Describe the principal characteristics of the demand for and

supply of agricultural products. What implications do

these features have for prices and farm incomes in both
the short and the long run?

The agricultural sector is a very unique sector in economics

because it displays characteristics in terms of the demand for
and the supply of its goods not seen in any other sector. The
principal characteristics of demand are that it is both income and
price inelastic and it has high dependency on population and
tastes which cause demand to be static in both the short and the
long run. On the other hand supply is very volatile in the short run
due to extraneous factors because supply is a biological process
though in the long run due to technological advances we tend to
observe an increasing trend. Also, because agricultural products
are perishable and because the production period is long, supply
will be inelastic so producers will have to supply in the short run
even at very low prices. Another characteristic of supply is its
atomistic structure and asset fixity. These basically imply that
there will be a large number of insignificant producers and that
most agricultural assets will be fixed. These have various
implications for prices which are very unstable in the short run
and in the long run present a declining trend. Similarly farm
incomes tend to be unstable in the short run and converge in the
long run though it must be noted that this is also due to extensive
government subsidisation of agriculture.

In the short run demand in the agricultural industry is affected

by the fact that it is income inelastic because of Engel’s law that
basically states that with successive increases in income food
consumption as a proportion of income declines. At this point it
must be pointed out that consumption is different from
expenditure unless all goods have the same price, in other words,
the money a consumer spends on food (i.e. expenditure) may
increase, remain stable or even decrease but his consumption will
decrease as illustrated in the following diagram.

In the diagram we see that at low incomes consumers spend great

amounts of their incomes on food however as incomes increase
the proportion of income spent on food declines as consumers can
now sustain themselves with the amount of food they have
purchased and prefer other goods like televisions or computers.
The above holds because the law of diminishing marginal utility
for agricultural goods kicks in at a much earlier stage compared
to other goods considering the fact that most agricultural goods
have been found empirically to be inferior . This is because a
person can only consume a specific amount of food so even if they
switch to more expensive alternatives they will still represent a
lower percentage of their income than before the increase.

Apart from being income inelastic demand is also relatively price

inelastic. Price elasticity of demand is the change in quantity
demanded as a result of a change in price which in the market for
agricultural goods is relatively low. This is because after
consumers have bought the goods they need no matter how much
producers lower the prices they won’t consume more because
excess consumption would lead to lower or even negative marginal
utility. Also, the lack of substitutes and the fact that food
occupies a low budget share will mean consumers are even less
sensitive to price changes causing prices in agricultural prices to
be very volatile in the short run without having a great effect in
demand.

As a result demand for goods in the agriculture industry is fairly

stable mainly because of low price and income elasticity. Even
though income and price elasticity are essential stepping stones
upon which to determine the demand for agricultural products in
the short run there are other factors that play a significant role
in the long run. One of these factors is population, the only way
demand for agricultural produce can increase is if there is an
increase in population as observed in the following diagram which
shows the dependency between population and food.

Another essential element of demand in the long run has to do

with knowing the food preferences and tastes of a region which
are usually determined by its demographics. For example a
wealthy region is more likely to demand expensive tropical fruit
as opposed to a poorer one that will opt for the cheaper, seasonal
ones. Finally like in demand for all products it is very important to
know consumers tastes in order to determine what kind of
products they will demand. However it must be noted that these
factors only affect demand in the long run and tend to remain
stable in economies that don’t experience rapid growth rates.

By combining what affects demand in the short run and in the

long run we can deduce that demand for agricultural products is
relatively stable in the long run seeing that consumers’,
irregardless of changes in price and income, won’t demand above a
fixed amount. Also the fact that food products don’t have any
substitutes means consumers won’t be able to consume below a
certain amount seeing that they need this food to survive. Thus
demand for food will converge in the long run and be relatively
stable as the only thing that can affect it in the long run is
population increase or a change in taste which in most developed
economies don’t occur.
On the other hand we have supply of agricultural goods which is
subject to weather and disease in the short run that are factors
that cant be controlled by the producer when deciding upon
whether to supply or not. The above two factors mean that supply
will be very unstable in the short run leading to prices and as a
result incomes in the agricultural sector being very volatile as
illustrated in the following diagram.

