Question

Explain why the prices of farm products are subject to abrupt short-term swings

Answer 1

The price elasticity of demand for agricultural products in industrially advanced economies is weak. Compared to the importance they placed on additional units of conventional products, buyers place a low value on additional farm production.The basic determinant of demand elasticity is the replaceability. When one product drops the buyer tends to substitute the product with other goods whose prices have not fallen.

The inelasticity of agricultural demand also has to do with rising marginal utility. The population is typically well fed and dressed in a high-income economy; it is largely saturated with the agricultural food and fiber. Additional farm products are subject to marginal usefulness declining rapidly. Significant price cuts need to cause minor increases in the intake of food and fibre.

Instability of prices and profits in agriculture results from (1) inelastic demand for agricultural products, combined with (2) variations in agricultural production and (3) changes in demand curve for agricultural products

Farmers have little control over their production. Floods , droughts, sudden frost, damage to insects and similar disasters will mean bad crops (prices rise), while excellent growing seasons mean crops bumper (prices fall).