What is a Commodity Parity Price?
Commodity parity price refers to the price of a commodity based on a single price or average of prices during a previous span of time.
How Does a Commodity Parity Price Work?
A commodity's parity price is a benchmark price against which its current price may be compared in order to gauge its purchasing power for producers. The U.S. Department of Agriculture (USDA) has established that parity pricing be measured as a commodity's average price over an immediately preceding 10-year period. For instance, if the market price for a bushel of wheat is examined for parity on 31 December 2008, the corresponding parity price would be the average price for a bushel of wheat between 30 December 1998 and 30 December 2008. In other words, if the average price for the past 10 years was $12.50, this would also be the parity price.
Why Does a Commodity Parity Price Matter?
In the U.S. commodities market, the parity price of a commodity based on a 10-year average was determined to be a fair pricing model by the Agricultural Adjustment Act of 1938, because it encapsulated the costs associated with producing and delivering the commodity. Provided that the current price is at least equal to the parity price, producers are being fairly compensated. Producers, such as farmers, are likely to receive subsidies in the event that a commodity's market price is lower than the parity price.
