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
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Author: Imre Fertő Supervised by Imre Fertő
June 2011
Week 9
Agricultural terms of trade 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.
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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
• 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 consumptiom
• Y: factors influencing demand such as income, population, prices of
4 other goods and services
• Farm level derived demand – PA=D-1(A, P, PB)
• A: aggregate farm output
• PA: farm price index
• PB: agricultural inputok price index
• P: price of food
• 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
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Distribution of consumer expenditures
Main groups In CPI In CPI for pensioners
Foods 23,223 30,316
Alcoholic bevareges,
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
100110120130140per cent
1985 1990 1995 2000 2005 2010
year
food cpi
.9.9511.05ratio
1985 1990 1995 2000 2005 2010
year
Food price and CPI
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90100110120per cent
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year
cpi agricultural
.8.911.11.2ratio_agri_cpi
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year
Agricultural price index and CPI
90100110120per cent
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year
food agricultural
.85.9.9511.051.1ratio_agr
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year
Agricultural and food price index
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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.
Hungarian terms of trade
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
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Agricultural terms of trade
• Agricultural terms of trade:
– It is the qoutient 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, feedingstuffs 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
9 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
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Agricultural and industrial prices in a growing economy
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
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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
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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
• Wheather
• 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