Fluctuating Prices and Declining Income of Farmers

INTRODUCTION

Farming is the growing of crops and the rearing of animals. Major agricultural products include; fish, cereals, cattle, vegetables, oilseed, poultry, potatoes, sheep. Farming contributed £5.6 billion to the UK economy in 2006.

In the last 25 years, farming in Britain has transformed a lot. Farming provided employment for quite a number of people, but nowadays, with the help of machinery and equipment, and the problems associated with farming, only a few people remain on the farm.

The total labour force employed in agriculture in the UK is 541,000, of whom 190,000 are employees and the remaining 351,000 are self-employed farmers, partners, directors and spouses. Overall, 1.8% of the UK’s workforce is directly employed in farming .The UK food chain accounts for almost 8% of the total economy (RuSource, 2008).

However, farmers have always faced problems such as Increasing population growth, water logging and salinity, converting the arable land into non-agricultural uses, high cost of production, fluctuating prices, declining income, increased tax etc.

But this article will focus mainly on why farmers have been facing fluctuating prices and declining income over the years.

PRICE AND AGRICULTURE

Price is the amount of money needed to purchase something or the quantity of payment or compensation for something. A price fluctuation is a change in the price market. Agricultural experts and businesspeople have blamed fluctuating commodity prices, difficult capital accesses and poor development of downstream industries for poor performance of the country’s agricultural industry.

Some of the causes of price fluctuations in agriculture includes; seasonal change in supply which is adversely affected by natural or climatic factors, lack of finance, use of crude implements, seasonal shortage of demand, etc.

The market structure of a farm which is perfect competition also affects the price. The market structure is such that the farmer cannot influence the price. The price is determined purely by the forces of demand and supply.

According to PT Perkebunan Nusantara (PTPN) IV executive director Dahlan Harahap,  fluctuating prices influenced the agricultural industry’s performances because most of the companies relied on their revenues on exports. Several major commodities which are mostly exported include crude palm oil (CPO) (77 percent exported), rubber (83 percent), cacao (86) and coffee (70).

INCOME AND AGRICULTURE

Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, “income is the sum of all the wages, salaries, profits, interest payments, rents and other forms of earnings received in a given period of time. For firms, income generally refers to net-profit: what remains of revenue after expenses have been subtracted.

Farmers have faced declining income over the years due to high cost of production and low return to investment. According to Dahlan, high bank interest is one of the factors impeding the country’s agricultural industry. Indonesia, he added, sets the highest bank interest rate in Southeast Asia. This however affects farmer’s income.

UK farming incomes are defined at the industry level by a measure known as Total Income from Farming (TIFF) and at the farm level by a measure known as Net Farm Income. Both measures have exhibited long term decline since the 1960’s, reaching a low point in 2000 with average Net Farm Income at just £8700.

Governments of many countries have felt it expedient to intervene in agricultural markets, and have resorted to different forms of controls and subsidies. These have often led to the accumulation of vast surpluses, which have sometimes rotted in storage and sometimes been sold abroad at subsidized prices.

The theory of demand and supply can be used to understand why farmers face fluctuating price and declining since Price is a reflection of supply and demand.

DEMAND AND SUPPLY IN AGRICULTURE

The agricultural sector is a very unique sector in economics because it displays characteristics in terms of the demand for and the supply of its goods not seen in any other sector. The principal characteristics of demand are that it is both income and price inelastic and it has high dependency on population and tastes which cause demand to be static in both the short and the long run. On the other hand supply is very volatile in the short run due to extraneous factors because supply is a biological process though in the long run due to technological advances we tend to observe an increasing trend.

Also, because agricultural products are perishable and because the production period is long, supply will be inelastic so producers will have to supply in the short run even at very low prices.

Another characteristic of supply is its atomistic structure and asset fixity. These basically imply that there will be a large number of insignificant producers and that most agricultural asset will be fixed. These have various implications for prices which are very unstable in the short run and in the long run present a declining trend.

Similarly farm incomes tend to be unstable in the short run and converge in the long run though it must be noted that this is also due to extensive government subsidisation of agriculture.

DEMAND

Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a good that a consumer is willing and able to buy at a given price over a given period of time.

Demand curve is a graph showing the relationship between the price of a good and the quantity of the good demanded over a given time period. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis

The law of demand states that the quantity of a good demanded per period of time will fall as price rises and will rise as price falls, other things being equal (ceteris paribus).

Demand on price and income

According to Richard and Chrystal (2007);

Agricultural production is subject to large variations resulting from factors that are beyond human control. For example, bad weather reduces output below that planned by farmers while exceptionally good weather pushes output above planned levels.

Inelastic

demand

De

E

Elastic

demand

D1 Price

Inelastic

demand

P0

Elastic

demand

Quantity

0 q1 q0 q3

Unplanned changes in output

.

Figure 3.1 Unplanned fluctuations in output (Richard and Chrystal 2007)

Because farm products often have inelastic demands, large price fluctuations causes unplanned changes in production which in turn affects farmer’s income.

Stabilization of agricultural prices: Farmers are allowed to sell their whole crop each year. When production unexpectedly exceeds normal output, the government buys in the market. It allows price to fall, but only by the same proportion that production has increased. When production unexpectedly falls short of normal output, the government enters the market and sells some of its stocks. It allows price to rise, but only by the same proportion that production has fallen below normal. Thus, as farmers encounter unplanned fluctuations in their output, they encounter exactly offsetting fluctuations in prices, so that their revenues are stabilized. In effect, the government has converted the elasticity of demand from being inelastic to being unitary. With a unit elasticity the total revenue of sellers does not change as quantity changes, because given percentage changes in quantity are offset by equal percentage changes of price but in the opposite direction.

Figure 3.2 Income stabilization (Richard and Chrystal 2007)

Income stabilization is achieved by allowing prices to fluctuate in inverse proportion to output

Appropriate government intervention in agricultural markets can reduce price fluctuations and stabilize producers’ revenues.