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Market Forces AS 91530 Level 3 Agricultural and Horticultural Science
The Basis for Trade Countries trade with each other to receive goods and services they can not produce themselves, or can only produce at a higher cost. Countries will specialise in the production of goods and services in which they have a comparative advantage. New Zealand has a comparative advantage in the production of primary goods and services. We have good growing conditions, suitable climate and soils compared with other countries. New Zealand has greater technical expertise, especially in the production of primary products (dairy, forestry) than many other countries. The closeness of our major cities to ports, good transport links and lower production costs add to New Zealand’s comparative advantage.
Free Trade Free trade is where trade between countries occurs without government intervention. Free trade allows producers to gain access to a wider range of markets and consumers a wider range of products at lower prices. Free trade has the advantage of allowing countries to specialise in certain products that they are best suited to producing and to buy products that they could possibly only produce at a higher cost.
Market Manipulations A market manipulation is something the artificially influences supply and demand. Industry demands impacting on production. Two main influences; Political Grower intervention organisations
1. Political Interventions Political intervention occurs when a government has regulations through legislation in Parliament (Act of Parliament) that affect: Either, products entering and leaving a country Or the supply of products within a country. Examples are; Government bans a product from entering a country for pest or disease control reasons. There are trade negotiations between governments on the amount of a product that can be traded. Government tries to protect the future supplies of a product such as native timber, crayfish and some fish species. Government bans the introduction of a disease for pest control such as myxomatosis for pest control. Legislation is carried out by government departments, such as Ministry of Primary Industries (MPI).
Reasons for political intervention To control the spread of animal and plant pest and diseases such as foot and mouth, scrapie, and Mediterranean fruit fly. Strict hygiene controls are put in place such as banning some products and animals, quarantining some imported plants and animals, spraying insecticides and inspecting overseas ships and mail. The effect of these on New Zealand’s agricultural and horticultural production would be disastrous. The Ministry of Primary Industries is responsible for biosecurity. Protect the growers and producers in one country from cheaper imported products. Barriers on trade between the exporting country and the domestic country prevent free trade and artificially influence the market. These include; trade barriers, quotas, tariffs, incentive grants and subsidies, tax concessions, and international commodity agreements.
Trade barriers A country will not accept another country’s primary products because they wish to maintain their own production without competition. Trade barriers may be imposed for biosecurity reasons. Tax concessions Government reduces or eliminates taxes for producers who produce a given product. Tax concessions are sometimes offered in the crop establishment period to encourage the growing of certain crops.
Subsidies A subsidy is a government payment to producers to help them produce a given product or a quantity of a given product. It reduces the cost of production. This artificially makes the product cheaper and helps to maintain international competitiveness.
Incentive grants The government offers financial incentive for producers to produce certain type or number of products. Dumping Countries that subsidise exports are accused of dumping (getting rid of) their goods at really low prices e. g. used cars from Japan to New Zealand, or tomatoes from Australia. Is the fear of low prices charged by foreign sellers. May hurt domestic producers but it always benefits domestic consumers.
Tariffs A tariff is a tax levied (added) to a product imported into a country to raise the price of the imported product.
Duties imposed on imported goods. Is a rate or % of value of a good. Can be set based on: Type of good Country of origin Value of the good Used where a product is competing with domestically produced goods. Raises the price of imported products. Tariffs allow local producers to raise their prices to ensure profitability while remaining competitive with the imported good.
Quotas The maximum quantity of primary product which will be accepted by an importing country. To protect home producers. E. g. the EC (European Community) will only accept a specified quantity of butter and meat each year from NZ. These have to be negotiated at regular intervals.
Quotas work by restricting the quantity of imports in a given time period. The restriction on the quantity of imports allows domestic producers to supply more goods and effectively protects them from unrestricted competition. Is a limit on the amount of a product which can be imported. Used to reduce the competition for domestic producers from imported products. Tries to be an amount great enough to top up local supply but not so great as to create a surplus. Tries to maintain prices received by the domestic producer.
