The economic essence of prices and pricing functions in agriculture

Pricing and its impact on farm economics

In economic practice, price serves as the primary financial regulator: it determines economic efficiency of production, the level of real wages, the cost of operations, and the investment opportunities of the enterprise. Pricing always combines two approaches: cost-based, derived from production expenses, and utility-based, reflecting the value of the goods to the buyer. The seller sets the lower price limit based on costs, whereas the buyer focuses on the consumer utility of the product. The actual market price emerges at the intersection of these interests as a result of negotiations, mutual demands, and concessions.

The structure of a product's price fully coincides with the elements of its cost and consists of two parts: expenses and profit. Expenses are formed by material costs and the labor wage fund. To ensure financial stability, the price must fully cover the cost of production and sale, as well as contain a normal level of profitability. Through the price mechanism, the law of value is manifested: the sum of prices of all commodity mass in the country equals its total value, although prices for individual batches of products regularly deviate from the value under the influence of demand, supply, inflation, taxes, and government regulation.

Adherence to price parity is of particular importance for the economics of an enterprise. The final result of operations is equally strongly influenced by the prices of produced agricultural products, the rates for purchased industrial means of production, and the cost of outsourced services. If parity is violated and the rise in prices for material and technical resources outpaces the rise in prices for the produce of fields and farms, the farm loses the ability to provide material incentives for workers and renew fixed assets.

Types of prices, sales channels, and service tariffs

Before the transition to market relations, a limited pricing system operated in agriculture. The bulk of production was distributed via strictly regulated procurement prices, which were purchase prices for collective farms and delivery prices for state farms. The remainder of the production was sold through consumer cooperatives, the collective farm market, or distributed within the farm. Modern market conditions require economists and managers to work with a multitude of contractual prices that differ in their formation methods and distribution channels.

• Share of state deliveries before the market transition — 80 % of total production
• Composition of costs in price — material expenses and labor wages
• Composition of purchase price — production cost and producer profit
• Composition of selling and wholesale price — production cost, profit, excise tax, and VAT

The diversity of prices applied in modern agribusiness is due to several key factors:

• sales channels — deliveries to the state, for export, to processing enterprises, to intermediaries, via barter, or directly to the retail network;
• level of price formation — local, regional, national, or world market;
• batch volume and degree of processing — bulk wholesale, small wholesale, retail, raw material, or processed product;
• contract terms, presence of discounts, markups, and form of state price regulation.

In practical work, agricultural enterprises deal with a strictly defined classification of prices and tariffs. Purchase prices are used directly for procuring agricultural raw materials and include the production cost and the producer's profit. Wholesale prices are set for products intended for production and technical use, while selling prices apply to consumer goods (these include production cost, profit, excise for excisable goods, and VAT). The retail price for sales without intermediaries is formed from the selling or wholesale price including VAT, a trade markup, and VAT on that markup.

A separate group of rates consists of tariffs — prices for services of a productive and non-productive nature. The farm pays electricity, transport and repair works, as well as consulting services according to tariffs. The level of a specific tariff directly depends on the current supply and demand in the service market, their quality, seasonality, and contractual terms.

How market price is formed and why price disparity is dangerous

Under modern conditions, the cost of third-party services for agriculture is growing at a faster rate compared to the prices of agricultural products themselves. This imbalance leads to price disparity, a direct increase in production costs, and the forced abandonment of vital technological operations by farms.

The final selling price always depends on the agreements between the seller and the buyer, the time and place of sale, the type of market, and the completeness of price information. This system also includes the estimated cost per unit of construction work, as well as various markups and discounts. In a simplified form, the market price is formed under the combined influence of supply and demand.

The utility theory defines demand D as the quantity of goods Q for which there is demand at various prices P. The cost basis (cost theory) forms the supply S. The intersection point of these curves determines the equilibrium market price Pe and the equilibrium quantity of goods Qe. When the price falls below the equilibrium level, a deficit is formed in the market, and when it exceeds it, a surplus of supply occurs. The pricing process is also simultaneously influenced by inflation, monopolization, and government intervention.

Practical functions of price in enterprise economics

Price acts as the main economic tool for production management. In the agricultural sector, it performs a range of interrelated functions:

• Measurement: the primary function that determines the amount of money for buying and selling. It allows comparing the value of different goods and calculating both quantitative indicators (production volume, trade turnover, investments) and qualitative ones (profitability, labor productivity, cost recovery).
• Accounting: ensures accurate recording of production costs and the conversion of physical units of production into monetary terms.
• Balancing supply and demand: regulates the link between production and consumption. When prices fluctuate, capital flows: the output of slow-moving products is reduced, and released resources are directed to positions in demand by the market.
• Stimulating: regulates production volumes through the deliberate deviation of the price from socially necessary costs. An increased price level for high-quality produce compensates for expenses on new machinery, technologies, cultivars, seed, and personnel training, and also ensures additional profit.
• Distribution and redistribution: used for the distribution of national income between industries, accumulation funds, and consumption funds. It is implemented through state-regulated prices, VAT, excise taxes, and other tax mechanisms.
• Rational production placement: a high price offer combined with low transport tariffs stimulates the deployment of production directly in a specific region.
• Information-reference: guides the producer in market conditions when choosing directions of activity.