Price Stabilization Funds

PRICE STABILIZATION FUNDS

BY
PETER BOWBRICK
1
SUMMARY
It is often suggested that an exporting country should set up a price stabilization
fund to insulate farmers from fluctuations in the world market price, by collecting
a proportion of farmers revenue when prices are high and paying it out when
prices are low Sometimes the funds are established and they operate with
limited success
!he ob"ectives of the funds are seldom clearly defined #uch of the
rationale vanishes if producers can store welfare from one period to another, for
instance by savings, investment, store or the purchase of durable consumer
goods !he system is not attractive if the fund will pay out less in real terms than
it takes in, because of limited investment opportunities, high risk investments,
mismanagement, corruption, excessive administration costs or a change in
government policy $onsiderations of producer and consumer surplus are, rightly,
ignored by governments in making decisions on this
!he switch to stable prices will have effects on production and investment
which may be unfavourable
!he price stabilization may stabilize or destabilize farm income and
national export earnings %ften it implies little or no change in the level of national
exports or their distribution over time& there is "ust a transfer of the instability from
one sector to another, possibly a sector less able to bear the risk and instability
1
Copyright Peter Bowbrick, peter@bowbrick.eu 07772746759. The right of Peter
Bowbrick to be ie!tifie "# the $uthor of the %ork h"# bee! "##erte by hi& i!
"ccor"!ce with the Copyright, 'e#ig!# "! P"te!t# $ct.
1
Peter 'owbrick
INTRODUCTION
$ typic"( price #t"bi(i)"tio! fu! i# #et up for "! e*port crop. +! ye"r# whe! the wor(
price i# high, #o&e of the retur!# "re p"i i!to the fu!, i! ye"r# whe! it i# (ow, the
"ccu&u("te re-e!ue# "re u#e to bri!g up the price. There "re &"!y -"ri"tio!# o! thi#
b"#ic &oe(. .o&e of the fu!# #oo! co(("p#e, whi(e other# go o! for ye"r#, #ur-i-i!g but
!ot !ece##"ri(y "chie-i!g their ob/ecti-e#.
The ob/ecti-e# of the fu! "re u#u"((y ob#cure, #o&eti&e# e(iber"te(y #o. 0or
e*"&p(e, f"r&er# pre## for #t"bi(i)"tio! without &"ki!g it too ob-iou# th"t to the&
#t"bi(i)"tio! &e"!# " (ower (i&it to price# r"ther th"! "! upper (i&it1 i! other wor#, they
w"!t " higher "-er"ge price. Co!#u&er# thi!k of price #t"bi(i)"tio! "# i&po#i!g
&i!i&u& price# r"ther th"! both &"*i&" "! &i!i&". +t i# ofte! "##u&e without
i#cu##io! or e-ie!ce th"t price #t"bi(i)"tio! be!efit# the f"r&er "! i# be!efici"( to the
eco!o&y. Thi# p"per #how# th"t the#e "##u&ptio!# "re !ot "(w"y# re"#o!"b(e, th"t the
"i&# "re #o&eti&e# co!tr"ictory, "! th"t the "i&# "re ofte! !ot co&p"tib(e with "
#t"bi(i)"tio! #che&e.
+!iti"((y, it i# "##u&e th"t output i! cou!try C i# co!#t"!t, but wor( output 2or
e&"!3 f(uctu"te#, with co!#e4ue!t price f(uctu"tio!#. %or( e&"! i# perfect(y price
e("#tic with re#pect to prouctio! by C. $ fu! i# #et up i!to which "(( retur!# "bo-e "
cert"i! price, P1, "re p"i. +f the price f"((# be(ow P2 the &o!ey fro& the fu! i# u#e to
bri!g the retur! up to P2. 0or &o#t of thi# "!"(y#i#, it i# e"#ier to "##u&e th"t P1 "! P2
"re the #"&e. +t i# "##u&e th"t i!ter!"( &"rketi!g i# co#t free. Thi# "!"(y#i# ig!ore#
#hort5ter& price f(uctu"tio!#, tho#e th"t occur withi! " #e"#o!. %e co!-e!ie!t(y "##u&e
th"t the -"(ue of the curre!cy re&"i!# co!#t"!t. +t &"y be "rgue though, th"t the ch"!ge#
i! f"r& i!co&e "! e*port i!co&e ue to wor( price ch"!ge#, "! ch"!ge# i! output, "re
#ufficie!t to ch"!ge the &"rgi!"( uti(ity of &o!ey to the f"r&er "! the &"rgi!"( uti(ity of
foreig! e*ch"!ge to the !"tio!.