How tariffs and quotas work Both tariffs and quotas restrict supplies coming in from abroad and drive up prices. The tariff works by raising prices and hence cutting the demand for imports while the sequence associated with quota goes the other way – restriction in supply forces prices up. An import quota on a product normally will reduce the volume of that product traded, raise the prices in the importing country and reduce the price in the exporting country. Any restrictions of international trade that is accomplished by a quota normally can also be accomplished by a tariff.
International commodity agreements International commodity (trading) agreements are negotiations between governments that decide which products should be traded and at what quantities. TPP (Trans-Pacific Partnership) is a free trade agreement (FTA) that will liberalise trade and investment between 12 Pacific-rim countries: New Zealand, Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, Singapore, the United States and Viet Nam. It was signed by the 12 countries on 4 February 2016 in Auckland, but has not yet entered into force. TPP will give New Zealand better access to globally significant markets. It will diversify New Zealand's trade and investment relationships, and provide a platform to build on the NZ$28 billion of New Zealand goods and services exported to TPP countries in 2014.
EU (European Union) is an association of European countries that aim to: Eliminate custom duties and trade restrictions between members Establish a common external tariff Encourage free movement of labour (workers) between member countries Establish common economic policies for agriculture. GATT (General Agreement on Tariffs and Trade) is an international agreement to reduce trade restrictions. It aims to negotiate tariff reductions and eliminate import quotas. CER (Closer Economic Relations) is an agreement between New Zealand Australia that aims to expand the export opportunities of both countries by reducing the trade barriers between them. For some products these barriers include duty (an import tax) and restrictions on the quantity imported.
Food Aid Government provides food aid or relief instead of money for goods. Mostly used in 3 rd world countries. Guaranteed price schemes Government guarantees a particular price for goods. If normal market forces does not reach this price, then the government will make up the difference.
Quarantine Imposed by an importing country on the country that is supplying the product Usually imposed on the plant where a product is processed, and the way the product is processed Includes bans due to health or pest concerns e. g. New Zealand apples not allowed to be exported to Australia which was the case until 2011. Officials from the country coming to inspect plants, where animals or product is produced Can affect exports by causing lengthy delays during delivery.
Embargo An embargo is a complete ban on trade with a particular country due to the political policies pursued by the government. Regulations are a way to control imports. Strict health and hygiene regulations, such as those that apply to food processed in an exporting country, can and have been used against New Zealand. Freezing works must comply with standards of cleanliness, or risk foreign inspectors taking away export licences.
Quality Control An importing country may impose quality standards to the extent that they limit supply. This can also reduce competition for domestic producers, and may be put into place instead of tariffs and quotas. E. g. Dairy Industry standards on milk quality and production standards. Animal Welfare issues such as tail docking; inductions and residues. Traceability issues. Environmental issues. (Concerns on the use of chemicals in the environment and in the production of food stuffs are having a major effect on demand for certain products).
Questions What does market manipulation mean? What is political intervention? List the two main reasons for political intervention. Name four methods of political interventions. Explain two of these.
2. Grower Organisations. Made up of representatives of the growers. Make decisions of behalf of the growers for the benefit of the whole industry. Influence the marketing of our products. Aim to get the best long term returns for growers. Examples: Veg. Fed Fonterra Beefand. Lamb. NZ New Zealand Kiwifruit Growers New Zealand Citrus Growers Pipfruit New Zealand Wools of New Zealand
How grower organisations influence the market. There are several ways in which grower organisations can manipulate or influence the market. These include; Those that influence supply; Establishing quality standards Organising a marketing system Providing technical know-how to improve production levels and product quality. Those that influence demand; Promoting and advertising products Researching and developing other ways of using a product Establishing quality standards.
