The Reasons Behind the Volatility of Agricultural Product Prices and Other Questions - Essay Example

? Exam Instructions Question Critically examine the reasons behind the volatility of agricultural product prices, the measures governments can take to reduce volatility and the measures that businesses can take to manage it Products that have unstable conditions of supply and demand tend to experience fluctuations of prices from year to year. The prices of agricultural products tend to be unstable because the supply of agricultural products changes from time to time, and this mainly depends on the variable weather conditions that affect the size of the harvest. According to a study carried out by Riley, he makes the conclusion that when the agricultural output falls short of planned output, for a given level of demand then the prices of products are bound to rise. On the other hand, Riley says that when the actual output is in excess of the planned output, for a given level of demand then the market price does fall (2006, p. 3). More often, the demand of a product has the effect making the value of the product higher when the supply for the products is low. Toepfer international carried out studies to determine the reasons for the price volatility of agricultural products. The study shows that there are three key market fundamentals. These fundamentals are responsible for the greater price variations of agricultural products. The report states that agricultural output does vary from season to season due to the natural shocks such as weather and pests. They also state production in the agricultural sector does take time, so the aspect of supply cannot respond much to price changes in the short term and lastly, the supply and demand elasticity is small when compared to the issue of price. The agency explain that, during a supply shock, the variation between supply and demand need to be strong so as to enable the regaining of the balance of supply and demand this is fundamental when dealing with a case of low stocks (2011, p.5). The supply and demand shocks are a vital part when it comes to the determination of the prices of agricultural commodities. A clear example is the massive drought that hit Russia in the year 2010; this was accompanied by the restriction of the exportation of grains out of the black sea region. These circumstances massively affected the prices of commodities; there was a reported increase in the prices of agricultural commodities. In such times of high and volatile prices, most countries decrease their exports and increase on their imports. The end results of such measures is a destabilizing effect, for instance, the restriction of the exportation of rice by leading exporters in the year 2007 saw the tripling of prices despite the stable demand and harvest (2011, p. 5). The issue of price volatility in agricultural products has been of serious concern to most of the governments. In June 2011, the Agricultural ministers of the G20 gathered their ideas on how this issue could be addressed. Among the many suggestions, they focused on the launching of the Agricultural Market Information system this would enable the providence of timely accurate reliable and transparent information that would be of help in addressing the issue of price volatility. The Agricultural ministries of the G20 also suggests the strengthening of the international governance of agricultural trade in favour of an open, rule based and well functioning global market for agricultural products. The main reason for this is that the international trade contributes in the improvement of food security and in addressing the issue of price volatility. Many governments also have invested in the boosting of agricultural production by strengthening agricultural research and innovation. The establishment of well and functioning markets is also a strategy that focuses on the encouragement of the public and private sector t invest in agriculture (Toepfer International, 2011, p.6). A group of researchers observed that the instability of financial markets and the strong variations in the exchange rates are among the key elements that contributed to the instability of agricultural markets (Grema, 2011, p.12). In an effort, to stabilize the agricultural market economists have to consider the correlation of the agricultural market to other markets. The agricultural market should be in have the ability to protect oneself from the instabilities of the neighbouring markets. The volatility of prices in the agricultural sector is harmful for the farmers as well as consumers. The issue of price volatility hinders farm innovation and investment. The researchers examined some of the instruments food price instability, this they conclude could be achieved by either stabilizing of prices or managing of the price risks through two forms of governance the market base or public. The central idea of the A instruments is that the arbitration of market actors causes the prices to be harmonized over time space and between products this will lower the instability. The A- instruments include the construction of storage infrastructure, the development of quality standards and the creation of warehouse receipt systems or exchanges. The focus on the market based control also focus on the B instruments, which focus on limiting the effects of price instability on the incomes. These instruments enable economic actors to cover themselves against the risks linked to price variability and harvests. The C instruments aim at stabilizing prices by controlling production regulating imports and exports and using public stocks. Finally, the D instruments enable personal income to be maintained during times of high prices. However, the combination of the four instruments has not proven effective in the controlling of the price instability problem. However, we have speculators who are key actors in the market and they are willing to bear the risks other actors