written by: N Nayab•edited by: Jean Scheid•updated: 3/4/2011
A pricing model determines how to fix the price of a product. A good pricing model accommodates the manufacturing costs, the nature of the product, the value the product provides, market sentiments, and competitor pricing. Here, learn more on pricing models for agricultural products.
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Agricultural products are different from other products manufactured in factories. The technologies advancements notwithstanding, the production depends on the vagaries of nature and climatic conditions. Being essential items for human consumption, demand remains constant, but supplies fluctuates widely, leading to price fluctuations, and occasional spikes. Methods of storage exist, but are added to the cost because agricultural products are perishable commodities. Such factors make agricultural products low margin, high volume, and fast moving items for traders.
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The traditional pricing model for products is a cost based approach where the selling price is a mark-up above the product cost, with the extent of mark-up depending on market conditions such as demand and supply.
The underlying challenges in adopting this pricing model for agricultural products is identifying the actual cost price of agricultural products. While it is easy to determine the total input costs such as cost for seeds, cost for equipment, labor charges, and other costs, it remains difficult to appropriate such input cost, and also common costs such as land value to individual crops. Agriculture depends on nature and it is next to impossible to forecast the exact yield of salable and the quantum of crops lost to inclement weather, pests, and other causes.
A limited range of agricultural products, such as organic products and niche products not in use for regular public consumption, however, follow a cost plus mark up based pricing model.
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Demand and Supply
The pricing model adopted for agricultural products depends largely on benchmark costs prevalent in the market, which is based on demand and supply, independent of the production costs. To a limited extent, the pricing model for agricultural products also bases itself on the value customers attach to the product.
For instance, a glut of highly perishable tomatoes in a market would see the prices nose-diving as traders try to offload their stock at whatever price they can get regardless of the cost price before the tomatoes go rotten; it costs traders money to dispose of products in the trash. On the other hand, a shortage of onions can see prices spiraling as many buyers try to purchase the limited stock available.
In perfect market conditions with the buyers and sellers aware of price levels, the pricing remains relatively stable, and price differentials across markets would remain the difference of transportation costs and number of levels in the supply chain. In imperfect market conditions with low awareness of prices, prices can vary significantly from markets to markets, and even among different traders in the same market.
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At times, market sentiments or perceptions play a big role in determining agricultural prices. For instance, crop failure owing to winter frost might see traders hoarding on to agricultural products in anticipation of a price rise owing to scarcity, exacerbating the shortage and leading to further price hikes. The same sentiment can lead to people to buy as much as they can store, in anticipation of further hikes or spiraling prices.
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Government polices play a big influence in the pricing of agricultural products.
Government subsidies reduce the input costs for agriculturalists, and support prices fixed by the government that ensures prices do not fall beyond such levels. The taxation policy that chooses to tax or exempt from tax agricultural products and the points of taxation also have an effect on prices.
Another big impact is the import export policy related to agricultural products. Policies that curb export of agricultural products may prevent shortages or cause a glut in the local market, leading to stable prices or a fall in prices. On the other hand, free import of agricultural products may lead to demand matching or exceeding supply, and a fall in prices. The converse can also happen, with exports and free movement of agricultural products causing shortages and price hikes in certain areas.
Government policy on land usage, such as permitting biofuel crops on agricultural lands can have an impact on overall level of food crops available, influencing supply levels.
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The issue of pricing models for agricultural products remains a hotly debatable issue especially in third world countries with predominantly agricultural economies, where price fluctuations become so exaggerated at times that survival of the farmers and lower income families becomes difficult. This intensification has been driven directly by falls over time in inflation-adjusted market prices for agricultural products.
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Halcrow, Harold, D. (1967) "Canadian and US Agricultural Policies." Journal of Farm Economics. http://www.jstor.org/pss/1236982
HM Government. "The 2007/08 Agricultural Price Spikes: Causes and Policy Implications." Retrieved from http://www.defra.gov.uk/foodfarm/food/pdf/ag-price100105.pdf on 01 March 2011.
"Agricultural Pricing Policies." Retrieved on http://www.exclusivepapers.com/essays/Politics-Essays/agricultural-pricing-policies.php on 27 February 2011.