Price fluctuations in agriculture and how to control them – Price Mechanism (Senior 4 Economics) | Ganzaa

Price Mechanism

Lessons

Senior 4 · Economics

Price Mechanism

4 lessons

Lesson 3 of 4

Price fluctuations in agriculture and how to control them

35 min

Up 38%, down 17%, up 19%

The National Bank of Rwanda records the average price Rwanda received for each kilogram of coffee it exported. Between 2021–22 and 2024–25 it rose by 38.3%, rose again by 16.1%, fell by 17.3% and then jumped by 18.6%. At home, NISR reported that fresh food prices rose by 7.7% in a single month, between August and September 2026. A factory that faced swings like these in the price of its product would struggle to plan. Farmers face them every season. This lesson explains why farm prices are so unstable, what the swings do to farmers and the economy, and how governments try to calm them.

1. Causes of price fluctuations in agricultural products

Cause	How it moves prices
Weather and natural hazards	Rain, drought, floods and hail shift supply from season to season, outside farmers' control
Pests and diseases	Crop and animal diseases cut supply suddenly
Inelastic demand	Food is a necessity, so a small change in supply causes a large change in price (Unit 3)
Inelastic supply in the short run	Once planted, the harvest is fixed; trees take years to mature
Time lags (the cobweb)	Farmers plant on last season's price, so supply keeps overshooting
Perishability and poor storage	Fresh produce must be sold at once, flooding the market at harvest time
Seasonal harvests	Prices are low just after harvest and high just before the next one
Many small, unorganised producers	No single farmer can hold back supply to steady the price
World markets	Export prices follow world supply (a frost in Brazil), world demand and the exchange rate
Poor transport and market information	Surpluses in one district cannot reach shortages in another

Definition

Cobweb theorem: a model of farm markets in which this season's supply depends on last season's price, because crops must be planted before the price is known. Price and quantity then zig-zag around the equilibrium. The swings die out if supply responds less to price than demand does (a converging cobweb) and grow if it responds more (a diverging cobweb).

Worked example 1: a converging cobweb (illustrative)

Demand: $P = 10 - Q$ . Supply, planted on last season's price: $Q_t = 0.8P_{t-1} - 0.8$ . Equilibrium: $10 - Q = 1 + 1.25Q \Rightarrow Q^* = 4,\ P^* = 6$ .

Season	Price expected (last season's)	Quantity planted $0.8 P - 0.8$	Price received $10 - Q$
1	7	4.80	5.20
2	5.20	3.36	6.64
3	6.64	4.51	5.49
4	5.49	3.59	6.41

Each season the gap between the price and the equilibrium price of 6 shrinks to 0.8 of the last one ( $- 0.8, + 0.64, - 0.51, + 0.41$ ), so the cobweb converges, slowly.

2. Effects of price fluctuations

Unstable farm incomes: farmers cannot plan spending, saving or school fees.
Low investment: risk discourages farmers from borrowing to buy fertiliser, seed or equipment.
Unstable export earnings and foreign-exchange receipts, making it harder to pay for imports.
Unstable government revenue from export and farm taxes.
Inflation and food insecurity: high food prices hurt households that buy more food than they sell; NISR's EICV7 notes that relatively high food prices in 2024 would directly hurt net buyers of food, including many poor people.
Resources shift away from farming, and young people leave for towns.
Speculation and hoarding by traders, which can make the swings worse.

Definition

Buffer stock scheme: an agency buys and stores a commodity when its price falls below a floor, and sells from its stock when the price rises above a ceiling, keeping the price within a target band.

Stabilisation fund: a fund, often run by a marketing board, that pays farmers a steady price, saving part of the revenue when world prices are high and topping up farmers' pay when they are low.

International commodity agreement: an agreement among producing (and sometimes consuming) countries to steady a commodity's world price, using export quotas, buffer stocks or both. For example, the International Coffee Agreements used export quotas from 1962 until 1989.

3. Controlling the fluctuations

How a buffer stock works. In the diagram, a normal harvest of 5 units gives a price of 5, inside the band. A good harvest (6.5 units) would push the price down to 3.5, so the agency buys 1 unit at the floor of 4.5. A poor harvest (3.5 units) would push the price up to 6.5, so the agency sells 1 unit from its store at the ceiling of 5.5. The price never leaves the band.

Other methods: minimum (floor) prices, such as NAEB's farm-gate price for coffee cherries (Lesson 4); diversification into more crops and non-farm work; better storage and processing to cut post-harvest losses; irrigation, which MINAGRI reports had reached 74,375 hectares in 2024–25; crop and livestock insurance; market information for farmers; forward contracts and commodity exchanges; and cooperatives that store and sell together.

Worked example 2: Rwanda's National Strategic Grain Reserve

MINAGRI describes the National Strategic Grain Reserve (NSGR) as a way to protect food security, soften shocks to food supply and stabilise prices. Its 2024–25 figures:

	Maize (tonnes)	Beans (tonnes)
Target to buy in 2024–25	9,626	5,903
Actually bought	8,467.764	4,407.910
Stock at end of June 2024	32,262.493	11,105.652
Stock at end of June 2025	28,342.425	13,557.221

Share of target bought: maize $\frac{8\,467.764}{9\,626} \times 100\% \approx 88\%$ ; beans $\frac{4\,407.910}{5\,903} \times 100\% \approx 75\%$ .

Change in stock over the year: maize $28\,342.425 - 32\,262.493 \approx -3\,920$ tonnes (about $- 12 %$ ); beans $13\,557.221 - 11\,105.652 \approx +2\,452$ tonnes (about $+ 22 %$ ).