in the market like to avoid. Speculation does stabilize prices in the case where the markets run smoothly. This stabilization of prices does dilute the shocks in space and time in the same manner that trade and storage do. The ability of speculation to stabilize prices is mainly during the periods that the market is functioning well, and expectations are accurate. Speculation destabilizes the prices when destabilizing behaviours take place in the market for instance panic and crashes for agricultural products. There is also the issue of international markets for agricultural products being coupled to future markets; this does allow the exchange of the risk associated with price fluctuations with a premium through forward contracts. This offers a way to manage price instability. However, this method is better suited for traders than for farmers due to the fact that transactions cost are high, and cannot be met by farmers especially those in the poorer countries. The duration of the contract is also over a year, therefore, it does not allow time for investment planning. In conclusion, we have seen that the volatility of the agricultural product prices is due to the uncertainty of the supply of the products due the seasonality weather and other natural factors. The excessive volatility as we have seen benefits neither the producer nor the consumer. Both consumers and the producers are concerned by the unstable market prices. We are aware that the demand for agricultural products tends to be relatively inelastic and stable; therefore, a sharp shift in yield tends to lead to a strong movement in the prices of the products. The governments focus that focusing on market transparency and efforts to change the slowdown in agricultural productivity growth does help to attaining a more stable price in the agricultural markets. The issue of speculation as a means of attaining stability in the market has been under study, and we conclude that speculation does work during favourable market conditions. We have looked in to the issue of private storage and hedging through forward `contracting, options and future markets as a way of dealing with the price instability issue, however, we noted that this method is effective for traders and not the peasant farmers. Bibliographies European Commission Agriculture and Rural Development., 2011. Agricultural Market Briefs. Policyreport, European Union. Gerald F., Alpha A., Beaujeu R. et. al., 2011 Managing Food Price Volatility for Food security and Development. Grema. Riley, G., 2006. “AS Markets and Market Systems.” Tutor2U,[online] 3 September. Available at http://www.tutor2u.net/blog/index.php/economics/comments/exam-advice-10-ideas-for-a-better-economics-paper/ (Accessed 10 January 2012). Sarris, A.,2009. World agricultural trade challenges to 2050 and Requirement for Evolving Structure of New world Trade Rules Compatible with Food Security for Developing countries. Rome: Food and The agricultural organization of the United Nations. Schnepf, R.,2006. Price Determination in Agricultural Commodity Market: A Primer. Congressional Research Service. Tangermann, S.,2011. Policy Solutions to Agricultural Market Volatility. International Centre ot Trade and sustainable development Toepfer International. Market Review. Hamburg: erdinandstrasses, 2011. Question 3: Assess the relative merits of business clusters for both global businesses and national economies Business clusters are regional concentrations of interconnected companies, service providers, specialized suppliers and associated institutions in fields that are present in a nation (Roback, 2003, p.1). Business clustering is healthy for fostering among companies that exist in the same business cluster. Apart from competing with one another these companies also, cooperate to increase their competitive advantage. The association of organizations that exist in the same business cluster is that they offer sustainable development to local economies. The main aim of focusing on the development of a business cluster in an economy is to obtain a thriving economy and increase the living standards of the people of that economy. For the businesses around a given business cluster, the spirit of competitive advantage is fostered. Any business cluster most of the times have proven to be beneficial for businesses, citizens and educational institutions. Some of the benefits that a business can enjoy from a clustered environment is instant access to information, new technology and a network of related companies. The educational institutions can benefit from access to research funds and a large pool of students. The citizens benefit from the arising opportunities and an increase in new business. In the advanced economies, it is true that the regional clusters of related industries are the source of jobs income and export growth (McPherson, 2008, 54). Business clusters enable a nation to raise it productivity. In many western countries, McPherson observes that productivity measures the nation’s prosperity. Every country has the goal of raising the living standards’ of its society as well as improves their quality of life. McPherson states that in order to have a prosperous economy a nation should have a high yield of productivity. This is because economists believe that a productive economy translates to paying high wages and a general improvement of the living standards of the inhabitants of the nation (2008, p. 60). The cluster of industries in any economy can be linked in a horizontal manner through customers’ technologies or vertically through buyer seller relationships distribution channels. The clusters generate synergies as benefits flow backwards forward and horizontally. The interconnections in the clusters are what foster new ways of competing and access to new opportunities. The competition in the cluster is what favours’ the upgrading of an industry in any given cluster. This growth of industries is seen as the growth