4. Concepts on price data

4. Concepts on price data

21. The term "prices received by farmers" as used in national accounting as well as for analysis of economic behaviour, should in theory refer to the national average prices of individual commodities comprising all grades, kinds and varieties net of subsidies received by the farmer in the nearest market. These prices are determined at the farm gate or first-point-of-sale transactions when farmers participate in their capacity as sellers of their own products and are, therefore, also known as "Producer Prices".

4.1 Farm gate prices

22. The farm gate prices are in principal the prices received by farmers for their produce at the location of farm. Thus the costs of transporting from the farm gate to the nearest market or first point of sale and market charges (if any) for selling the produce are, by definition, not included in the farm gate prices. Thus the prices collected from such markets may be adjusted for these costs to arrive at farm gate prices. In a number of countries, some commodities are sold at farm-gate, while others are sold at markets or delivered to purchasers' premises. Sometimes the recorded off-farm prices are adjusted to the farm-gate equivalent by allowing transport costs but in many cases no adjustment is made. In many developing countries, agricultural marketing is not well organised and farmers use the entire range of distributive channels: farm-gate, local village markets, wholesale and retail markets and sales of export crops to marketing boards. In order to approximate farm gate prices information on the marketing channels used and quantity sold for different crops and other products is required. Average prices should then be worked out using the output disposed of through various channels as weights. Thus the prices that producers receive when they sell their output should be used, as the attempt to separate the trade and transport margins is usually neither practical nor useful.

4.2 Wholesale prices

23. 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.

  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 produce-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 if both bear them, then in what proportion.
  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.

24. 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.

25. Wholesale prices of agricultural products are collected in most countries. These prices are required for three broad reasons. Firstly, the wholesale markets are usually well organised and consequently wholesale prices are easy to record. Secondly, wholesale prices 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 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.

26. An example to illustrate the calculation of farm gate prices from wholesale prices is given in the Worksheet 1 (page 8). Calculations in the worksheet have been divided into three parts separately dealing with secondary wholesale market, primary wholesale market and farm gate market. Secondary wholesale markets are the last points for any product from where the goods are moved either to retail sale point or to the exporters. Buyer in this market generally purchases goods from primary wholesale markets and re-packs the goods according to need of selling market. Price collected from this market generally includes cost of bag and other packing charges, transportation cost, handling and trading commissions, etc. apart from profit margin. Depending upon local conditions a list of items of expenses included in the prices can be studied through specially designed surveys or type studies covering some of the prominent markets. By subtracting all such component one can arrive at the prices prevailing in primary wholesale markets. A similar exercise may be attempted to arrive at the farm gate prices from the price data collected from the primary wholesale market. Worksheet I provides a suggestive list of items which are required to be taken care in arriving at the farm gate prices from wholesale prices. In this illustration, it has been assumed that the commodity retains the same form (raw or processed) and the same quality specifications throughout the different stages of marketing.

Box 1 : Working tip

Working tip Generally it is not feasible to undertake specially designed surveys or type studies for estimating various components which are required to be adjusted from one type of price to the other. A general efficient way is to study the differences in the prices prevailing in the two types of markets for important selected commodities and work out the aggregate component in terms of percentage of reference price, which is required to be adjusted. This factor can be used for other commodities for which required data are not available.

4.4 Other types of prices available in countries

27. Apart from wholesale and retail prices, which are very often available in many countries, some other type of price data is sometime available in many countries. The two prominent types of prices, which are very often quoted, are export prices and prices fixed by the government. Depending upon the commodities and need these prices can be adjusted to arrive at farm gate prices which are required by policy makers. A brief detail of these prices is given below.

4.4.1 Export prices

28. 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 (denoted by f.o.b. prices). If 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 as indicated in Worksheet I.

4.4.2 Support prices

29. Prices of some of the crops at the farm gate markets are fixed by Government to pursue various economic policies relating to welfare of farmers or to obtain food-grains etc. for distribution through various plans and programmes (e.g. poverty alleviation or rural development programmes) or to develop foreign trade. Normally such prices are listed annually and are applicable to the total country. The agricultural support prices have various categories depending upon price policy instruments. These can be termed as: (a) Guaranteed minimum prices / intervention prices in which farmers are encouraged to grow certain new crops which do not have developed assured market and government assures farmers that in case of any difficulty or an abrupt fall in the price level government would either procure the produce or provide cash subsidies to the farmers. Generally such subsidies are provided through extension workers; and (b) fixed purchase prices in which to provide direct benefit for foreign trade or in case of commercial crops (e.g. sugar cane) to safeguard interest of farmers Government announces fixed prices.