Macroeconomic influences on future agricultural prices in the European Community

Summary This paper contains a model of the agricultural price decision process in the European Community which is used to project target prices annually to 1990. The approach assumes a bargaining procedure among the member countries. Two constraints on price decisions are proposed: (i) individual countries disallow any price change that, in conjunction with expected green rate changes, leads to a nominal price decrease, and (ii) cost-cutting pressures from the Commission exclude price increases in any country which are greater than the previous year's inflation. These constraints, along with projected inflation rates, exchange rates, and green rates, define a band of feasable target price increases for each year up to 1990. The results suggest that in commodity markets characterized by a high degree of government intervention, government policies should be included as an integral part of the model rather than be considered exogenously. Second, for each member country, policies are conditioned not only by commodity markets, but also by macroeconomic influences, most notably differential rates of inflation and corresponding exchange rate movements.