minimum prices
⚫️minimum price could hold the price artificially high
➡️ reducing consumer demand of an important commodity
⚫️expensive for government ➡️buying up excess supply ➡️cost of storage ➡️opportunity cost of reduced spending on other sectors ➡️like education and heath
⚫️creates mountain of stocks which no body wants
➡️government dump them on LEDC
➡️farmers in poor countries out of work
➡️cant compete with these low prices
➡️so world poorest countries
➡️paying the price to support the incomes of rich world farmers
⚫️to prevent dumped stocks
➡️government pay farmers to cut back production
⚫️if price set below current market equilibrium
➡️will have no effect on market price
What does buffer stocks mean
➡️organisation ➡️set up and financed by governments ➡️buys up agricultural supplies ➡️in time of plentiful harvests ➡️sells these when harvests are poor ➡️purpose is to reduce price fluctuations in markets
Explain the buffer stock diagram
⚫️in one year
➡️supply of agriculture good at S1
➡️resulting free market price within the target band
➡️so no need for government to intervene
⚫️in second year ➡️theres bumper harvest ➡️so S2 is supplied onto the market ➡️without government intervention market prices would fall to P1 ➡️which is below the price floor
➡️to maintain within the target band
➡government buffer stock scheme
➡️must buy up the surplus at Pmin
➡️and take stock out of the market
⚫️next years bad weather
➡️may result in a poor harvest
➡️so only S3 is supplied
➡️without government intervention
➡️market price would rise to P2
➡️which is above price ceiling
➡️to prevent this from happening
➡️government must release stored stock from buffer scheme
➡️this increases supply
➡️so reduces the price to within the target band
What are the advantages of buffer stock schemes
⚫️stabilise prices for producers consumers
⚫️self financing ➡️if governments able to buy stocks ➡️when low in value ➡️sell later at higher value ➡️depending on the costs of running the scheme ➡️storage and administration ➡️might even be profitable
What are the disadvantages for the buffer stock schemes
⚫️wont work for perishable good ➡️carrots milk ➡️but other agricultural commodities like wheat ➡️have much longer life ➡️will eventually go bad ➡vermin's will damage storage supplies
⚫️Expensive for government
➡️cost of storage
➡️opportunity cost
⚫️difficult of setting target price
➡️price of commodity always fluctuating
➡️if target price too high
➡️mean government price too high
➡️mean government will have to continually buy up surpluses
➡️on the other hand
➡️may be permanent changes
➡️to price of a particular commodity
➡️due to other external factors
⚫️problem of dumping persistent surpluses on the developing world
What are the Common agricultural policy objectives
⚫️ensure fair living standards for agricultural community
⚫stabilise markets
⚫️ensure availability of food
⚫️provide food at reasonable prices
How much does the common agricultural policy cost
⚫️EU spens 43bn euros a year
➡️additional 7.7bn euros on rural development
⚫️france biggest recipant of CAP funds, then spain, germany italy, Uk
How is the money of common agricultural policy spent
⚫️until 1992
➡️most of CAP budget spent on price support
➡️farmers guaranteed minimum price for their crop
➡️more they produce, bigger the subsidy they receive
➡️rest was spent on export subsidies
➡️compensation for traders
➡️who sold agriculture goods to foreign buyers
➡️for less than the price paid to European farmers
➡️in international trade negotiations
➡️EU offered to cut all export subsidies from 2013
➡️as long as other countries reciprocate
➡️by lowering tariffs on industrial goods
➡️big cuts in import tariffs discussed in latest trade round
➡️but no breakthrough was achieved
How many people benefit from common agricultural policy
⚫️critics argue
➡️CAP costs too much
➡️benefits only few people
➡️only 5% EU citizens work agriculture
➡️but importance of farming to the national economy, varies from one EU country to another
➡️Poland 18% population works in agriculture
➡️less than 2% in UK and Belgium
⚫️supporters of CAP says
➡️farmers and employers work long hours for little money
➡️would be unprofitable if EU subsidies were withdrawn