$t fir#t #ight, f"r&er# wi(( be i!iffere!t betwee! " f(uctu"ti!g i!co&e "! "
#t"b(e i!co&e "# (o!g "# their "-er"ge i!co&e i! re"( ter&# i# the #"&e. 6owe-er, we(f"re
eco!o&i#t# c"! e&o!#tr"te th"t we(f"re i# gre"ter u!er #t"bi(ity, pro-ie th"t (i!e"r
#upp(y cur-e# "re "##u&e, "! the other "##u&ptio!# "re #ufficie!t(y "b#tr"cte fro& the
re"( wor(. They o "ccept though th"t their co!c(u#io!# "re !ot "t "(( robu#t "! -"ry
gre"t(y with ch"!ge# i! "##u&ptio!#.
Thi# i# "rgui!g "bout how &"!y "!ge(# c"! #it o! " pi!, "! + fu((y #upport
Cochr"!e7# 219803 "tt"ck o! thi# re#e"rch progr"&&e for it# poor #cie!tific &etho "!
hi# co!c(u#io! 9th"t we(f"re "!"(y#i# b"#e o! the co!cept# of co!#u&er "! proucer
#urp(u# h"# !ot i! the p"#t &"e, "! wi(( !ot i! the future &"ke, "!y recog!i#"b(e
co!tributio! to the &"ki!g of eci#io!# by the :!ite .t"te#, other e-e(ope cou!trie#,
the (e## e-e(ope !"tio!# or the i!ter!"tio!"( "ge!cie#, either to i!iti"te co&&oity
#t"bi(i)"tio! progr"&# or re/ect the&;. + propo#e, therefore, to ig!ore thi# "#pect.

TRANSFER OF WELFARE OVER TIME
To " ("rge e*te!t, "!y "rgu&e!t# for price #t"bi(i)"tio! &u#t epe! o! the "##u&ptio!
th"t the fu! c"! effecti-e(y #tore -"(ue o-er ti&e whi(e the f"r&er c"!!ot "! oe# !ot.
2
Price Stabilization Funds
%here #t"bi(i)"tio! c"!!ot be #how! to be e#ir"b(e for other re"#o!#, it &"y be
#ufficie!t to #how th"t the fu! #tore# -"(ue "e4u"te(y, e-e! if !ot e!ough to co-er
i!f("tio! "! ti&e prefere!ce, "! th"t the f"r&er c"!!ot perfor& "# we((.
Welfare transfer by te far!er
+! &"!y cou!trie#, the ("ck of #"-i!g# b"!k# "! fi!"!ci"( i!#titutio!# i! the rur"( "re"#
&e"!# th"t f"r&er# c"!!ot put their &o!ey i!to i!tere#t5be"ri!g epo#it# "! &u#t re#ort
to buryi!g their &o!ey. They g"i! !o i!tere#t, the &o!ey (o#e# i! purch"#i!g power, "!
they f"ce the ri#k th"t the white "!t# wi(( get "t it. +! other cou!trie#, the i!#titutio!# "re
there, but the r"te of i!tere#t i# we(( be(ow the i!f("tio! r"te.
+! #o&e cou!trie#, !ot"b(y i! the 0"r <"#t, f"r&er# with #urp(u# c"#h c"! &"ke
high profit# "# &o!ey(e!er#, tr"i!g o! the f"ct th"t they "re better i!for&e "bout the
creit5worthi!e## of their fe((ow# th"! the creit org"!i)"tio!# "re. +! $fric", ge!er"((y,
the oppo#ite i# the c"#e1 if "!ythi!g f"r&er# wi(( borrow "t ti&e# of (ow price# fro& creit
org"!i)"tio!#, p"yi!g "! i!tere#t we(( be(ow the r"te of i!f("tio!, "! wi(( rep"y "t perio#
of high price#. They #t"bi(i)e their i!co&e "! h"-e " higher re"( i!co&e 2"! i!-i#ib(e
#ub#iy to the "gricu(tur"( #ector3.
0"r&er# c"! i!-e#t i! c"pit"( #uch "# tree#, p(ough# "! &"chi!ery or i! i!put#
#uch "# ferti(i)er. +! thi# w"y, they effecti-e(y #pre" their i!co&e o-er " (o!ger perio.
Their retur! fro& thi# i!-e#t&e!t i# (ike(y to be #ub#t"!ti"((y higher th"! the retur! the
fu! wi(( get fro& it# i!-e#t&e!t#.
