PROBLEM OF PLENTY
Author: NA
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Boom and bust in the prices of agricultural goods has become a common phenomenon. The price of potatoes which has been quite high for the past few months, has fallen sharply (less than Re.1 at some places in wholesale markets) after a year of bumper production. Last year, the price of red chilli, tur dal and tomato had witnessed a similar trend.
Such rise and subsequent fall in the prices happens due to the Cobweb Phenomenon.
What is Cobweb Phenomenon?
Farmers tend to increase the production of certain crops in response to their high prices during the previous season, which in turn leads to excessive supply that causes prices to crash. The cycle repeats each passing year, with the lag between price and production causing a huge mismatch between supply and demand. This phenomenon is called the Cobweb Phenomenon.
Fiscal measures like farm loan waivers and higher minimum support prices or a combination of the two are temporary in nature.
Permanent solutions to agricultural distress will have to deal with the problem of price fluctuations. The major problems are:
- An over regulated and broken supply chain.
- Absence of robust market for buying and selling forward looking contracts.
- Dominance of wholesale markets by cartels.
Along with better returns on the crops, farmers need stable returns on their crops.
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