The agricultural market is a complex system influenced by various economic factors. But did you know that some key economic principles play a significant role in shaping the dynamics of the agricultural market?
Understanding the economic principles behind the agricultural market is essential for, especially farmers, traders and consumers as this will help these players make informed decisions.
According to Chiko Chiobvu, an agricultural economist, the economy has to do with resources available to society and how those resources are distributed to benefit the individuals of that community.
She explains distribution, production, and consumption are three critical societal functions in an economy. Without one of these functions, the others lose meaning and the system fails.
Farmers and traders
Chiobvu highlights that the economics of agriculture work differently than other markets. The basic economic principle of supply and demand is crucial in understanding agricultural markets, she adds.
The supply of agricultural products is determined by factors such as weather conditions, technology, and government policies, while demand is influenced by factors like population growth, income levels, and dietary preferences.
Prices in agricultural markets are determined by the interaction of supply and demand. When supply exceeds demand, prices tend to fall, encouraging producers to reduce output. When demand outstrips supply, prices rise. This provides an incentive for producers to increase production.
“What makes it so unique is that the supply side is connected to international markets, meaning that factors abroad can affect the supply and demand for agricultural products,” Chiobvu says.
A web of interaction
According to her, it is important to know who everyone in the market is and understand how they interact together.
“Your price taker is your farmer, farmers are hoping that the best case scenario the market price is favourable and that they’re able to cover their costs and make some profit,” she explains.
The price makers on the other hand are role players who influence prices. The general economic principles regarding supply and demand have to do with the scarcity of prices.
“[For example] during the mango season there’s a lot of mangoes, which means the prices will be a lot lower because there is a supply for it.
“But there’s also a large influence of global markets in this case of COVID-19 and a war a lot of the time prices do go up because supply is affected at a global level. This goes across the board for grains and your fresh produce,” she explains.
And for consumers?
All these dynamics also affect consumers and it is equally as important for consumers to understand how the economy in agricultural markets works.
Chiobvu explains it this way: Inflation is commonly measured using the consumer price index (CPI). The CPI reflects the average change in prices paid by consumers for a basket of goods and services over time.
This basket typically includes items that represent the spending patterns of the average consumer, providing a way to gauge how the overall cost of living is changing.
“[Consumer] household staple items are put in this basket and what happens is the price fluctuations or the price changes of these specific prices or goods is used to measure inflation. If [consumers] find that the change of price is quite high for this basket of goods, you find that the inflation goes up,” she explains.
It’s really important to understand markets because you become better prepared as an individual. There’s an advantage to gaining this kind of knowledge, she adds.
Factors to consider
“It’s important to understand that before food got to the supermarkets, there’s so many hands in a pot. There are logistics, the value addition, and the farmers themselves,” she explains.
Another element to this, if people can’t work, things like deliveries and farming do not operate as smoothly as they should. As a consumer, because you are not sure what is happening, it is important to be prepared and have enough supplies. Knowing what is going on in the market helps you get ready,” Chiobvu says.
“I’m not encouraging panic buying or being in a frenzy. But it’s always good to be informed and to prepare your life accordingly,” she says.
Chiobvu adds that understanding these economic principles allows farmers to make informed production decisions, traders to navigate market fluctuations, and consumers to anticipate price changes and make choices based on their preferences and budget constraints.
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