.i&i("r(y, i!-e#t&e!t i! ur"b(e co!#u&ptio! goo# wi(( e!"b(e the& to #t"bi(i)e
their we(f"re o-er " perio, e-e! if their i!co&e f(uctu"te#. $ bicyc(e, " r"io or "
corrug"te iro! roof for the hou#e prouce# uti(ity o-er #e-er"( ye"r#. +t c"! be "rgue i!
thi# re#pect th"t the i!co&e f(uctu"tio!# be!efit f"r&er#1 &o#t peop(e te! to #pe! !e"r(y
"(( of " #t"b(e i!co&e "! it i# co&&o!(y "##u&e th"t f"r&er# "re ri#k "-er#e. Thi# i#
ob-iou#(y #o with #ub#i#te!ce crop# "! (e## ob-iou#(y #o with the &"i! c"#h crop#, but
ofte! f"r&er# "re wi((i!g to g"&b(e with " &i!or crop, perh"p# bec"u#e they (ike
g"&b(i!g, perh"p# bec"u#e of the higher uti(ity of wi!f"(( e"r!i!g#, "! perh"p# bec"u#e
the high ri#k crop# h"-e " &uch higher e*pecte pro/ect. +! the #"&e w"y, it i# co&&o!
for peop(e to t"ke the "pp"re!t(y irr"tio!"( #tep of buyi!g both i!#ur"!ce "! (ottery
ticket#.
$ co&&o! "rgu&e!t i# th"t "&i!i#tr"tor# k!ow better th"! poor ig!or"!t
pe"#"!t# wh"t price# "re goi!g to be i! the future #o they #hou( force the& to "ct i! the
w"y th"t i# for their ow! goo. Thi# "rgu&e!t i# #e(o& he"r fro& eco!o&i#t# who
re"(i)e the &"rgi! of error i! their price preictio!#. <-e! if the "&i!i#tr"tor# i k!ow
better, " fi-e5&i!ute r"io bro"c"#t o! &"rket co!itio!# wou( be &ore to the poi!t
th"! #etti!g up " fu!.
<-e! &ore p"ter!"(i#tic i# the "rgu&e!t th"t the pe"#"!t# "re too feck(e## to #"-e,
"! wi(( /u#t #pe! "!ythi!g they e"r! i&&ei"te(y. Thi# "rgu&e!t i# u#u"((y &"e by "
&"! who i# o-err"w! "t the e! of e-ery &o!th, "bout f"r&er# who h"-e to p("! their
foo prouctio! "! co!#u&ptio! ". ye"r i! "-"!ce with the pro#pect of hu!ger "!
po##ib(y #t"r-"tio! if they &"ke " &i#t"ke.
+t i# "(#o pre#u&ptuou# to te(( pe"#"!t# th"t their #c"(e of ti&e prefere!ce# i#
wro!g1 it cou( e"#i(y be "! opti&"( eci#io! to #pe! i!co&e "# #oo! "# po##ib(e, i! our
=
Peter 'owbrick
i!f("tio!"ry eco!o&y, p("gue with #hort"ge#, thi# cou( we(( be #o. Thi# #tr"tegy "(#o
re&o-e# &"!y ri#k#.
%ith #o&e crop#, f"r&er# "! who(e#"(er# c"! #t"bi(i)e i!co&e# by #tori!g fro&
o!e perio to the !e*t. $ price #t"bi(i)"tio! fu! wou( &"ke thi# u!profit"b(e. The
"&ou!t bei!g e*porte "! foreig! e*ch"!ge e"r!i!g# wou( f(uctu"te &ore, which
wou( !ot be i! the !"tio!"( i!tere#t, whi(e f"r&er#7 i!co&e# &ight be !o &ore #t"b(e.
%e &"y ig!ore hegi!g "# bei!g irre(e-"!t to " e-e(opi!g cou!try.
Te F"n#
$! "##u&ptio! i! &uch of the (iter"ture i# th"t the fu! wi(( pro-ie, "t !o co#t, " perfect
tr"!#fer of we(f"re fro& o!e perio to the !e*t. Thi# h"# !ot bee! fou! to be the c"#e i!
the p"#t.
:!er #o&e #y#te&#, the co#t of "&i!i#teri!g the fu! i# !eg(igib(e > the
&"rketi!g bo"r tr"!#fer# #o&e &o!ey to go-er!&e!t o!e ye"r, "! the go-er!&e!t
tr"!#fer# it b"ck whe! price# "re (ow. The#e #y#te&# h"-e co&pe!#"tory i#"-"!t"ge#
though. 0ir#t, there i# !o -i#ib(e e-ie!ce th"t " fu! e*i#t#, !o office#, "! !o phy#ic"(
i!-e#t&e!t#, #o f"r&er# &"y oubt if it i# re"((y there. <*perie!ce h"# #how! th"t i! f"ct
#uch fu!# "re ofte! !ot there whe! !eee, go-er!&e!t h"# " &ore urge!t !ee for the
&o!ey whe! price# "re (ow.
+! " o!e5crop eco!o&y, go-er!&e!t i# (ike(y to !ee &o!ey e#per"te(y /u#t whe!
price# "re (ow "! it h"# to p"y out.
