Chapter 5


2.2.1 Price stabilisation

Price instability is a major indicator of supply instability, and price stabilisation is a widely
applied strategy to stabilise food supplies. Two main approaches to achieving price stability
can be distinguished:

1) The direct approach, by setting official market prices, e.g. by a pan-seasonal pricing
 system or, more commonly, by a system of price guarantees with floor and ceiling
 prices (see also section 7.2 of Chapter 4);

2) The indirect approach, by stabilising prices through public sector market interventions.

The second approach allows greater flexibility, and can, therefore, be considered as more
market friendly. Nevertheless, both policy approaches operate according to the same basic
principle whicn is:

* the government purchases (usually through a parastatal marketing agency) food on thfe
 market and builds up food stocks when market supplies are abundant and the prices tend
 to fall below a fixed or desired level,

* the government releases food onto the market (from stocks or imports) when supplies
 are limited and prices tend to rise above a fixed or desired level.

Figure 5.4 shows the stylistic pattern of such a system with typical seasonal price variations
and floor and ceiling prices (if the price were absolutely fixed as in the case of a pan-
seasonal pricing regime, floor and ceiling prices would coincide, i.e. be the same).

 Fig. 5.4: Floor and ceiling prices and ideal price movements

 price

 Begin of harvesting season


 ---. .. -',-- Ceiling price

 S.... Market price
 1 Floor price


 -i > time
 Purchases Sales Purchases time

 Periods and types of government market interventions
 actual market prices (with intervention when prices reach limits of guaranteed price range)
 counterfactual free market prices withouth intervention)

 In order to be effective in achieving its price stabilisation objectives, a system as described
 above requires a number of preconditions to be fulfilled: