Guaranteed prices

Farm prices are regarded as particularly important in that they have an impact on a range of other economic variables, including farm incomes, consumer welfare and export earnings.

Farm prices also have a bearing on food 'security' in that if prices become unstable or fall to unsustainable levels farmers may be driven off the land. Indeed, farm prices are characteristically unstable and may fall to levels that cannot fully support farm income.

Various schemes can be used to help stabilise farm prices, including price guarantees.

A guaranteed price (also called a guaranteed minimum price, or intervention price) is a price agreed by a government or agency which will be paid irrespective of market conditions and the market price.

Guaranteed prices come into effect if market conditions push prices to an unacceptably low level. In the diagram below the guarantee is set at P1. If supply increases as a result of an unusually good harvest, the guarantee ‘clicks in’ to prevent price falling to P2.

Guaranteed price

Video on guaranteed prices

However, the risk is that over-production is encouraged, which creates storage and disposal costs. It is also argued that such support creates moral hazard, so that farmers and growers operate less efficiently than they otherwise would.

Go to buffer stocks and unstable markets

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