2024-04-11 17:25:42
Thursday April 4, the deputies adopted at first reading, despite opposition from the presidential camp, a law in favor of “minimum purchase price of agricultural products”. The text proposed by the elected representatives of Europe Ecology the Greens, and which will probably not be not voted on by the Senate, starts from a laudable intention. Necessary perhaps given the low prices which sometimes do not cover the costs of agricultural production. The idea of aligning by law farmers’ selling prices with their cost prices determined by experts from chambers of agriculture or inter-professional associations, in particular, is undoubtedly attractive.
However, it contains the seeds of deleterious consequences which could ultimately degrade the economic health of sectors already in poor condition. The law appears to be proposed without prior substantive study of its full effects on markets. However, two main problems could well arise. The first is technical. It concerns the setting of the floor price, its level. The second is economic and concerns the impact of the floor price on the consumer. The two points are linked. Let’s start, in order, with the price level to set.
Benefiting producers who do not need it
In all sectors, agricultural and industrial, companies are heterogeneous and differ in their levels of productivity and quality. Farms that are disparate in productivity therefore have different costs to produce a similar good and the most productive ones record higher profits. Increasing sales prices by law would thus risk creating excess profits among the most productive. The system would therefore benefit actors who did not need it. This is a primary source of inefficiency.
The only response to this problem is to adapt the price by category of exploitation. This can be done roughly by looking in particular at their size: the larger the farm, the more it will theoretically be able to benefit from economies of scale and therefore better productivity. Such an approach would, however, remain both approximate and complex because it will require a price per category.
Things become even more complex when we consider goods that differ from each other by their quality. A floor price will especially increase the price of lower quality. As a reaction, operators of immediately superior qualities will increase their prices to signal their superior qualities and avoid finding themselves in the situation of selling a superior quality good at a lower price. By carrying over from quality bracket to quality bracket, the entire price scale along the range will rise. However, here again, no price increase was initially justified for higher qualities. An effect of rent, of surplus profit, appears again.
Experience in other areas shows that the price range should actually tighten. A good example of this dynamic of upward propagation of a price increase at the bottom of the scale is given by the price of labor with regular increases in the minimum wage (smic in France). The effect fades from a salary level greater than or equal to 1.5 minimum wage. Therefore, we can anticipate a contagion of an increase in a floor price attenuating as we move up the scale of qualities and therefore prices.
More to lose than to gain?
However, the consequences of floor prices in terms of rents for the most productive and qualitative farmers do not appear to be the main problem for the agricultural sector. The biggest pitfall could come from the consumer. What about the evolution of demand in the face of an increase in prices following the establishment of a floor price?
The effect goes through two mechanisms called direct price elasticities and cross-price elasticities of demand for agricultural goods by the final consumer. The direct price elasticity of demand for a good measures as a percentage the variation in demand following a variation in the price of this good. Concretely, how much does demand decrease when the price increases by 10%?
In a preliminary study on the French wine industry, we calculated elasticities for entry-level wines sold in supermarkets that could exceed unity: that is to say, demand varies in a greater proportion than the prices. This work is consistent withothers, already published which measure these export price elasticities for foreign demand. The turnover of producers will then fall: the price multiplied by the quantity sold will decrease under the effect of the drop in consumption being greater than the increase in price.
The consumer loses even more. Ultimately, it is the social surplus which has deteriorated with a marked loss for the consumer whose transfer to the producer, via the increase in the selling price, is not enough to improve the latter’s situation. Both lose and it is therefore a net social loss.
New consumer choices?
The consumer can also postpone consumption in the face of an increase in the price of a given good: towards higher quality goods, towards imported goods or towards close substitutes, all of which become in relative terms less expensive compared to the good. whose price has increased. This is the game of cross-price elasticities between different goods.
The example of wine is again rich in lessons. Our first results show that these carryover effects seem to be at work. The increase in entry-level price could push the consumer towards a higher quality level, thus precipitating the drop in turnover for entry-level wine. The exact opposite of the effect desired by the law.
Worse, the carry-over effect can go towards imported goods and therefore lead to a net loss on a national scale. In certain sectors, origin is less looked at than in others and an “EU” label is sometimes enough to reassure the consumer of a certain level of quality. Finally, the carry-over effect can even push the consumer out of a sector. This is the case for wine where a floor price can lead to consumer arbitration in favor of beer or other drinks deemed substitutable.
Avoid a boomerang effect downstream
The conditions for the success of the law thus depend on the targeted sectors: they must be as homogeneous as possible in productivity and quality to minimize the effects of rents and carryovers. It must also relate to agricultural goods whose demand is poorly price elastic, therefore goods which are difficult for the consumer to do without. Thus, for the producer, the loss of sales will remain limited and more than offset by the increase in price. In addition, substitutes, imported or not, must be few in number to avoid carryovers. The public authorities will have to decide this delicate question of eligible products for which the law would not have adverse effects. According to the text voted in the National Assembly, it is a “public lecture” by sector which would set these minimums, a conference which would only be convened “at the request of a majority of producers” in the sector in question.
Public authorities will also have to decide the fate of unsold goods generated by a price increase. Who will pay for their destruction? Compensation will undoubtedly be requested by producers who will see their stocks swell. All these questions will boomerang from the law. Was all this weighed, evaluated, budgeted at the time of the vote? Wouldn’t there be measures to take upstream to avoid these downstream effects?
Since a large part of the problem comes from the increase in price for the final consumer, the floor price should not affect the consumer to avoid the adverse consequences described above. Two solutions. Either the State subsidizes the floor price by compensating the difference between the market price and the floor price so that the chain of intermediaries maintains the same prices and nothing changes for the final consumer. Either the intermediaries absorb the price increase linked to the law in their margins. If the increase is measured it could be absorbed within the framework of negotiations involving all the players and, why not, within the framework of yet another discussion on the Egalim law.
In all cases, in agricultural sectors (as in most sectors elsewhere), most of the value creation takes place in the last stages of the value chain, the marketing stages. The value does not increase linearly from upstream to downstream of the production process of a good, it increases exponentially: a little at the beginning, a lot at the end. It was good documented in wine For example. A fundamental reflection on the sharing of value between the actors, the industrial organization and the governance mechanisms of the agricultural sectors is necessary. This work was certainly prior to a law on floor prices.
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