III. TYPES OF AGRICULTURAL PRICES

Conceptually, agricultural prices cover prices of agricultural products (output prices) and prices of requisites for agricultural production (input prices), at various stages of marketing.

Distribution channels

After an agricultural product leaves the farm gate it may pass through anyone of a number of different marketing and distribution channels before reaching the ultimate consumer. It may move directly to the consumer (if the producer himself sells at the farm- gate, at the roadside or in a local village market); it may be sold by the producer directly to a retailer, to an exporter, or to a manufacturer particularly production under contract); or the producer may sell directly to a government controlled official marketing board which will pay fixed prices that may have been determined well in advance of harvesting, for example.

Alternatively, the producer may sell to a wholesaler who will then resell to any of the buyers mentioned above either directly or through other wholesalers or middlemen. All combinations are possible.

In the same way, a farmer buying the requisites of agricultural production may deal directly with retailers, wholesalers, manufacturers or importers.

Thus agricultural prices derive their meaning and significance from the stage of marketing to which they relate. They may, therefore, in accordance with the above, be prices received by farmers, wholesale prices, retail prices, or export prices (for produce sold); and import prices, wholesale prices, retail prices or prices actually paid by farmers (for the purchased means of production).

It is because of the wide range of marketing methods Which may operate in individual countries, and the consequent wide variety of price quotations available, that it has been found most appropriate to use the principle of farm-gate prices (actual or national) for the purposes of agricultural price statistics. This principle is dealt with in detail in the remainder of this chapter. It should be borne in mind, however, that if, in any country, the vast majority of sales of agricultural commodities, or purchases of requisites of production, are made through one single marketing system, then it may be more expedient to record prices at that marketing point and not attempt to work back to notional farm-gate prices by making estimated deductions or additions in respect of transport, etc., costs.

Such a situation, however, is not likely to occur in many countries.

Prices received by farmers (producer prices)

In line with the Handbook of Economic Accounts for Agriculture (provisional) and the deliberations at the regional seminars and conferences convened by the FAO at which the subject of agricultural producer prices has been discussed, prices received by farmers for their produce are, in principle, the prices realized by them for that produce at the farm-gate. Thus, the costs of transporting agricultural produce from the farm to the market or to the first point of sale off-farm, and of selling it there (whether these activities are performed by the farmer himself or by specialized agents) are not, by definition, to, be included in the farm-gate price. The cost of such activities, if included in the price realized at the market or the first point of sale must, therefore, be deducted from that price to arrive at the estimate of the farm-gate price.

It can be argued that activities such as transportation and sale of farm produce are an integral part of the agricultural production activity and that the price quoted at the first point of sale off-farm should, therefore, be taken as the price received by the farmer. Against this view, it should be noted that the first point of sale may even be the retail market, as often happens in the case of perishables, particularly where cold storage facilities are either inadequate or non-existent. Inaccuracies will result if, in evaluating the total agricultural output, a part of it is valued at the farm-gate price, a part at the wholesale market price, a part at the retail market price and a part even at the export price. To avoid this, a single, uniform concept of price received by farmer must be defined and adhered to. The concept normally used is that of the price actually or notionally received at the farm gate. For agricultural products for which actual farm-gate prices are not available, notional farm- gate prices must be estimated by deducting transportation charges, marketing expenses and taxes, etc., paid by the farmer per unit quantity from the appropriate wholesale or retail price (see: Techniques of averaging prices).

Wholesale prices

After an agricultural product leaves the farm-gate, it may pass through one or even two wholesale markets and a chain of other ”middlemen” before reaching the retailer from whom the ultimate consumer buys it. Where two wholesale markets are involved, the first may be only an assembling market and may be called a primary wholesale market; and the second may be a distributing market, called a secondary market. Sometimes, one comes across a third category of wholesale market, viz., a terminal wholesale market, from where there is no further resale, as for example, a market from where the product is exported. It is not necessary that the functions of assembly, distribution and export should necessarily be performed by three separate wholesale markets; a single wholesale market may perform one, two or all three of these functions.

An assembling wholesale market, as its name implies, is one where, by and large, the producer-sellers or their agents assemble their products and offer them for sale in bulk or large quantities. The wholesalers buy in this primary wholesale market for further sale to local or nearby retailers, to exporters or to another set of wholesalers who would carry the products to other places or markets for resale to retailers there.

A secondary or distributing wholesale market is one where the products are brought for sale largely by the wholesalers from the assembling markets. Small quantities are brought by the producer-sellers too. The agencies buying from the secondary wholesale market are the retailers, and also the exporters or bulk consumers.

