Variable determinants of the agricultural market like the weather or natural disasters create a situation in which in order to maintain a particular amount of food available on the market, governments encourage farmers to produce more. They tend to do it in a similar way, often, by providing them with subsidies and setting guaranteed prices of the products. Pic. 1. This diagram shows us the correlation between the supply and demand curves in the farming sector. Both of them are quite inelastic, because of a constant need for agricultural products and their regular provision.
We can see that the excess of supply is cause by the encouraging policy of the EU, increasing the competition among the farmers. This leads to a greater supply which is often far above the real demand. The difficult matter to solve for authorities is setting the actual minimum price, because the consumers would obviously prefer a lower price than the farmers. This leads to many misunderstandings and mistakes in the chain of supporting the agricultural production. The European Union decided to create a whole system of subsidies for the farmers.
However, to maintain the food safety within its borders, the EU established guaranteed prices for products. This particular system of intervention is called the Common Agricultural Policy, The CAP. The farming sector is protected and purposefully kept stable. The most important aim of CAP is to sustain regular supplies from the farming branch. Bad weather conditions or natural disasters usually harm the harvest and decrease the amount of agricultural products. To maintain a particular amount of food available on the market, he EU decided to encourage farmers to grow more crops, developing the competition among them, but what is even more important, increasing the number of suppliers. This means that generally more products are available, even in extreme situations. Guaranteed prices also allow to keep farmers’ income during good harvest when prices would be driven down and protect consumers form incredibly high prices during a bad harvest. Moreover, more farmers are assured that they do not really risk their expected income and they develop their methods of growing.
Provided with generous subsidies, they can invest more capital to increase their long term profit. Such a situation results as a higher productivity and efficiency of the farming sector. On the other hand, extended usage of lands is a cause of ruining the environment. Overdeveloped sense of competition among the suppliers leads to more crops being grown, and more lands being used. Most farmers easily avoid an environmental laws and limitations which are not really executed. Regular polluting waters and grounds with overdosing insecticides result as a natural catastrophe and are not survivable for the local fauna and flora.
Furthermore, such actions undertaken by the EU led to overproduction. Because of an extremely high number of suppliers, the market was overwhelmed with products. As a result, governments were forced to sell the excess onto the world market and by doing it, they harmed farmers form countries that do not provide such support. Most of them, developing countries, whose economy is based on the farming sector, were instantly defeated on the market, finding it impossible to compete with such a system, because the prices offered by Europeans were too low for them to sustain their regular income.
To sum up, guaranteed prices strongly support farmers in the European Union, maintaining the provision of food at a sufficient level. However, over-usage of such a way to encourage them to be more efficient and competitive, leads to problems like environment pollution and threatening developing countries. Moreover, in long term such actions harm the interest of consumers, who cannot benefit from any changes on the agricultural market and even expect lower prices from massive suppliers.