In the above figure we see that in a bad year where producers

can get high prices for their produce very few of them are able
to produce so even though they have achieved the desired price
in the market disease and weather hinder the ability to obtain
the profits of the higher price illustrated by the orange area. On
the other hand in a good year where most of them can supply the
price they get for their goods in the market is too low and thus
most make very low profits. From the above we deduce that short
run supply is relatively inelastic mainly because the goods are
perishable and because the production period is too long. Also we
see that farm incomes are usually very unstable especially
considering the atomistic structure of the market which means
that a single producer can’t affect the market in any way. In
other words once a farmer has produced a certain amount of food
he has to sell it because otherwise it would go off and he would
have to incur higher costs per unit produced. At the same time
bec ause agricultural goods take a relatively long time to produce,
once a farmer has decided to produce he can’t withhold
production if in the end food prices are too low making him unable
to respond to changes in price either by increasing or decreasing
his supply. This leads to the paradox of income in the agricultural
sector where profits in a bad year are greater than profits in a
good year. However this wouldn’t occur if the agricultural
industry was faced with a relatively more elastic demand curve.

In the long run however supply experiences growth because it is

subjected to improvements in technology. As a result if producers
have examined weather conditions or diseases that cause their
crops and subsequently their production to suffer they can inject
technology to overcome these difficulties. As a result supply in
the long run will expand. As a result in the long run prices face a
downward trend because demand is constrained by Engel’s law and
supply expands greatly. However producers will have slightly
higher incomes in the long run as illustrated by the blue area in
the diagram below.

Overall we see that the inelasticity that characterises both

demand and supply in the agricultural sector means that even
though in the short run both prices and incomes will be very
volatile in the long run prices present a downward trend and
incomes an upward one. The price instability is proven empirically
by the fact that the all commodities price index is at +/-11.6%
whereas the price index for manufactured goods is +/-4%.
Similarly the price decline is illustrated empirically by the fact
that the price for food has been found to have a -2.8% price
change annually.

Agriculture Marketing
Direct Marketing: Direct marketing enables farmers to meet
the specific requirements of wholesalers from the farmers’
inventory of graded produce and of retail consumers based on
consumers’ preferences, thus enabling farmers to dynamically
take advantage of favorable prices and improve their net
margin. It encourages farmers to undertake grading of farm
produce at the farm gate and obviates the necessity of farmers
to haul produce to regulated markets that are not necessarily
spaced on the principles of efficiency. Direct marketing thus
enables farmers and buyers to economize on transportation costs
and to improve price realization considerably. In South Korea,
for instance, as a consequence of expansion of direct marketing
of agricultural products, consumer prices declined by 20 to 30
per cent and producer received prices rose by 10 to 20 per cent
and this also provided incentive top large scale marketing
companies to increase their purchases directly from producing
areas.

Agriculture Marketing Project & Programmes

Agricultural Marketing Systems Development
Programme(AMSDP)

Introduction

The Agricultural Marketing System Development

Programme (AMSDP) is a seven year Programme
implemented in two phases of four and three
years. The Programme implementation
commenced in January 2003. The Prime
Minister’s Office is the implementing agency.

The programme is jointly financed by the

Government of Tanzania, the International Fund
for Agricultural Development (IDAD), African
Development Bank (ADB) and the Government of
the Republic of Ireland for a total of shillings
48.9 billion.

Beneficiary Districts
Thirty six districts located in eight regions of
Tanzania Mainland are the major beneficiaries.
These are the areas with high crop yields but
are faced with serious market problems. These
districts are located in Arusha, Manyara,
Kilimanjaro and Tanga regions in the Northern
Zone in Iringa, Mbeya, Rukwa and Ruvuma regions
in the northern Highlands zone which in
agriculture circle are popularly known as the “Big
Four”

Although the AMSDP was officially launched in

January, 2003. It was until 2004 that its fully
implementation commenced in the first eight
districts of Arumeru. Hai, Babati and Muheza in
the Northern Zones and Mufindi, Songea, Mbeya
Rural and Sumbawanga Rural in the Southern
Highlands. Other 12 districts were added in
January 2005. These include Monduli, Hanang,
Mbulu, Rombo, Same and Lushoto (Northern
Zone) and Mbarali, Rungwe, Mbozi, Nkasi, Ludewa
and Mbinga (Southern Highlands Zone). In
general the Programme is expected to benefit
over 9.5 million people from these districts.