Interpretation: the reserve released more maize than it bought, including 4,907.194 tonnes sent out through the East Africa Exchange "for stabilizing food price on local market" (MINAGRI), while it built up its stock of beans. That is the buffer-stock principle: sell when supplies are short, buy when they are plentiful.

Warning

Buffer stocks have limits, and an essay should name them. The agency needs money to buy in good years and must store grain without losses; perishable crops such as tomatoes cannot be stored; if the floor is set too high, the agency keeps buying and the stock grows without end; if a run of poor harvests empties the store, it can no longer hold the ceiling. Several international buffer stocks collapsed for these reasons.

Tip

Buffer stock rule: "Buy low, sell high, keep the band." Draw the band first (floor and ceiling), then a good harvest (agency buys) and a poor harvest (agency sells).

Important

Discuss. Which method of stabilisation best suits each of these Rwandan crops: maize, tomatoes and coffee? Think about storage, exports and how many farmers grow each one.

tutor2u, "Price Volatility and Buffer Stock Schemes". Geoff Riley explains why commodity prices are volatile and how a buffer stock buys and sells to keep prices in a band; listen for the reasons such schemes can fail.

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Practice

Explain five causes of price fluctuations in agricultural products in Rwanda.
Explain four effects of unstable farm prices on a developing economy.
Using the BNR data, calculate the percentage rise in the coffee export unit value from 2019–20 (US$3.05) to 2024–25 (US$5.66).
With a diagram, explain the cobweb theorem. Under what condition does the cobweb converge?
A buffer stock agency sets a floor of Frw 400 and a ceiling of Frw 500 per kg of maize. Demand is $Q_d = 1\,000 - P$ (tonnes). How much does it buy or sell if the harvest is (a) 700 tonnes, (b) 450 tonnes?
Distinguish between a buffer stock scheme and a stabilisation fund.
Using MINAGRI's figures, explain how the National Strategic Grain Reserve acted as a buffer stock in 2024–25.
"Buffer stocks are the best way to stabilise farm prices in Rwanda." Discuss.

Show answersHide answers

Any five: weather; pests and diseases; inelastic demand; inelastic short-run supply; time lags (cobweb); perishability and poor storage; seasonal harvests; many small producers; world prices and the exchange rate; poor transport and information.
Any four: unstable farm incomes; low investment; unstable export earnings; unstable government revenue; inflation and food insecurity; movement of labour out of farming.
$\frac{5.66 - 3.05}{3.05} \times 100\% \approx 85.6\%$ .
Farmers plant on last season's price, so a high price leads to a big crop and a low price, then a small crop and a high price, and so on. It converges if supply is less responsive to price than demand (in the usual diagram, the supply curve is steeper than the demand curve).
(a) At the floor of 400, $Q_{d} = 600$ ; the harvest of 700 would push the price to 300, so the agency buys $700 - 600 = 100$ tonnes. (b) At the ceiling of 500, $Q_{d} = 500$ ; the harvest of 450 would push the price to 550, so the agency sells $500 - 450 = 50$ tonnes.
A buffer stock buys and sells the commodity itself to steady the market price; a stabilisation fund steadies the price paid to farmers by saving money in good years and paying it out in bad years, without holding the crop.
It bought maize and beans (8,467.764 t and 4,407.910 t), released maize when supplies were short (including 4,907.194 t to stabilise local prices), and its stocks fell for maize but rose for beans: buying when supply is plentiful, selling when it is short.
For: works for storable staples like maize and beans; protects poor buyers and farmers; NSGR already does it. Against: costly; useless for perishables like tomatoes; cannot steady world coffee prices; risk of losses in storage and a wrong floor price. Conclusion: buffer stocks suit storable staples, combined with irrigation, storage, insurance and diversification.

Quick check

Put the steps of a cobweb in order, starting from a high price.

Tap the cards in the right order.

Key points

Farm prices swing because of weather, pests, inelastic demand and supply, time lags, perishability, seasons, many small producers and world markets.
The cobweb theorem shows how planting on last season's price makes prices zig-zag.
Unstable prices mean unstable incomes, low investment, unstable export earnings and food insecurity.
Controls: buffer stocks (such as Rwanda's NSGR), stabilisation funds, commodity agreements, floor prices, storage, irrigation, insurance and diversification.

Sources and credits

Coffee export prices: Annual Report 2024–2025, Appendix 15, National Bank of Rwanda (BNR).
Monthly food prices: Consumer Price Index (CPI), September 2026, NISR.
Food prices and net buyers: EICV7 Poverty Profile, NISR, 2025.
National Strategic Grain Reserve and irrigation: Annual Report 2024–2025, Ministry of Agriculture and Animal Resources (MINAGRI). Percentages calculated by Ganzaa.
Photo: Maize drying, post harvesting, Synkubito, via Wikimedia Commons, CC0 1.0.
Video: Price Volatility and Buffer Stock Schemes, tutor2u, embedded from YouTube.

Written by Ganzaa: the text, the coffee price chart (drawn from BNR's published table), the cobweb and buffer-stock diagrams, the tables, the worked examples and the practice items. The cobweb and buffer-stock figures are illustrative.

1Up 38%, down 17%, up 19%

21. Causes of price fluctuations in agricultural products

32. Effects of price fluctuations

43. Controlling the fluctuations

Up 38%, down 17%, up 19%

1. Causes of price fluctuations in agricultural products

2. Effects of price fluctuations

3. Controlling the fluctuations