Chapter 4


3) Floor and ceiling prices:

Instead of keeping price absolutely fixed, the government of many (including western
industrial) countries have applied a system of price guarantees on the basis of floor and/or
ceiling prices. Here, the government is (only) obliged to intervene in the market if the price
of the product concerned tends to drop below the guaranteed floor price (minimum price
guarantee for the producers), and/or if, in the case of rising prices, the market price reaches
the upper price limit defined (maximum price guarantee for food processors and consumers).
This pricing system represents an intermediate approach between price fixing and liberal
price formation, with the advantages of a greater flexibility as compared to a fixed price
system on the one side, and a greater (price) stability than a free market system on the other
side. However, there are also some special problems involved in such an approach, as, for
example, the experiences in Mali reveal (see Box 4.6).

Box 4.6: Food Marketing and Pricing Policy Reforms in Mali

An interesting example of far-reaching food marketing and pricing policy reforms comes from Mali. The
objectives of the cereal market reform in Mali are to stimulate production of cereals, increase the efficiency of
the cereal marketing system in order to provide consumers with cereals at stable and at lower price possible
while eliminating the deficits of the grain board. The reform which was to be implemented over a five-year
period was supported by a number of donors. By 1984, the marketing of coarse grains had been liberalized and
the private sector has been handling the marketing of rice since 1986. Because the price of grains in Mali has
been maintained at artificially low levels in urban areas for years, the reform made provision for gradually
raising consumer prices by using food aid as a buffer, while increasing and supporting prices to producers.
Although the Malian experience has been relatively successful because private traders can buy and sell
foodgrains freely or transact with the grain board as they wish, a number of problems remain unresolved. For
example, in 1985-86, with the return of normal weather conditions, Mali, like most Sahelian countries,
experienced a bumper cereal crop. Pursuing the producer price support policy, the marketing board (OPAM),
through its own purchases and those of private traders who deliver grain to it, found itself out of money to
continue purchasing grains from producers at the support price. Furthermore, its storage facilities became
quickly inadequate. OPAM stopped grain purchases and producer prices fell below the minimum price. On the
consumer side, the market price dropped considerably below the OPAM intervention price (i.e., the
stabilization price), and the board was left with huge costly unsold stocks.

from: FAO, Food security policy issues in West Africa, op.cit.

In order to be effective, a price guarantee system with floor and ceiling prices requires:

1. An institutional and physical marketing infrastructure which allows:

 purchases to be made, and
 buffer-stocks to be built-up

 in periods of abundant supplies, when prices tend to drop below the floor price, and the
 availability of:

 buffer-stocks to be released, and/or
 food (aid) imports to be channelled into the market,

 when the market prices reach the ceiling.


- 161 -