Programme Objectives

The long term goal of AMSDP is to increase the

income and ensure food security to the target
groups in the designated areas. The intermediate
goal is to strengthen the marketing systems for
agro – based products in order to improve the
welfare of the peasants. The short – term goal
of the programme is to increase and widen the
market base among small scale producers,
processors and traders thus increasing their
participation in the agricultural marketing. The
beneficiaries under this programme are targeted
grouped in the categories:-

• Small scale farmers/peasants

• Small scale processors and entrepreneurs
and
• Officials in the Central Government and
Local Government Authorities

AMSDP Major Components and Implementation

Status

The implementation of the AMSDP is done

through five components:

• Agricultural Marketing Policy Development

• Producer Empowerment and Market
Linkages
• Financial Market Support Services
• Rural Marketing Infrastructure and
• Programme Organization and Coordination

The Commodity Marketing is implementing four

Major Components which are:-

Agricultural Marketing Policy Development

The objective of this Component is to support a

policy reform and legislative process that will
contribute to improving efficiency on the
marketing system in order to benefit smallholder
producers, intermediaries, consumers and other
participants in the system. This process includes
reforms at both central and local government
levels. It involves two sub-components namely:
National Policy Development and Local
Government Policy Development. The
implementation progress of the two sub-
components is as follows:-

National Policy Development

Under the National Policy Development sub

component, the following activities were
undertaken

Preparations of the Agricultural Marketing

Policy

The Ministry of Industry, Trade and Marketing

in collaboration with key stakeholders has been
finalized the process of formulations of the
Agricultural Marketing Policy. It is now seeking
Government approval for its implementation.

Studies on Crop Board

The Ministry of Industry, Trade and Marketing

in collaboration with the Ministry of Agriculture,
Food Security and Cooperatives is implementing
the Government Circular on Rationalization of
Roles, Functions, Financing and Accountability of
Crop Boards by undertaking Revision of Crop
Boards Legislation.

Rural Marketing Infrastructure

A total of 14 roads covering some 275

kilometers were completed out of the projected
1000 kilometers. Along the intended kilometers
some 100 bridges and 500 culverts were to be
rehabilitated /constructed. Following the
rehabilitation of the roads, a significant
improvement has been noted in the
transportation of crops from the farms to the
market places.

Of the projected 20 market places, six have

been contructed/rehabilited. These are Babati
(Gallapo), Arumeru (Kikatiti), Hai (Kwa Sadala),
Muheza (Mtindiro), Mbeya Rural (Inyala) and
Sumbawanga Rural (Matai).

Producer Empowerment and Market Linkages

The main objective of this Component is to

increase benefits that small holder farmers,
traders and processors obtain from manner. 700
groups received different types of training. The
training package provided includes aspects of
group dynamics, business skills, marketing skills,
agro-enterprise selection and other cross
cutting issues (HIV/AIDS, Environment and
Gender)

Market Information
Activities on this sub-component include training
of regional and district market monitors and
MITM officials, supply of market information
software (agro-market), motorcycles and
computers to the designated districts. Under
the sub-component, market place notice boards,
radio and television programmes as well as
newspaper articles were initiated. Also, the use
of mobile phone short message service - SMS
through Vodacom in combination with the
village/group billboards has been intensified
while other areas have adopted the “Mkulima
shushu” (market informer) approach in accessing
marketing information.

Financial Market Support Services

The objective of this Component is to address

the liquidity constraint facing small holder
producers, small and medium scale rural traders
and sub-components were earmarked for
implementation.