Entries Tagged 'agriculture' ↓

Readers Question: How is the market of raw coffee determined  on the world commodity markets?

The price of raw Coffee is determined by the basic principles of supply and demand.

Demand for coffee beans will be largely determined by the large coffee firms such as nestle and Kenco. In turn their demand depends on the consumer demand for drinking coffee.

In recent years the demand for coffee has been increasing because:

• Coffee has become a more fashionable drink with an explosion in the number of specialist coffee houses, such as Starbucks and Cafe Nero.
• Coffee is increasingly seen as an alternative to alcohol, as drinking during lunch becomes less common.
• Rising incomes, is increasing demand for specialist coffees.

However, rising demand is not guaranteed to increase price because it also depends on supply.

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I answered a readers question about – What should economists do about a food shortage?

Basically, economists face a choice between advocating a free market solution and advocating government intervention to overcome market failure in agriculture.

Agriculture is a notoriously difficult market to leave to market forces. Because supply and demand are inelastic, weather conditions can cause big changes in prices.

There is also a difference between the response in the short run and in the long run.

If people are starving it is no comfort to say, in the long term the shortage will encourage extra supply. Next year is too late. At the same time, there is a danger that the wrong kind of government intervention can further distort the market and undermine market based initiatives to overcome shortages.

I remember, not too recently, when supermarkets where happily having a price war over the price of bread, and you could easily pick up a loaf of bread for 7p. However, the 7p loaf seems a distant memory now as the price of wheat has increased from £90 a tonne to £180. Many loaves now cost over £1.

The price of wheat and food prices is being driven higher by various factors

1. Increased Use of Biofuels. Food such as mazie, grown to provide renewable energy and an alternative to oil. However, these crops reduce the supply of food for the market. Many governments especially in America are committed to increasing the amount of bio fuels and so this could contribute to rising prices.
2. Rising World Population. The global population is expected to rise from 6 billion in 2000 to 9 billion by 2050. This will place increasing strain on the land.
3. Desertification. Global warming and other environmental shifts is decreasing the quantity of available farmland, especially on the African continent. If global warming continues water supplies could be disrupted leading to falling food production. This will only place further strain on food prices in future.

I think there is a good chance that food prices will continue to increase in the long term. This is not such a problem for western economies – food is a small % of our total bill. But, it is bad news for developing countries where food consumption is a much bigger % of income.

It may be hard to believe, but decades after being condemned as a grotesque waste of taxpayers money, the EU (through the Common Agricultural Policy) still give hundreds of thousands of £ in subsidies to rich farmers.

It is estimated that the Queen, (who is hardly on the breadline herself) receives approximately £404,000 a year in European subsidies for her Sandringham estate and at least £140,000 for Windsor Castle. Some of the richest British aristocrats, such as the Duke of Westminster, the Duke of Marlborough and the Earl of Leicester, are also known to receive hundreds of thousands of pounds each year. The reason is that the CAP gives subsidies depending on agricultural output. It is estimated that 80% of the CAP budget goes to the richest 20% of farmers.

The EU is now thinking of reforming this and placing a symbolic cut on the amount of subsidies that the richest farmers get. Subsidies over £100,000 will be reduced by 10%. The Queen may find herself losing upto £148,000 a year (perhaps we should pass a hat around)

Whilst large scale farmers get generous subsidies (basically for being … er rich and big) small farmers often struggle due to squeezed profit margins and declining markets.

• 3 of the Worst Economic Polcies (CAP is one)
• Costs of CAP
• Reforms of CAP

• Off with their subsidies at Independent

Should Govt intervene with minimum prices for goods like olive oil.

Reasons for minimum Price

• A minimum price ensures a minimum income for farmers. For example, if supply increased prices would fall significantly.
• Demand for agricultural goods is inelastic, therefore this makes prices more volatile
• Supply can vary due to weather conditions.
• i.e. agricultural markets are more prone to market failure than other markets.

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How might a fall in production of olive oil affect Spanish economy. (8)

Olive oil is an important commodity, therefore farmers are likely to see a fall in revenue because they have less to sell. Therefore, this also results in lower exports and less export revenue for the economy.

However, the fall in production has increased price. Because demand is inelastic, this could actually increase the incomes of farmers, even though they have less to sell. (the % increase in price is bigger than than the % fall in quantity – therefore revenue increases)

It is unclear how significant olive oil production is for the Spanish economy. It is likely to be quite a small sector and therefore the fall in output maybe insignificant.

Farmers also get subsidies from the European Union. This may protect them from falling production, especially now subsidies are not targetted to production.

See also: Common Agricultural Policy of EU