Exercise No 3 Notes

Exercise No. 3 Price Spread and Market Efficiency

Price Spread

                                                                                               

            Price spread is the difference between the price paid by the ultimate consumer and that received by the producer per unit of the commodity.

Market Efficiency

            It is the ratio of total value of goods marketed to the marketing cost.

ME = CP / ∑ (MC + MM)

            where, CP is the consumer’s purchase price, MC is the market cost and MM is the marketing margins.

            This is also called as Shepherd’s Index.

Model Problem

Marketing costs, margins and price spread for tomato (Rs. / q)

Sl. No.	Particulars	Channel I	Channel II	Channel III
Farmer
1	Net price received by producer	426	607	679
Village trader
2	Price paid by village trader	426	-	-
3	Marketing cost	37	-	-
4	Profit margin	228	-	-
5	Marketing margin	265	-	-
Wholesaler - cum - commission agent
6	Price paid by Wholesaler	691	607	-
7	Marketing cost	13	13	-
8	Profit margin	265	301	-
9	Marketing margin	278	314	-
Retailer
10	Price paid by Retailer	819	819	-
11	Marketing cost	22	22	-
12	Profit margin	271	271	-
13	Marketing margin	294	294	-
Consumer
14	Price paid by consumer	1113	1113	679
15	Producer’s share (%)	38	55	-
16	Price spread	687	456	-
17	Shepherd’s Index	1.22	1.73	-

Solution:

(i) Producer’s share = (Net price received by producer / Price paid by consumer) *100

                                    = ( 426 / 1113) *100 = 38 %

(ii) Price Spread  =    Price paid by consumer - Net price received by producer        

                              = 1113 - 426 = Rs. 687.

(iii) Shepherd’s Index =   CP / ∑ (MC + MM)

                                      = 1113 / (909) = 1.22

Inference

            The price spread was very high at Rs. 686 / q (62 per cent) in Channel I and Rs. 456 / q (46 per cent) in Channel II.

            The  Shepherd’s  Index  of  market efficiency  was  very  low  for  the tomato crop in Channel I (1.22) and low in Channel II (1.73).

            Since Channel III involves direct marketing by the farmers, there will be none of the market intermediaries involved. Thereby, there will be no need for working out price spread or market efficiency. But both the farmer and the consumer are benefitted here, as the farmer is able to realize a better price for his produce and the consumer is getting the vegetable at a comparatively low price.