+t i# &o#t u!(ike(y th"t #uch " go-er!&e!t5oper"te fu! wou( p"y out #ufficie!t
to co-er i!f("tio!, with "! "itio!"( "&ou!t for i!tere#t. +t i# &ore (ike(y th"t they wou(
p"y "! "&ou!t b"#e o! the b"!k r"te, or e-e! th"t they wou( forget "bout i!tere#t.
<-e! if the eci#io!5&"ker# "! the peop(e e#ig!i!g the fu! "re eter&i!e th"t
it wi(( work #trict(y "ccori!g to the pri!cip(e# ("i ow!, there "re (ike(y to be " iffere!t
#et of eci#io! &"ker# f"ci!g " -ery iffere!t #et of prob(e&# whe! the ti&e co&e# to p"y
out.
%here the fu! i# "! i!epe!e!t i!-e#t&e!t org"!i)"tio!, it wi(( h"-e " ("rge
"&i!i#tr"ti-e u!it, " ("rge i!-e#t&e!t u!it "! "! "ccou!ti!g u!it, "! it i# (ike(y to h"-e
i!-e#te i! pre#tige office bui(i!g#. The "uthority h"# " -e#te i!tere#t i! it# ow!
e*i#te!ce "! i# u!(ike(y to (i4ui"te it#e(f to p"y the f"r&er#, howe-er gre"t the !ee.
+! e-e(opi!g cou!trie# with !o &o!ey &"rket, there i# " #hort"ge of #uit"b(e
i!-e#t&e!t opportu!itie#.
The fu! c"! buy (ow5yie(i!g ?o-er!&e!t #ecuritie#, but there "re -ery few
(ow5ri#k #h"re# i! e#t"b(i#he fir&#. $ ("rge #t"bi(i)"tio! fu! i! " o!e5crop eco!o&y
cou( we(( h"-e 20 per ce!t or &ore of the e4uity c"pit"( of (oc"((y5ow!e pri-"te
corpor"tio!#. +f it were to put the#e #h"re# o! the &"rket "(( "t o!ce, to p"y f"r&er# i! "
(ow5price ye"r, there wou( be ch"o#. +!#te", the fu! &ight be force to i!-e#t i!
property, f"ctorie#, or other high(y #pecu("ti-e i!-e#t&e!t#. $g"i!, it wou( be -ery
ifficu(t to c"#h i! o! the#e i!-e#t&e!t# whe! !eee, "! the &o!ey wou( h"-e to be
borrowe. The &"cro5eco!o&ic effect of c"#hi!g i! #o &"!y #h"re# "t o!ce &u#t "(#o be
co!#iere.
+! #o&e cou!trie#, " ("rge proportio! of the fu! h"# i#"ppe"re through
e*ce##i-e "&i!i#tr"ti-e co#t#, (o##e# i! " high5ri#k e!-iro!&e!t, or corruptio!.
4
Price Stabilization Funds
+t #hou( be !ote th"t, e#peci"((y i! " #i!g(e5crop eco!o&y, the perio of (ow
price# wou( be " perio of !"tio!"( #hort"ge of foreig! e*ch"!ge. 0"r&er# wi(( h"-e
their i!co&e# boo#te by the fu! "t the #"&e ti&e "# i&port# "re reuce, #o price# wi((
ri#e, reuci!g the purch"#i!g power of the e*tr" p"y&e!t to f"r&er#.
Fa$l"re %f te F"n#
There "re #e-er"( re"#o!# why the fu! &"y ru! out of &o!ey. +f price ch"!ge# "re
r"!o&, the fu! &"y p"y out ye"r "fter ye"r, bec"u#e of "! u!preict"b(e ru! of b"
ye"r#. +f the price# "re cyc(ic"(, the fu! wi(( f"i( if it #t"rt# oper"tio! "fter price# h"-e
#t"rte their ow!w"r #wi!g, .o&eti&e# the ie" of " fu! i# r"i#e whe! price# "re "t "
pe"k, there i# " co&&i##io! of i!4uiry, "! the! (egi#("tio! i# e!"cte, by which ti&e
price# "re we(( ow!, "! the fu! oe# !ot h"-e ti&e to "ccu&u("te &o!ey before it
&u#t #t"rt p"yi!g out. The fu! wi(( "(#o co(("p#e if the ow!#wi!g ("#t# (o!ger th"!
e*pecte, or if the wor( price tre! i# o-ere#ti&"te.
The fu! i# i!here!t(y u!#t"b(e. +t i!#ure# "g"i!#t #o&ethi!g th"t i# cert"i! to
h"ppe!, " price f"((, "! the o!(y 4ue#tio! i# how fre4ue!t(y (ow price# wi(( occur,
Bec"u#e o!(y o!e co&&oity i# co-ere there i# !o!e of the ri#k #h"ri!g th"t &"ke#
i!#ur"!ce profit"b(e.
