The recent banana glut has caused prices to drop sharply. Luckily, the government's emer-gency measures have prevented the worst of the effects from hurting farmers.
Many people wonder why the production and sale of Taiwan's agricultural products is so often unbalanced. How can the problem be solved once and for all?
The emergency measures for dealing with this imbalance emphasize the short term. Without other effective complementary measures, the problem is destined to return on a cyclical basis.
The price of agricultural products are decided by supply and demand. Significantly affected by the weather, supply is seasonal, while demand is relatively stable. Because short term supply and demand elasticity is low, prices can fall drastically at harvest time.
To prevent price declines during the harvest season, we can reduce supply and increase demand. Short-term methods to reduce supply include no harvesting, storing, processing or exporting, and the destruction of produce. Short-term methods to stimulate demand include sales promotion, consumer subsidies and giving away produce for free.
Medium and long-term methods involve structural industry adjustments. For supply, such adjustments include diversifying production periods, reducing planted area, improving storage and delivery technology and improving the quality of the final product. In terms of demand, structural adjustments include finding more uses for the product, changing consumption patterns to create greater demand and expanding overseas markets.
In the past, the government's response to a serious decline in agricultural prices was to subsidize producers by buying produce for storage and processing, holding promotional exhibitions and providing export subsidies.
The effectiveness of these methods, however, was limited and it is questionable if it even indirectly boosted farmers' income. In other words, those who really benefited from such methods were probably the processing factories, export companies and retailers, not farmers. If our concern is protecting the income of farmers, direct income subsidies may be a more effective way to deal with the problem -- and this also tallies with WTO regulations.
To avoid drastic price fluctuations, we must start by grasping and accurately predicting industry supply and demand. To prevent farmers' income from falling together with prices, income subsidies should dovetail with the various corrective measures described above.
Even if the government really has to carry out emergency measures to overcome short-term imbalances between supply and demand, it should directly subsidize farmers so that they reduce supply and increase quality at the same time. This is an even more direct and effective way of maintaining or improving prices.
Subsidizing processing factories, export companies and intermediary businesses does not directly benefit farmers. Although this could indirectly reduce market supply and thus increase prices, it is much inferior to direct subsidies to farmers to reduce the supply of bad quality products.
Before harvest, products for which a glut is expected should be promoted through the media in order to stimulate overall consumption. If we want to boost prices and farmers' income, actively increasing demand is probably more helpful than passively reducing supply.
Finally, for products that suffer an imbalance, we should begin by reducing planted areas. In particular, the conversion of orchards on overdeveloped land and hill sides into forests or tourist ranches should be encouraged.
Woo Rhung-jieh is a professor in the Department of Agricultural Economics at National Taiwan University.
Translated by Eddy Chang
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