A wholesale market may thus be defined as a market situated somewhere between farm gate and retail market, usually handling a large quantity of sales for a further stage of distribution of the commodity. Wholesale price accordingly is the rate at which a relatively large transaction, generally for further sale, is effected. Depending upon the extent to which the transportation charges and other expenses incidental to marketing are borne by the sellers and buyers in the wholesale market, and remembering also that the wholesalers include their profit margin in their price quotations, a wholesale price may take any of the following forms:

1. In a primary wholesale market, the wholesale price of a product may refer to the price at which the wholesale buyer makes purchases from the producer-seller or his agents. This price would differ from the price the producer-seller gets, depending upon whether the buyer or the seller bears the incidental charges; and
2. In a primary wholesale market, the wholesale price of a product may also refer to the price at which the wholesaler offers it for sale to the retailers, etc. This price should exceed the price in (a) above by the wholesaler's margin of profit.
3. In a secondary wholesale market, the wholesale price of a product may refer to the price at which the wholesaler sells it to the retailers, etc. This price should exceed the price in (b) above by transportation charges, incidental expenses and margin of profit.

The effect of the above is that if the notional price received by the farmer for an agricultural product at the farm gate is to be derived from any of the above types of wholesale prices, it will be essential to make arrangements for determining the magnitude of deductions on account of transportation and marketing charges, etc. to be made from the wholesale price to estimate the price received by the farmer at the farm gate. This obviously calls for appropriate investigations, possibly through random sample surveys.

Wholesale prices of agricultural products are collected in most countries. This is so for three broad reasons. Firstly, the wholesale markets are usually well organized and consequently wholesale prices are easy to record. Secondly, wholesale price are quoted throughout most of the year and can, therefore, be obtained with the needed frequency, whereas farm gate prices are obtainable only for that period after the harvesting of a crop over which the agricultural producer disposes of his surplus. Lastly, the dealers in a wholesale market are usually well informed of the supply and demand situation of the product, so that the wholesale prices tend to reflect the sensitivity of the market to forces of supply and demand; this essentially is the element of price statistics of greatest interest to most economists and administrators.

Retail prices

Retail prices are established in transactions in which quantities dealt with are relatively smaller than in wholesale transactions and in which the final consumers of the agricultural product participate as buyers.

Retail prices of agricultural commodities are collected in most countries. Unlike farm gate prices, they are available throughout the year. Retail prices are used in constructing consumer price indices, in undertaking studies into cost of living and levels of living, and in determining cost of living allowances for wage earners.

If an agricultural producer sells his product in the retail market directly to consumers, the notional farm-gate price received by the producer is estimated by deducting transportation and marketing charges from the retail price. If, however, the product is brought for sale From a wholesale market, then deductions From the retail price must be made for transportation and marketing charges, and for margins of profit, at both wholesale and retail stages, to arrive at the notional price received by the farmer at the farm gate.

Export prices

Export prices are determined in export markets for products intended for delivery outside the customs boundary of the country. Export markets are also described as terminal wholesale markets, where the valuation of the product is made as free-on-rail, or free-alongside-ship or free-on-board, lf the producer-seller sells his product in such markets, the notional farm gate price is worked backwards by deducting from the export price the transportation charges and all other incidental expenses incurred by him.

Prices paid by farmers

The concept of prices paid by a farmer is the counterpart of prices received by a farmer a-ad covers all prices paid by him as he participates in the transaction of goods and services in his capacity as a buyer of the means of agricultural production.

Just as the price received by a farmer for his produce is the price realized by him for that produce at his farm-gate, so the price paid by a farmer for an agricultural production requisite is, in principle, the price paid by him for that item at his farm-gate or village site. If a requisite of agricultural production is bought off-farm, say, from a factory or a government store, the expenses incurred in transporting it to the farm must be added to arrive at the estimate of the price at the farm-gate. If, however, it is purchased from a local blacksmith or tradesman in the village, then the purchase price can be taken as the farm-gate price paid by the farmer.

Conceptual distinction between prices received and prices paid by farmers

Both prices received by farmers and prices paid by farmers have the same common locational reference, that is, the farm-gate, but there is an important distinction as to the stage of marketing to which the two sets of prices relate when first collected. In most instances, the farmer sells wholesale but buys retail. Therefore, farm-gate prices received by farmers are usually derived from the average WHOLESALE price at which they dispose of their produce; while farm-gate Prices paid by farmers are, in general, calculated from the average RETAIL price at which they make purchases.

Utilisation of prices received and prices paid

As has already been indicated in Chapter II, prices received by farmers are used in preparing economic accounts for agriculture, and in the context of policies related to output price support, farm incomes, resource allocation to different commodities, etc. Prices paid by farmers for materials used in current agricultural production, for factor services and for investment goods are also needed for the agricultural accounts; in addition, they are used for constructing price deflator series to calculate value aggregates consistent with the national accounting framework. The two sets of prices are also converted into index numbers (see. Parity index numbers) which can indicate the parity between prices received and prices paid by farmers and can act as warning signals to public agencies to consider either raising the output prices for agriculture or lowering the prices of agricultural inputs (or vice versa), in order to correct imbalances developing between the two. So important are parity index numbers to policy makers, particularly in countries where agriculture represents a significant proportion of the national economy, that the task of collection and compilation of agricultural prices is accorded high priority in national programmes for price statistics.