+f the f"r&er# "re gi-e! p(e!ty of w"r!i!g th"t the fu! i# ru!!i!g out of &o!ey
#o they wi(( h"-e to t"ke the &"rket price for " ye"r or two u!ti( &ore re-e!ue i# e"r!e,
the! they &"y "ccept the #itu"tio!, e#peci"((y if the fu! h"# perfor&e we(( for " (o!g
ti&e, +f, howe-er, the &o!ey ru!# out "fter twp or three ye"r#, if the f"r&er# "re gi-e! !o
w"r!i!g "! if there i# " #u#picio! of corruptio! or &"("&i!i#tr"tio!, f"r&er# "re !ot
(ike(y to "ccept the co!ti!u"tio! or re-i-"( of the fu!. <-e! if there i# " !ew fu! or the
fu! i# re-i-e, the proucer#7 re"ctio!# to it# "!!ou!ce price# wi(( be iffere!t.
@!e other re#po!#e to the f"i(ure of the fu! i# th"t the ?o-er!&e!t wi(( p"y, "# "
#ub#iy or "# " (o!g5ter& (o"!, the &o!ey !ece##"ry to keep the price #t"b(e. @fte! thi#
&e"!# " #ub#iy which i# co!tr"ry to ?o-er!&e!t po(icy.
0"r&er#A be(ief i! the "e4u"cy of the fu! "ffect# their we(f"re. 0"r&er# who
be(ie-e i! the fu! "! "re pro-e correct 2or be(ie-e th"t they "re pro-e correct3 get the
#"ti#f"ctio! of1
2"3 e*pecti!g to get " #t"b(e i!co&e i! the future,
2b3 the #"ti#f"ctio! of "ctu"((y getti!g it, "!
2c3 the #"ti#f"ctio! of bei!g pro-e right.
The f"r&er# who i !ot be(ie-e i! the fu! "! "re pro-e right,
2"3 #uffer i! "!ticip"tio!,
2b3 #uffer the "ctu"( we(f"re (o## whe! the fu! f"i(# "!
2c3 get the #our #"ti#f"ctio! of bei!g pro-e right.
There "re &"!y co&bi!"tio!#, "! it wou( be r"#h to "tte&pt to r"!k the&.
5
Peter 'owbrick
EFFECT ON PRODUCTION
.o f"r, it h"# bee! "##u&e th"t output i! cou!try C i# co!#t"!t fro& ye"r to ye"r "!
there "re !o f(uctu"tio!# ue to the we"ther or f"r&er#A re"ctio!# to price. +! thi# #ectio!,
the effect of price o! output i# co!#iere. %e co!ti!ue to "##u&e th"t wor( &"rket price
i# !ot re("te to output by cou!try C, #o cobweb effect# c"! be ig!ore. The 4ue#tio! of
whether it i# e#ir"b(e to #t"bi(i)e prouctio! i# (eft u!ti( ("ter.
The prob"b(e i&p"ct of price #t"bi(i)"tio! o! output epe!# o! how f"r&er#
&"ke their eci#io!#. +f they "##u&e th"t thi# ye"r7# price wi(( co!ti!ue to ho( !e*t ye"r
the! price #t"bi(i)"tio! e*pecte to re#u(t i! #t"b(e prouctio! i!te!tio!#.
+f, howe-er, they b"#e their eci#io! o! " weighte "-er"ge of the price# for the
("#t three or four ye"r#, "# #ee&# (ike(y, there i# " co!#ier"b(e egree of #t"bi(i)"tio!
"(re"y, "! the i&p"ct of the fu! wi(( be (i&ite. +!ee, it i# o!(y with " (o!g5ter&
cyc(ic"( crop, "t the pe"k "! trough, th"t the ("gge price wi(( be -ery iffere!t fro& the
fu!7# e#ti&"te of tre! price# 2which it#e(f &"y be wro!g3.
