Problem

Fluctuating agricultural products markets


Experimental visualization of narrower problems
Other Names:
Instability of trade in food and live animals
Unpredictability of world agricultural markets
Excessive fluctuations in food trading
Nature:
Instability in world agricultural markets, reflected in excessive fluctuations of prices and also in the uncertainty which surrounds the availability of agricultural products in world markets, is a recurrent problem. The current phase of instability is one of the worst experienced in recent history. Enhancing the stability of markets is a necessary step toward the establishment of an orderly trading system in which both importers and exporters can take advantage of trade for their internal development. Though some countries may temporarily gain from exceptional price increases, these are usually shortlived windfalls and do not provide an adequate basis for production planning. In the same way, low prices have attraction for consumers but they could lead to shortages and high prices at a later date if they weaken incentives for producers. There are several causes of instability: fluctuations in production; variations in the level of demand; the technical lags in production of many agricultural goods in response to price changes, which result in supply changes inappropriate to current market conditions; and monetary problems or fluctuations in currency rates.

Absolute price stability is neither possible nor of itself desirable in a situation where price has to play the role of reflecting or influencing relative demand and availability. Equally, undue price fluctuations indicate that the market is not operating satisfactorily. Individual countries can and do take action to ensure a greater degree of stability on domestic markets. Some countries hold stocks of foodstuffs which can be managed in such a way as to enhance domestic price stability. Others have to provide various forms of subsidies. Action is often taken also by means of flexible import restrictions or export aids, or price control in the market for food. Other stabilization instruments are available in the form of bilateral or regional trade agreements.

The problem for the international community is that stabilization of a limited part of a global market may lead to greater instability in those parts of the market excluded from the stabilization arrangement. To the extent that many developing countries depend on the 'free' part of otherwise managed markets, both for export outlets and for imported supplies, this presents a serious problem. Hence a reasonable level of stability of the world or 'free' markets for all food commodities would be a desirable aim of international policy.

The world market for cereals holds the key to any measure designed to control fluctuations in the prices of basic foodstuffs. Of the markets for the different cereals, that for wheat is the most significant in this regard, although stability in the market for rice and feed grains is also of great importance. The inter-linking of these markets must be acknowledged in any stabilization policy. Any action taken on the storage and marketing of wheat, for instance, must take into account developments in the markets for other grains. This would in turn reduce the size of reserves needed for each particular grain.

The inevitable link between stocks and prices raises different problems for different governments. If national stocks become too 'large' in a particular year and prices begin to fall, governments of the main grain exporting countries might be forced to adopt adjustment measures to reduce production and to protect farm incomes from falling. But if such measures were to be adopted before the world as a whole had built up adequate security stocks, it could expose the main importing countries to dangers of serious shortages and very high prices in case of crop failures in subsequent years. At the same time, however, the exporting countries cannot be expected to carry the entire burden of security stocks and also suffer any depressing effect on prices which might be created by large stocks. The dilemma created by this inherent conflict between what could be regarded as legitimate national objectives of many governments and the international requirements for food security and price stability cannot be resolved without some agreed international approach for sharing the burden of security stocks on an equitable basis and for stabilizing grain prices within agreed limits.

Problem Type:
D: Detailed problems
Date of last update
12.05.2000 – 00:00 CEST