Guaranteed prices

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

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.

Stabilising farm prices

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 have been used to help support the agriculture sector, and farms in particular. While attempts to support farming can be traced back to ancient Egypt and China, setting or manipulating prices is a more recent strategy to stabilise farm incomes. For example, in the US the Agricultural Marketing Act of 1929, established the Federal Farm Board to boost prices by purchasing surpluses, and in the UK intervention went further when the Agriculture Act 1947 specifically introduced a price guarantee system. India established its Agriculture Price Commission in 1965 to recommend minimum support prices for a range of farm commodities1.

How do guaranteed prices work?

Guaranteed prices or minimum support 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

Criticisms

There are several criticisms of state intervention in agriculture in general, and specifically in terms of using guaranteed or minimum support prices.

  1. High risk of over-production, which creates storage and disposal costs in the sort run, and may lead to a future price collapse. For example, regarding the minimum support price scheme in India, an editorial in the Hindu Business Line of India commented that:
  2. The minimum support price mechanism for agri-produce came in for scathing criticism last year (2018) after farmers produced bumper crops of pulses and oilseeds based on declared MSPs, market prices collapsed due to excess supply, and government agencies failed to procure sufficient quantities to shore up the market (February 2018).
  3. It is also argued that such support creates moral hazard, so that farmers and growers operate less efficiently than they otherwise would.
  4. The source of price instability could come from abroad, with price shocks in one part of the world working their way into global and then local prices. This may lead governments to operating import controls to help regulate domestic prices.
  5. There may be issues in determining the level of the price guarantee to achieve the specific policy objective, with agencies suffering from information failure.
  6. There may be more effective alternatives, including crop insurance schemes, direct income support, such as 'deficiency payments' which are made when incomes fall below an agreed threshold, and imposing domestic quotas to regulate the quantity of food produced locally.

Buffer stocks

How do buffer stocks work?

Buffer stocks
Unstable markets

Why are some markets unstable?

Unstable markets
Supercycles

What are commodity supercycles?

Supercycles

1. Aditya K.S., Subash S.P., Praveen K.V., Nithyashree M.L., Bhuvana N. and Sharma A, Awareness about Minimum Support Price and Its Impact on Diversification Decision of Farmers in India - Asia and The Pacific Policy Studies; May 2017, viewed March 3, 2021 https://onlinelibrary.wiley.com/doi/pdf/10.1002/app5.197

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