The Future of Smallholder Farming in Eastern Africa - Uganda ...

ANNEX TABLES
Annex 1.1: Notes on price discovery
By G.R Tomek and L.K Robinson, 1981, London: Agricultural Market
Product Prices, Cornell University.
The process by which buyers and sellers arrive at specific prices and other terms of
trade is known as price discovery. The following are some of the major categories of
price discovery:
i. Informal negotiation between individuals – a range of prices rather
than a single equilibrium is likely to prevail. This range may reflect
imperfections in the pricing method, including the relative bargaining
power and trading skills of the participants. Price reporting where so
much variability exists is time-consuming, expensive, and sometimes
inaccurate. This system of pricing becomes progressively less
satisfactory as the volume of production per farm increases and the
opportunity cost of time spent in bargaining rises. For this reason, as
agriculture becomes more commercialized, the price a farmer receives
is less likely to be determined by individual negotiations.
ii. Trading on organized exchange or auction, including both specific
market places and electronic exchange or auctions – Two types of
trading occur on organized markets. One is the ‘spot’ or cash market
which involves trading in actual commodities, normally on the basis of
samples. The other is in futures contracts which specify the minimum
grade or particular grade of a commodity which must be delivered in
fulfillment of the contract at some future date.
The structure of such markets can be viewed as a continuum from pure
competition to absolute monopoly. A simple division is possible,
iii.
however, between ‘competitive and non-competitive’.
Pricing via formulas – pricing formulas are usually based on some
reported price, such as a quotation derived from a central market or the
price paid to producers in a particular region or location. A welldesigned
formula offers the advantage of providing an impersonal,
prompt, and low-cost method of adjusting prices. Once adopted, a
pricing formula makes it possible to change prices more or less
automatically in response to changes in the designated base price or
whatever movers are incorporated in the formula.
iv. Bargaining conducted by producer associations or co-operatives –
Dissatisfaction with price levels and other terms of trade has led
farmers, in some cases, for form bargaining associations or coperatives
in an attempt to negotiate with buyers. The fundamental weakness of
voluntary association to raise prices on a national scale is that it is
difficult to get everyone to join especially when the potential benefits
of remaining outside of the associations are so great.
v. Administrative decisions, both in the private and public sectors – the
objective of government administered pricing in agriculture in some
cases is simply to provide a floor under prices in years of large crops
so as to limit price fluctuations, while in others it is to provide
incentives to increase production, as during World War II. The
resource allocation function of prices is often sacrificed in order to