To Tackle the Price Volatility

     The current situation seems like many economic sectors are facing with a problem of price uncertainty, particularly agriculturists producing various agricultural goods are confronting the declining product price problem; for instance, rubber, corn, tapioca, etc. At the same time, the factor prices such as fertilizers, oil, gas, etc. are more likely to climb, impacting on lots of production sectors.

     One reason of the continuous changing price level is the normal condition of economy system or unavoidable market. But, another reason also comes from external factors or interferences which are derived from 4 major factors including

      1) Business cycle : it refers to the upward and downward movements of levels of GDP or economic activities. The fluctuation pattern comprises 4 periods which are depression, expansion, boom and recession. The price level has a tendency to go up in expansion and boom period and go down in depression and recession period.

      2) Seasonal goods : In particular, a number of agricultural goods simultaneously released to the market during the same season have lowered the product price; whereas there would be less non-seasonal products released to the market which cause higher product price.

      3) Change in price control policy: The government tends to implement a policy on price mechanism control by openly aiming at creating an income guarantee or support for some producers or at sustaining the price stability of some goods.  (perhaps the hidden agenda is to develop popularity vote.) However, that policy is likely to change as the government has changed or encountered the fiscal risk from executing this policy. Price control would increase or decrease the price beyond the market price which would bring about an inaccurate expectation of production cost and future product price for entrepreneurs. Once the price changes rapidly, entrepreneurs will be aggressively struck.

      4) Connectivity with the global economy system:  economic globalization and connectivity of Thai economy with global economy have made Thai economy approaching the fluctuations arising from the increasing fluctuations of global economy, especially the consequence of swift capital flow as well as the climate change of global economy. For example, the change in exchange rate affects the price level of exported and imported goods. The deceleration of Chinese Economy - the major market of Thailand - has lowered the price of numerous goods. 

     The uncertainty of goods and service price level is regarded as a crucial problem for a certain group of Thai producers, specifically a decline in product price or a hike of factor price which takes  place very fast and stays beyond expectation.  This does not enable producers to adjust themselves quickly against the change or allow the product quantity exceed or fall behind the market demand.

     For example, if the government sector price-guarantees some products above the market price, this will encourage producers to concentrate on producing more goods, leading to oversupplying problem. However, when the government sector has insufficient budget for product price guarantee, the product price will fall very rapidly.  Or, if encountering the depression circumstance, producers may experience a severe loss.

     As you can see, the price volatility partly is a normal phenomenon of economy system so the business sector cannot shun the impact of that volatility.  Anticipation for having the government support and interfere the market is merely an unsustainable short-term government aid measure. Establishments or production units, therefore, are required to develop themselves for handling that risk by pursuing the following significant development principles.  

     Principle 1: An access to information and future anticipation.  Many producers, particularly in agricultural sector, laid out a production plan by considering only the current price level or the historical price trend. And, they often anticipate on their own that the future price trend will go in line with the historical trend.  Consequently, accesses to information and abilities for future anticipation are extremely essential for producers to survive from the price volatility. The government sector should manage to initiate an education on anticipation of production quantity, demand, and price level of major goods in both short and long term. Then disseminate the anticipated information to the target producers accurately, thoroughly and in due course.

      In the meantime, the government should identify the strategies for industrial development in conjunction with the future global market demand and also set up guidance and encouragement measures for producers to run the production in conformity with those strategies. For example, agricultural zoning and supporting measure for agriculturists to produce what is designated for that zone so that the production which meets the longer-term market demand can be controlled.

     Principle 2: The elasticity of production sector.  In the state of price volatility, the elasticity of production unit is crucially necessary as the production unit would be enabled to resist changes. Elasticity could mean ability in fine-tuning the production size or switching to produce other goods quickly without making such a huge impact. But, the primary elasticity is the high profitability rate of a business which could accept a relatively wide change in price. 

     High profitability rate of any business emerges from different strategies in 3 main areas: 1) product invention or new innovation that matches global market demand 2) technology application for increasing productivity and focus on development of the entire working process system to be consistently more effective and efficient  3) value-added creation through marketing strategies such as brand creation, impression-added service, convenient and speed product distribution, unique product design and so on. 

     Principle 3: Risk protection and diversification. For production unit or production of some goods with low elasticity. For example, rubber which would take 7 years to reap the final product; or goods with high competition (low profitability rate) like commodities.  Apart from having producers anticipate the future accurately, the principle of risk protection and diversification is necessary for combating with the price volatility. Producers should study options and tools for protecting potential risks. For example, the benefit from the Agricultural Futures Market and so on. Also, producers should pay attention on risk diversification by producing more than one kind of products and each of them has no price relationship to one another. Then, the producers? income won?t waver by the price of a certain product. 

     In globalized economy, the price volatility is a normal phenomenon. A preparation for dealing with price volatility is an issue that government and business sector should focus on. For government to cope with the price problem, a short-term support or interference on price mechanism has to be transformed to building strength for producers to tackle the long-run price volatility. 

Kriengsak Chareonwongsak.
Senior Fellow at Harvard University?s Center of Business and Government.
kriengsak@kriengsak.com, http://www.kriengsak.com