AGRICULTURAL PRICES
AND MARKETS
AGRICULTURAL PRICES AND MARKETS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
AGRICULTURAL PRICES AND MARKETS
Author: Imre Fertő
Supervised by Imre Fertő June 2011
ELTE Faculty of Social Sciences, Department of Economics
AGRICULTURAL PRICES AND MARKETS
Week 9
Agricultural terms of trade
Imre Fertő
Literature
• Theory:
– Tomek, W. G.–Robinson, K. (2003): Agricultural Product Prices. Cornell University Press, Chapter 10
– Colman, D. (2009): Agriculture’s Terms of Trade:
Issues and Implications. Presidential Address
prepared for presentation at the 27th Conference of the International Association of Agricultural
Economists, Beijing, China, August 17, 2009
• Applications:
– Zanias, G. P. (1998). Inflation, Agricultural Prices and Economic Convergence in Greece. European Review of Agricultural Economics, 25, 19–29
Outline
• Determining factors of general level of agricultural prices
• Measuring general level of farm prices
• Agricultural terms of trade – Definition
– Measurement
– Facts
Determining factors of general level of agricultural prices
• We focus until now on price changes at the product level
• There are several reasons to focus on the general level of farm prices rather than specific prices of individual commodities
• Farm prices although very diverse, generally move together as whole
– Influenced by a number of macroeconomic variables such as monetary and fiscal policies, trade policies etc.
• General level of farm prices has some economic and political implications
– Relative well-being of the farm sectors – General impact of changes in policies
Determining factors of general level of agricultural prices
• Level of farm prices is determined by aggregate demand and aggregate supply
• Primary demand at the retail level – P=D-1(Q,Y)
• P: price of food
• Q: aggregate food consumption
• Y: factors influencing demand such as income, population, prices of other goods and services
• Farm level derived demand – PA=D-1(A, P, PB)
• A: aggregate farm output
• PA: farm price index
• PB: agricultural input price index
• P: price of food
Determining factors of general level of agricultural prices
• Farm level supply – A=A(PA,t-1, X)
• X factors influencing supply
• PA,t-1= lagged prices of inputs
• Three equations help to understand that prices received by farmers are influencing many factors which
– partly is coming within farm sector
– partly is arising from other sectors and international markets
Measuring general level of farm prices
• The Consumer Price Index (CPI) measures the average change of price changes of goods and services purchased by households for their own consumption. It measures the inflation of
national currency
• The CPI is a fixed base weighted index
(Laspeyres type). The weights of the 141 basic
headings are the same every month throughout
the year
Main groups In CPI In CPI for pensioners
Foods 23,223 30,316
Alcoholic beverages,
tobacco 9,483 6,305
Clothes 4,403 2,700
Durable goods 6,851 2,843
Electricity 9,903 16,994
Other goods, fuelsa) 17,272 16,913
Services 28,865 23,929
Total 100,000 100,000
a) Include drugs and medical goods
Distribution of consumer expenditures
100110120130140
per cent
1985 1990 1995 2000 2005 2010
year
food cpi
.9.95 1
1.05
ratio
1985 1990 1995 2000 2005 2010
year
Food price and CPI
90100110120
per cent
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
year
cpi agricultural
.8.9 11.11.2
ratio_agri_cpi
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
year
Agricultural price index and CPI
90100110120
per cent
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
year
food agricultural
.85 .9.95 1
1.05 1.1
ratio_agr
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
year
Agricultural and food price index
Terms of trade
• This issue arises from theory of international trade
• Terms of trade:
– A quotient of export and import price indices – The terms of trade shows the percentage
change of exports from basis to reference period, for purchasing each unit of imports.
– If more exports are dispatched for each unit of imports, then the value of index is less
than one, and vice versa.
80 90 100 110 120 130 140 150
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
export import terms of trade
Hungarian terms of trade
Agricultural terms of trade
• Agricultural terms of trade:
– It is the quotient of the agricultural producer price index and the input price index
• Agricultural producer price index: It reflects changes in prices paid to producers for agricultural products
procured for processing or further sale, or sold directly to households for consumption (on market), excluding price changes of intermediate sales of agricultural
products (young animals for breeding)
• Agricultural input price index: data on purchase price of fertilizers, pesticides, feeding stuffs and veterinary products are collected from retailers and wholesalers
Agricultural terms of trade in Hungary (pervious year=100)
60 70 80 90 100 110 120 130 140 150 160
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
crops livestock total agricultural input agricultural terms of trade
Agricultural terms of trade in Hungary (same period of previous year=100)
80 85 90 95 100 105 110 115 120 125 130
2004. 2005. 2006. 2007. 2008.
total agricultural inputs investment Agicultural terms of trade
Agricultural and industrial prices in a growing economy
P
Q Pm
Pe Pa
S1
S2
Dm1
Da1 Da2
Dm2
Terms of trade of commodities
• To generalisation of agricultural terms of trade
• Prebish-Singer hypothesis:
– the historical record shows a long-run tendency for the commodity terms of
trade of the less developed countries to
deteriorate
Evaluation of P-S hypothesis
• Empirical papers partly support P-S hypothesis
• Why may be true?
– Engel curve
– Substitution away from mineral products as a form of technological progress
• Why may not be true?
– Technological progress in manufactured goods can lead to a fall in the prices of these goods as they become easier to produce. This is a fall in terms of trade for industrialised countries rather than developing countries
– OPEC has managed to keep oil prices high by
restricting supplies on the world market
Conclusions
• The forecast of agricultural prices is difficult task
independently from time length and aggregation level because they are depend on
– Economic factors
– Non economic factors
• Political decisions
• Weather
• Other unforeseeable events
• Fluctuations of agricultural prices are the norm rather than exception
• Thus, players in agri-food sector are maintain a strong interest in strategies and public policies to manage
price risks or compensate unstable terms of trade