$ c"#e c"! be &"e for #t"bi(i)"tio!, #o&eti&e# " -ery #tro!g c"#e, whe! there i#
!o ri#k, whe! for e*"&p(e there i# perfect k!ow(ege of future price#. Bo#t of the
"rgu&e!t# "re the &"cro5eco!o&ic "rgu&e!t# th"t wi(( be i#cu##e be(ow. $rgu&e!t#
o! proucer7# #urp(u# "re, "# &e!tio!e "bo-e, #u#pect. %ith perfect k!ow(ege,
co&&u!ic"te to the f"r&er, o!e c"! get the #"&e effect fro& creit, #tor"ge, tr"!#fer of
we(f"re o-er ti&e or i!-e#t&e!t of #urp(u#e# "# fro& price #t"bi(i)"tio!. The effect of
price #t"bi(i)"tio! o! prouctio! co#t# i# !ot ob-iou#. The f"r&er c"! reuce (o##e# by
#witchi!g to higher price crop# "t (ow price perio# 2co#t# to the f"r&er of u!u#e
c"p"city &u#t be co!#iere with co#t# to the !"tio! of u!er5prouctio! "t high price
perio#. .o&e co#t# wi(( "ri#e if there i# !o "(ter!"ti-e crop.3
The co#t# of ri#k "re tho#e "ri#i!g fro& the f"ct th"t the e*te!t "! ti&i!g of price
f(uctu"tio!#, "! of we"ther "! i#e"#e5c"u#e f(uctu"tio!# of the i!i-iu"( f"r&er "re
!ot k!ow! i! "-"!ce. The#e reuce f"r&er#7 creit worthi!e##, they &e"! th"t they h"-e
to ho( c"#h re#er-e# which they cou( otherwi#e i!-e#t. They &e"! th"t f"r&er# f"ce "
gre"ter ri#k of b"!kruptcy > &ore ri#k the &ore they epe! o! purch"#e i!put#.
+!-e#t&e!t &u#t be "(tere by the f"ct th"t there i# " co!#t"!t price r"ther th"! "
price th"t f(uctu"te# "rou! the #"&e (e-e(. 0"r&er# c"! be e*pecte to prefer " ri#k5free
#t"b(e price "! to i!cre"#e their opti&u& i!-e#t&e!t (e-e( "ccori!g(y. @! the other
h"!, they "re &ore (ike(y to i!-e#t "t high price#, bec"u#e the high price# c"u#e th"! to
h"-e u!u(y opti&i#tic e*pect"tio!# 2which p"rt(y or who((y co&pe!#"te for u!u(y
pe##i&i#tic e*pect"tio!# whe! price# "re (ow3. +t i# o!(y whe! price# "re high th"t f"r&er#
h"-e "!y #p"re c"#h for i!-e#t&e!t 2the po#itio! i# "(tere whe! #e-er"( c"#h crop# "re
t"ke! i!to "ccou!t.3 @!e c"! i&"gi!e the #itu"tio! where i!-e#t&e!t t"ke# p("ce "t high
price# but !ot "t the #t"b(e price. +!ee pre##ure for #t"bi(i)"tio! ofte! "ri#e# whe!
f"r&er# p("!t " pere!!i"( crop o!(y "t high price#, c"u#i!g cyc(e#. The oppo#ite c"#e &"y
6
Price Stabilization Funds
be #tro!ger, f"r&er# #tro!g(y i#cou!t i#t"!t i!co&e "! "t (ow price# "re (ike(y to
i#i!-e#t, gr"bbi!g orch"r# "! p("!t"tio!#.
Cep("ci!g thi# i# e*pe!#i-e "! t"ke# ti&e. $ #t"b(e price (e"# to " higher "!
better i!-e#t&e!t p"tter!.
+t c"!!ot be "##u&e either th"t "(( f"r&er# re"ct i! the #"&e w"y to price. $
egree of output #t"bi(i)"tio! i# brought "bout by the f"ct th"t #hrew f"r&er# p("!t whe!
price# "re (ow, e*pecti!g th"t &o#t f"r&er# wi(( o the oppo#ite.
+f o!e #t"te #t"bi(i)e# price# "! "!other oe# !ot, or e-e! if they "opt iffere!t
po(icie#, #&ugg(i!g beco&e# big bu#i!e##. Thi# c"! be ob#er-e i! the <: i! #pite of
r"ther #&"(( price iffere!ce#. Thi# e#t"bi(i)e# i!co&e# but i!cre"#e# the&, "t the
e*pe!#e of the fu!.
Thi# i#cu##io! h"# #how! th"t price #t"bi(i)"tio! c"! h"-e "! effect o!
prouctio!. +t c"! re#u(t i! " &ore #t"b(e output, "! e-e! " ("rger "-er"ge output. +t
cou( howe-er, h"-e the oppo#ite effect of reuci!g i!-e#t&e!t The c"#e o! which &uch
of the theory i# b"#e, th"t of the f"r&er who e*pect# th"t "(( future price# wi(( be the
#"&e "# tho#e of the curre!t ye"r, i# " r"rity. +t i# co&&o!er for " f"r&er to "##u&e th"t "
future price wi(( be weighte "-er"ge of p"#t re"( price# The output #t"bi(i)i!g effect i#
(ike(y to be co!#ier"b(y (e## th"! "t fir#t #ee&# prob"b(e.
