Actions Taken by Governments to Reduce or Limit Price Fluctuations of Coffee Commodity - Essay Example

ACTIONS TAKEN BY GOVERNMENTS TO REDUCE OR LIMIT PRICE FLUCTUATIONS OF COFFEE COMMODITY Lecturer’s Introduction Basic Economics- Supply and demand notions are fundamental to economics. Supply and demand logic indicates that the consumers will be willing to buy goods at a larger quantity with lower prices than they would at a higher price. However, the assumption is usually violated when consumers use prices of commodities as a cue to quality assuming that a higher priced commodity is better. As well, farmers and sellers will be willing to sell a larger quantity of good when the prices are higher. Macro and Micro-economic Influences on Prices A common concern in many countries and the United States is the low agricultural prices of the commodities especially from coffee. As a result, the farmers will not be able to make a profit and will end up running in a danger of going out of business. The government, therefore, intervenes and attempts to raise the prices or try to affect the farmer revenue. A good example of this intervention is through subsidy or negative taxation. In these cases, the farmers receive extra payments from the government. An example is in the coffee industry. Alternative solutions include government involvement to buy the products in the open market causing an increase in demand until the commodity prices get to the desired level. Alternatively, the supply of the commodities are curtailed by quotas where only certain farmers are allowed to grow a certain crop, and there are limits on how many products can be produced i.e. sugar, coffee, tobacco. Price controls can be imposed to limit the maximum and minimum prices that can be charged for a certain product. However, it has serious consequences causing a decrease in production as it will not be profitable to produce as many products as they are demanded because of the low prices causing a shortage of the commodity. Reducing price fluctuation in coffee Farmers generally face price fluctuation of coffee product prices. This is so because coffee products that are produced by one farmer are equivalent to a similar product of the same grade that is produced by another farmer. Farmers are, therefore, considered to be price takers as they can sell all their products at any market price but have no individual bargaining power for their products to raise their prices. Therefore, it is essential to ensure that there is stability in the global market prices of the agricultural products (Mohan 2007). Supply management programs, and agricultural policies in the past have helped in maintaining production around the demand to ensure that farmers do not produce an oversupply that can lead to prices collapse of their products. A number of strategies have helped to keep the coffee prices above the price floor as well as help in reduction of price fluctuation that is necessary for the farmers to survive in the ever competing and dynamic market that include: Imposing tariffs Imposing tariffs by the government on agricultural products i.e. coffee products is essential to help reduce price fluctuation of the products and help in the creation of market sustainability. Many countries have high tariffs imposed on the importation of agricultural products as a measure of protecting their local industries and farmers. Imposing taxes on the imports makes the imported products to be more expensive than the local products. Therefore, it is important for the United States government to maintain a high tariff on the imported coffee products in order to protect the small family coffee farmers against any flood of cheap coffee imports that will cause instability in the coffee market. The strategy has been utilized previously by government around the world to help in guarantying food security by encouraging local agricultural production of products (Hoekman et al. 2004). Imposing Quotas Quotas are limits on the total amount of imports that can be allowed for a particular commodity in the country. To ensure stability in the coffee market, the government needs to maintain quotas on the amount of coffee that can be imported in the country in order to protect the U. S. coffee sector from foreign competition as well as market fluctuation. Many of the small developing agricultural countries maintains quotas on small basic products such as grains, corn and rice that are important for food security as well as are essential for the livelihood of the rural population. Thus for such nations, eliminations of such tariffs puts the rural people at a risk of starvation and hunger as many people end up losing their income source and access to their own food security (Severová et al. 2012). Thus, imposing quotas for the coffee product is essential to reduce market fluctuation of the coffee prices. Subsidies Apart from quotas and tariffs, government subsidies are essentially important. Subsidy is a form of support or financial incentive that is extended to the economic sector. The main aim is promoting social and economic policy. Subsidies come in various forms i.e. direct cash, interest-free loans, grants, insurances, tax breaks and low-interest loans. A production subsidy is important for encouraging the suppliers (farmers) to increase the output of a particular product (coffee) without offsetting the production costs. The objective is to expand production of the produce without raising the financial prices to the consumers. The U S congress in 1996 passed a farm bill that eliminated major price supports and supply management programs. As a result, the income of the farmers was reduced drastically due to the fluctuation of the market prices. However, the congress responded with “emergency legislation” years after by sending farmers payment subsidies to prevent the collapse of the rural economy (Daniel & Kilkenny 2009). Subsides thus provide huge benefits to farmers and corporate agribusinesses as they allow them to purchase products from the small household farmers at a price that is far below the production cost as well as to allow them to sell the products at favorable market rates. Subsidies provide relief to the struggling farmers, and the government should provide more subsidy’s to prevent the fluctuation of coffee market prices (Szabo & Grznar 2002). However, they have contributed to small farms erosion in the United States increasing the market concentration of products. Ways that the government provides subsidies for the coffee industry: 1) Through direct cash payments that are made to farmers when the farm commodities fall to prevent fluctuation of coffee prices and make up for their financial losses. 2) Through loans provision granted to farmers by the united states department of agriculture. The loans are a gift since loan defaults are not penalized 3) Insurances are sold against weather and pest damage to the coffee crops at affordable prices. 4) Farmers also get government disaster aids when coffee crop damage is suffered. Other strategies of preventing price fluctuation of the coffee prices include promoting fair trade. Fair trade models are essential to enhance agricultural trading as they guarantees fair prices of agricultural produced commodities and as well enhance community empowerment. They decrease the power of the purchasing monopolies thus creating market stability of the products. Global commodity agreements are also essential in regulating the demand and supply in an effort of keeping the market prices in a steady range thus promoting sustainability and stability for the rural farmers. References Daniel, K. & Kilkenny, M., 2009. Agricultural subsidies and rural development. Journal of Agricultural Economics, 60, pp.504–529. Hoekman, B., Ng, F. & Olarreaga, M., 2004. Agricultural tariffs or subsidies: Which are more important for developing economies? World Bank Economic Review, 18, pp.175–204. Mohan, S., 2007. Market-based price-risk management for coffee producers. Development Policy Review, 25, pp.333–354. Severová, L. et al., 2012. Microeconomic aspects of government subsidies in the agricultural market. Agricultural Economics (Czech Republic), 58, pp.542–548. Szabo, L. & Grznar, M., 2002. Subsidies and efficiency in the agricultural sector. Ekonomicky Casopis, 50, pp.971–988. Read More