of a nation’s economy. Let us consider Australia as an economy under study it is evident that Australia have opened up their economy to global competition this is by reducing their tariff and introducing a national completion policy. Australia has also had a microeconomic reform and restructure the key inputs such as gas electricity telecommunications, finance and regulatory frameworks. Lastly Australia have also supported the public sector research infrastructure and provided a strong education system (McPherson, 2008, 64). Many European countries have adopted the clustering policies. The characteristic of a given cluster depends on the social, political and economic environment of the region. Most governments have focused on the improvement of the country’s economy from the microeconomic level. The strategy includes removing of obstacles of growth and upgrading of the existing and emerging clusters takes on priority. Clusters do form a driving force for increasing the exports, and they attract foreign investments. The clusters also form the new forum whereby dialogue among companies, government agencies schools universities and public utilities takes place (Porter, 2000, p.2). porter clarifies that a cluster as a unit of measure of the country’s economy is better compared with the kind of competition and appropriate roles of the government. Cluster captures critical linkages complementarities and spillovers in terms of skills, technology information customer needs and marketing that cut across firms. The view of companies as a cluster highlights the chances for coordination in areas of common interests with less of a risk of distorting competition. The treatment of industries as clusters often degenerates to lobbying over subsidies and tax breaks. Usually the resulting pubic investments’ involves fewer spill over benefits to the individual firms and industries. More than often there a numerous reports of distorted markets most companies do not participate in this competition for fear of aiding a competitor. The main objective of a cluster as we have noted is to enhance competition. Porter studied the role of cluster in the economic development. He concluded that there existed a relationship between the microeconomic business environments and the prosperity of national economies. It is evident that the presence of a well developed cluster provides powerful benefits to productivity and the ability to innovate which proves hard to match by firms based elsewhere (2000, p.21). Clusters enhance competition by increasing the current productivity of the constituent firms and industries, by increasing the capacity of cluster participants for innovation and productivity growth. It also stimulates new business formation that supports innovation and expansion of cluster. Porter states that many cluster advantages rest on external economies or spill over is across firms industries and institutions of various sorts (2000, p.22). Cluster affects productivity in the sense that when an industry is located within a cluster they benefit from the lower cost access to specialized inputs business services machinery and personnel compared to the formal alliances with outside entities vertical integration or importing inputs from distant locations. The cluster, therefore, offers an effective means of assembling inputs. The firms within a cluster benefit from the ease in accessing information. It is also helpful in the flow of information between units in the same company. Cluster also enhances productivity through the facilitation of complementarities between the activities of cluster participants. A cluster also enables access to the institution and public goods. It enables a firm recruit employee’s already trained n local training programs this lowers the cost of internal training. Firms are also able to access specialized infrastructure, advice from experts, and all services they get at a lower cost. Lets us conclude this discussion by looking at a summary of the benefits of the cluster to the national economy and the global economy. The business cluster increases the productivity of a firm or the industries that exist in a given cluster. This increase in productivity translates to improved living standards’ for the citizens of the given region. Economically a reported increase in productivity means that a nation is doing exceptionally economically. Globally speaking business clusters fosters competition among firms that exist within the same business cluster and this translates to a global competition. Economically consumers benefit from better services the competition promotes the production of original products in order for a company to create a name for its products. Companies that exist in a business cluster benefit from access to the market and ease of access to information. They also have an access to labour as well as innovation benefits Bibliographies Business.Utah.gov.,n.d. Economic Clusters. http://business.utah.gov/targeted-industries (accessed 10 January 2012). Johnson, R.,2011. “What are The Advantages of Business Clustering.” eHow.com. [Online]05. November. http://www.ehow.com/print/info_12199393_advantages-business-clustering.html (Accessed 10 January 2012). McPherson, L., 2008. “Cluster Policy: a Future Strategy for Australia.” Innovation Enterprise.com. http://www.innovation-enterprise.com/archives/vol/4/issue/1-3/article/1711/clusters-policy (Accessed 10 January 2012). Phambuka-Nsimbi, C., 2008 “Creating Competitive Advantage in Developing Countries through business Clusters: a literature Review.” African Journal of Business Management, pp.125-130. Porter, M. E., 2000. “Location Competition and Economic Development: Local Cluster in A Global Economy.” Economic Development Quaterly (Harvard School of Business), pp. 15-34. Porter, M., 1990. The Competitive Advantage of Nations. New York: Free press. Roback, P.,2003. Cluster: An Economic Development Strategy. Ozaukee: UW-extension. . Read More