WORLD PRICES
+t w"# "##u&e i!iti"((y th"t cou!try output re&"i!# co!#t"!t. %e !ow "##u&e th"t
p("!!e prouctio! re&"i!# co!#t"!t, but th"t there "re r"!o& ch"!ge# i! output brought
"bout by we"ther "! i#e"#e. +t i# #ti(( "##u&e th"t wor( price# "re !ot "ffecte by
ch"!ge# i! cou!try C7# output, but they "re "ffecte by ch"!ge# i! wor( output, which
&"y be c"u#e by r"!o& c(i&"tic effect# or by the "ggreg"te re#po!#e to price,
Cou!try C7# output &"y be po#iti-e(y corre("te with tot"( wor( prouctio!
bec"u#e of c(i&"te. The effect i# the! r"ther "# though Cou!try CA# output "ffecte wor(
price# e*cept th"t the ch"!ge# i! prouctio! "re r"!o& "! u!p("!!e "! #o c"! be
ig!ore, 2though they o h"-e #o&e effect, i! #o f"r "# the #t"b(e price &e"!# &ore or (e##
tot"( prouctio!3. %he! the effect i# #i&i("r to "! i!e("#tic e&"!, " #(ight(y higher
output occurri!g whe! there i# " &uch (ower price, or whe! there i# " po#iti-e
corre("tio!, " high price occurri!g with " high output, the !"tio!7# i!co&e fro& thi# crop
f(uctu"te# co!#ier"b(y "! #o oe# the f"r&er#7. .t"bi(i)"tio! &"ke# f"r& i!co&e &ore
#t"b(e, but the f(uctu"tio! i! !"tio!"( e*port# i# u!ch"!ge, #o other #ector# h"-e to
prouce the re#ource# for the #t"bi(i)"tio!. +t i# po##ib(e i! #o&e eco!o&ie# th"t the
pe"#"!t f"r&i!g #ector i# better fitte to cope with the#e i!co&e f(uctu"tio!# th"! i# "
!ew #&"(( "! e(ic"te i!u#tri"( #ector.
%he! the re("tio!#hip i# #i&i("r to th"t which wou( occur with " u!it e("#ticity of
e&"! or "! e("#tic e&"!, the! price #t"bi(i)"tio! wou( e#t"bi(i)e f"r& i!co&e. 2+!
f"ct, #o&e #t"bi(i)"tio! #che&e#, t"ke output i!to "ccou!t "# we(( "# price, 2Duiggi! E
$!er#o!, 19793. .i!ce !"tio!"( e*port# f(uctu"te "t the #"&e r"te "# before, the
"gricu(tur"( #ector i# t"ki!g i!cre"#e i!co&e f(uctu"tio!# to "&p ow! the effect o!
other #ector#,
7
Peter 'owbrick
+t i# r"ther "!gerou# to "##u&e th"t the#e re("tio!#hip# wi(( ho( i! the future if it
i# !ot c(e"r why they he( i! the p"#t. +f it c"! be pi!!e ow! to we"ther, we(( "! goo.
%ith " preict"b(e price "! " #hort5ter& crop, #t"bi(i)"tio! #ee&# i!efe!#ib(e.
There i# the c"#e ob#er-e i! $u#tr"(i" i! the e"r(y 1950#, where the price of whe"t w"#
#t"bi(i#e "! he( (ow o-er " fi-e ye"r perio, whe! the co&bi!"tio! of re#tricte wor(
#upp(y "! high wor( e&"! &e"!t high wor( price#. .t"b(e price# i! $u#tr"(i" &e"!t
" #t"b(e $u#tr"(i"! output o-er " perio whe! higher output wou( h"-e be!efite the
f"r&er#, the !"tio! "! wor( co!#u&er# %he!, ("ter, price# fe((, the #ub#ii)e whe"t
w"# #o( "t " (o## 2Duiggi! "! $!er#o!, 19793
There w"# " #eriou# &i#"((oc"tio! of re#ource#. The 4ue#tio! of i!co&e
#t"bi(i)"tio! oe# !ot "ri#e, f"r&er# k!ew wh"t to e*pect "! cou( h"-e &o-e to
"(ter!"ti-e crop#, "ccepti!g " #&"(( (o## i! i!co&e, or !ot prouci!g, "! #o #"-i!g o!
i!put#, r"ther th"! prouci!g the crop "t " (o##.
%he! it i# !ot po##ib(e to forec"#t price i! thi# w"y the #itu"tio! i# #i&i("r to the
c"#e of -"ri"tio!# bei!g ue to r"!o& f(uctu"tio!#, "# i#cu##e "bo-e.
%ith " (o!g5ru! crop, prouctio! i# fi*e three or four ye"r# i! "-"!ce, "! !o
gre"t ch"!ge c"! be e*pecte i! (e## th"!, #"y fi-e ye"r#, u!(e## there i# ("rge #c"(e
grubbi!g. The tre! c"! be f"ir(y "ccur"te(y preicte fro& k!ow! p("!ti!g#. 6ere
#t"bi(i)"tio! oe# !ot "ffect #hort5ter& prouctio!. F"tio!"( e*port e"r!i!g# co!ti!ue to
f(uctu"te i! the #"&e w"y i! the #hort ru!, whether or !ot there i# #t"bi(i)"tio!.