Organising a marketing system for producers Growers selling products on the domestic (New Zealand) market can select the type of selling systems that suit them best. This might be gate sales, auctions, or direct selling on contract to retailers or processors. Export market is much more complicated because it has to; Sell to several countries each with different sets of regulations on disease control, quality standards, quotes and trading agreements. Deal with different types of transport (such as shipping and aircraft) each with different regulations. Deal with large volumes of a product. Consider the perishable nature of many products and the specific storage requirements. These are need coordination. These can be done by the marketing divisions of large grower organisations, such as Fonterra, and Zespri.
E. g. Single desk system Having a single marketing organisation to control the export of a product is called a single desk system. It is efficient because: Growers don’t have to find their own markets or compete against each other. The product can be stored under optimum conditions. The amount that is processes into different end uses is controlled. In many situations these efficiencies have advantages for growers and increase their returns. Under a single desk system is may be possible to: Control the volume of a product released on to the market, so preventing oversupply and falling prices Set prices for a product.
Establishing quality standards. Quality standards are often established by grower organisations. Quality standards differ accordingly to the products but the aim is to provide end users with a product known for quality. For example, the common features for high quality fruit are; Uniform size and shape Correct colour for the cultivar Ripeness (or other maturity level) Unblemished both inside and out due to disease control Pesticide residue levels that meet customer requirements.
Providing technical knowledge Grower organisations employ advisory officers who have direct links with the producers and provide the technical knowledge on ways to improve production levels and/or product quality. This kind of knowledge can be passed on through discussion groups or field days. For example, for wool producers this could be advice on: Fleece weighing to select sheep with heavier fleeces to breed from and so increase the amount of wool each sheep produces. Selecting Merion rams and ewes for fineness of wool Introducing more productive pasture species in drier areas, such as chicory.
Promotion and advertising Many grower organisations are involved in promotion and advertising of their products. To increase demand for a product it needs to be: Advertised – consumers need to know a product is available and how to use it. Packaged to suit consumer preference e. g. butter is sold in Britain in 250 g packs and not 500 g packs as in New Zealand.
Research and development focuses on other ways of using a product that, in turn, lead to increase in demand. Here are examples of the way New Zealand Wool increased the demand for wool: By developing a fine wool fibre to weave wool fabrics that can be worn in spring and summer especially in Europe. It is marketed as “Cool Wool”. Using wool for insulation in houses instead of fibreglass insulation such as Pink Batts. Spraying woollen upholstery (chair and couch coverings) with Scotch guard to make the wool fabric stain resistant. Using a blend of wool and synthetic fibres to make a fabric to cover car and bus seats. This fabric wears longer, doesn’t pill (form small round balls on the surface) and is more fire resistant than synthetic fibres.
Comparing political intervention and grower organisations. Political intervention occurs through legislation in parliament (an Act of Parliament) and is carried out by government departments. Grower Organisations are made up of representatives of the growers. Growers usually have to fit into political constraints (limits). For example, if an export product is not allowed into country because of a disease problem, then the grower organisation is likely to respond by looking for ways to overcome either the disease or the constraint or restriction. An example of a way to over come a disease is to try and breed a disease resistant cultivar or breed.
Differences between political intervention and grower organisations. Political intervention. Affecting supply. Controlling pests and diseases entering a country Establishing tariffs Negotiating trading agreements Controlling the volume of a product into a country Maintaining quality control as MPI. Affecting demand. Maintaining quality control as MPI.
Grower organisations. Affecting supply. Regulating the volume of a product produced Controlling the volume of a product allowed into a country. Storage and processing before export. Affecting demand. Storage and processing before export. Regulating the grading and /or sizing of a product. Designing packaging to match consumer preference Deciding on the type of advertising and promotion Maintaining quality control
Questions Name three grower organisations in New Zealand. Describe 5 ways that grower organisations can manipulate the market and for each, say whether supply or demand is manipulated. Why is the export market more complicated than the domestic market? What is a single desk marketing system? Why is single desk system an efficient system for export products? List one other possible advantage to growers. Give a general statement about the effect of: Political intervention on supply and demand? Grower organisations on supply and demand?