Annex 1


deficit is reduced. If the market functions and transmits the signals of increased demand to
producers, food production is stimulated and the agricultural incomes rise. In summary, the
demand and the supply deficits are reduced (from B-A to B-E in Fig. A-9) and overall food
security improves.

5. Impact of the food marketing system

Food demand and supply are linked through the food marketing system. The performance of
the marketing system has a significant impact on the prices the producers get and the prices
the consumers have to pay. This depends on various factors:

* market regulations (flexible versus rigid price and market regulations),
* market structure (monopolistic versus competitive structures),
* marketing institutions (public enterprises, private traders, transport agents, etc.), and
* physical marketing infrastructure (roads, means of transport, warehouses, etc.).

Structural adjustment programmes commonly aim at improvements in all these spheres.

In our previous discussion, we made no distinction between producer and consumer prices.
We assumed that the market prices contain already the marketing margin (difference between
the consumer price 'cp' and the producer price 'pp'). The producers will, of course, only
receive the producer prices. Therefore, the actual production/supply function
(production/supply at pp) is, according to the marketing margin, below the production/supply
curve expressed in consumer prices (production/supply at cp). This is shown in Figure A- 10.

Improvements of the performance of the food marketing system will reduce marketing
costs, hence (in a competitive market) the marketing margins. Fig. A-I 1 illustrates such a
situation, and the corresponding effects on food supply and demand.

In our example we assume that, due to improvements of one or more of the factors mentioned
above, the average marketing margin is cut by about half (from old cp old pp to new cp -
new pp). What are the consequences of the reduced marketing cost?

Lower marketing costs induce an increase in producer prices and/or a decrease in consumer
prices. In a competitive market and assuming normal supply and demand response, both
effects are likely to happen simultaneously. The size of the relative price changes depends on
the supply and demand elasticities (expressed by the shape of the supply and demand curves
in the relevant price range) and, of course, on the market system (whether producer prices,
consumer prices, and the marketing margins are regulated or not).


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