PRICING MISCONCEPTION AND REAL WORLD PRICING – Fred M’membe

PRICING MISCONCEPTION AND REAL WORLD PRICING

I note that my article on rising inflation and the pass through effect on the maize price for 2024 pegged by the Food Reserve Agency (FRA) at K330, which will predictably result in a huge increase in mealie meal prices and stock feed prices has generated a lot of interest. Most commentators are of the view that this creates an opportunity to invest in farming.

Now let’s test this assertion. The assumption being made here by those who think that this is a great business opportunity is based on the following assumptions:

1. That this is seller’s market and not a buyer’s market. Unfortunately, market dynamics have changed, and the current scenario is that the buyer has more say than the seller
2. ⁠That prices are set on a cost plus basis, meaning the producer adds up all his production costs and puts a mark, say 25%, to peg the selling price. Again, 19th-century thinking and total academic thinking, which works in a classroom but not in the real world.

Why do I say 19th-century thinking?
In that era, most products were produced by monopolies, and they could dictate the price, and one has no choice but to comply because there was no alternative, be it in price or quality terms. Hence the term “seller’s market”.

In the 21st century, buyers dictate the price based on quality and perceived value in the product or service you offer. So buyers will dictate the price, and if the price falls way above perceived value, they will not buy until you reduce the price.

People are queuing for mealie meal from Eagle Millling on account of price, while other brands are readily available. If Eagle Milling were to supply and fulfil national demand, competitor millers will have two options: shut down or lower their price to match Eagle Milling and run at a loss.

So if we go to chickens as a specific example, the reality of the matter is that the current selling price of between K100/K120 per chicken is likely to be below the cost of production given the monthly esacalating feed prices which can be confirmed by the Poultry Association of Zambia which means farmers are either at a break even level or making losses.

If costs of production are higher than selling price per unit of production, the business will shut down because it is eroding capital invested. So when commentators say this is creating a business opportunity because increased input price will result in increased selling price and therefore increased profits, then you need to rethink this theory.

This is the reason why farming is subsidised in most parts of the world to ensure constant/increased production and enhance food security. Most importantly, it ensures that farming remains profitable at all times.

Lastly, advocates of the sellers’ market or cost plus pricing should understand that the issue of affordability comes into play. With all costs going up, do they think the ordinary person will afford to absorb all these increases on a static salary? Your salary goes up by K850 per month, but the price increase for basic products you consume in your household goes up by K2,000?

Let’s stop textbook economics and apply practical solutions to cushion the ordinary Zambian in these hard times. Tactical targeted subsidies are critical to ensure food security and consequently national security. A hungry man is an angry man.

I truly appreciate all your comments on my article as it gives me an insight into how others view critical issues.

Fred M’membe
President of the Socialist Party