Go!g5ru! #t"bi(i)"tio! &"y be "ccept"b(e whe! #hort ru! #t"bi(i)"tio! i# !ot,
bec"u#e f"r&er# b"#e their i!-e#t&e!t eci#io!# o! #hort5ter& i!for&"tio!.
0or the (o!g ru!, #t"bi(i)"tio! i# i&port"!t i! (e-e((i!g out the prouctio! cyc(e #o
th"t prouctio! i# !o (o!ger corre("te with wor( output. Thi# wi(( &e"! th"t !"tio!"(
e*port# epe! e!tire(y o! price#. Thi# &ight, or &ight !ot, reuce the f(uctu"tio!# i! the
-"(ue of e*port#, epe!i!g o! how &uch of the pre-iou# f(uctu"tio!# were ue to price
f(uctu"tio!# "! how &uch to output f(uctu"tio!#. +f, pre-iou#(y, output of cou!try C w"#
po#iti-e(y corre("te with wor( price, the !ew po(icy wi(( #t"bi(i)e !"tio!"( e*port
e"r!i!g# but it wi(( "(#o reuce the&. +f, pre-iou#(y, the corre("tio! w"# #uch th"t "
#(ight(y higher (e-e( of Cou!try C7# output w"# "##oci"te with " &uch (ower (e-e( of
price, the! the &ore #t"b(e output wi(( &e"! " &ore #t"b(e e*port, "! &ore #t"b(e
e"r!i!g# for the f"r&er i! the (o!g ru!. +f, pre-iou#(y, the corre("tio! w"# #uch th"t "
&uch higher (e-e( of cou!try C7# output w"# "##oci"te with " #(ight(y (ower (e-e( of
price, the! the #t"b(e output wi(( re#u(t i! (ower "-er"ge e*port e"r!i!g# "! &ore
-"ri"b(e e*port e"r!i!g#, "! the effect o! f"r&er# wi(( be #i&i("r. Co!cei-"b(y the fu!
cou( p"y price# th"t "re high whe! output i# high i! orer to re-er#e the cyc(e #o the
!"tio! h"# high e*port# whe! the wor( price i# high, which i!cre"#e# e*port# "! i!co&e
but "(#o ecre"#e# i!co&e #t"bi(ity.
Conclusion
+t &u#t be co!c(ue th"t the f"ci(e reco&&e!"tio!# th"t there #hou( be #t"bi(i)"tio!
#che&e# to #t"bi(i)e f"r& i!co&e# "re "!gerou#. The ob/ecti-e# of #uch fu!# "re
#e(o& &"e c(e"r.
Buch of their r"tio!"(e -"!i#he# if, "# i# !e"r(y "(w"y# the c"#e, proucer# c"!
#tore we(f"re fro& o!e perio to "!other, by #"-i!g, by i!-e#t&e!t, by #tor"ge, of output
8
Price Stabilization Funds
or purch"#e goo# or by the purch"#e of ur"b(e co!#u&er goo#, +t -"!i#he# too, if
there i# re"#o! to be(ie-e th"t the fu! wi(( !ot #ucce##fu((y #tore -"(ue o-er ti&e.
+t i# by !o &e"!# u!i-er#"((y true th"t the price #t"bi(i)"tio! wi(( #t"bi(i)e
i!co&e#. The effect o! the !"tio!"( eco!o&y &"y "(#o be u!"ccept"b(e
Thi# "!"(y#i# i# !ot "(( e&br"ci!g "! there "re #ti(( " (ot of g"p#. 0uture work
#hou( t"ke i!to "ccou!t wh"t h"ppe!# whe! cou!try CA# output "ffect# wor( price, the
po##ibi(ity of " ho&e &"rket, "! the effect o! co!#u&er#, the effect of the fi*e e(e&e!t
of prouctio! "! &"rketi!g co#t# "! #o o!. The "!"(y#i# #hou( co!ce!tr"te o! #pecific
crop#, ge!er"(i)"tio!# "re "!gerou#.
References
Cochr"!e, %.%. 219803, 9.o&e !o!co!for&i#t thought# o! we(f"re eco!o&ic# "!
co&&oity #t"bi(i)"tio! po(icy; $&eric"! Journal of Agricultural Economics, pp 5085
511
Duiggi!, H.C. "! $!er#o! H.C. 219793, 9.t"bi(i)"tio! "! ri#k reuctio! i! $u#tr"(i"!
$gricu(tureI Australian Journal of Agricultural Economics, 2=2=3 1979, 191>206
9