Econ 337, Spring 2014 ECON 337: Agricultural Marketing Chad Hart Associate Professor [email protected] u 515-294-9911 Lee Schulz Assistant Professor lschulz@iastate. edu 515-294-3356
Dec 24, 2015
Econ 337, Spring 2014
ECON 337:Agricultural Marketing
Chad HartAssociate [email protected]
Lee SchulzAssistant [email protected]
Econ 337, Spring 2014
Price Determination and Discovery
Price Determinationis the broad forces of supply and demand
establishing a market clearing price for a commodity.
Price Discoveryis the process by which buyers and sellers
arrive at a transaction price for a given quality and quantity of product at a given time and place.
Econ 337, Spring 2014
Price Determination Supply determinants or factors affecting quantity
produced Input prices (feed, feeder cattle, weaned/feeder pigs)Technology (growth promotants, etc.)Expected price of outputs produced from inputs (finished
cattle, finished hogs)
Demand forces or factors affecting quantity consumedPrices of products produced (beef, pork)Prices of competing products (chicken, turkey, beef, pork)Consumer incomeTastes and preferences
Econ 337, Spring 2014
Price Discovery A human process, subject to relative bargaining
power of the buyer and seller. Involves several interrelated concepts:
Market structure (number, size, location, and competitiveness of buyers and sellers),
Market behavior (buyer procurement and pricing methods), Market information and price reporting (amount, timeliness,
and reliability of information), and Futures markets and risk management alternatives.
Two stage processEvaluate supply, demand, and market prices.Estimate the price for the specific trade.
Econ 337, Spring 2014
Futures Markets in Price Discovery
Centralized pricingGlobal forces in one locationPredominate price discovery for grains
Still have local price discovery for basis
Livestock price discovery more complicatedVariability – basis a bigger issueGrowing inventory problem
Econ 337, Spring 2014
Centralized Pricing All buyers and sellers in one place at
one time, i.e., auction market+ Full and immediate information+ Competitive bidding+ Equalizes market power - Transaction cost- Physical movement of product
Econ 337, Spring 2014
Important Market FunctionsAssembly function
Feeder cattle Cull cows
Sorting function Feeder cattle grade and condition Weight Intended use/destination
Econ 337, Spring 2014
Decentralized PricingOne-to-one negotiations
+ Reduced transportation cost+ Reduced transaction cost- Depends on skills and information- Higher search cost
Econ 337, Spring 2014
Where to Sell Terminal markets have declined Auction markets important when assembly is
neededFeeder cattle and cull cowsGrowing interest in fed cattle in fringe areas
Direct salesSlaughter cattle and hogsWeaned and feeder pigsGrowing in feeder cattle where source verification is
important
Econ 337, Spring 2014
Feeder Cattle Sales Live weight sales
Various weight classes In general, lower $/# and heavier weights
Auction is major marketAssembly function important
Video auctions Direct trade Premium paid for
Large uniform lotsCertification/verification ??????
Econ 337, Spring 2014
Slaughter Cattle and Hogs Direct sales most common
Animals are delivered directly to the packing plant Spot or cash market
Seller contacts buyer when ready to sellNegotiate price and terms on each group
Contract marketMay be for one group or an ongoing agreement
between buyer and sellerTerms and pricing method determined ahead of
marketing date
Econ 337, Spring 2014
Hybrid Markets Electronic markets
Centralized pricingDecentralized product movement
ExamplesSatellite auctionsElectronic auctionsTel-o-auctionE-commerce
Econ 337, Spring 2014
Formula Pricing
Price discovery from elsewhereFormula contracts
Spot marketCutout priceFuturesCost of production
Do you trust the underlying market for price discovery?
Econ 337, Spring 2014
Cash/Spot market priceOften through a brokerUSDA report
Formula priceBased on observable priceSpot marketHog futures, maybe corn & SBM
Example: 50% of 5-month-out LH futures
Econ 337, Spring 2014
Wean to Finish Pig Pricing Simulation
50% 5-month out LHF
Seller’s Buyer’s Returns ReturnsAverage $7.31 $3.03Std Dev $5.68 $16.97Minimum -$6.39 -$36.67Maximum $18.91 $35.23
Econ 337, Spring 2014
Wean to Finish Pig Pricing Simulation
60% 5-month out LHF
Seller’s Buyer’s Returns ReturnsAverage $15.12 -$4.78Std Dev $6.94 $16.11Minimum -$2.83 -$44.00Maximum $27.43 $27.56
Econ 337, Spring 2014
Wean to Finish Pig Pricing Simulation
70% 5-month out LHF
Seller’s Buyer’s Returns ReturnsAverage $21.58 -$11.24Std Dev $6.90 $16.51Minimum $1.71 -$51.33Maximum $29.95 $24.74
Econ 337, Spring 2014
Performance Issues“Least cost” method of price discoveryEffect of the mechanism on price behaviorMarketing vs. pricing efficiency
Econ 337, Spring 2014
Information and Markets
Price reportingRole of the governmentCollection and dissemination and timely
reporting of prices that were discovered.Other private treaty buyers and sellers
incorporate new information into their negotiation.
Facilitates formula pricing
Econ 337, Spring 2014
Packer Offering Price
Starts with derived demand from wholesale and retail markets
Time lag between sales of product and purchase of animals.Orders typically booked 3 weeks in advance.
Special features, holidays etc may be longer. Clean up orders may be few days
Packer is anticipating prices and stands risk
Econ 337, Spring 2014
Derived Demand
Px
Qx
Dfarm
Dretail
S
Pretail
Pfarm
Q
Dwholesale
Pwholesale
Cuts of meat
Carcasses
Animals
Vertical distance is the difference in price at 3 levels
There is cost associated with moving from one level to the next
Econ 337, Spring 2014
Derived Demand for Pork
Average retail price $/lb $2.50Value of trim and scrap $/lb $0.10Costs from whlse-retail $/lb -$1.00The most retail will pay $/lb $1.60Retail pounds per carcass 100The most retail will pay $/head $160
Econ 337, Spring 2014
Derived Demand for Hogs
Wholesale carcass value $/hd $160Value hide and offal $/hd $25Costs to slaughter and fab $/hd -$20The most packer will pay $/hd $165Wholesale pounds per carcass 200The most packer will pay $/cwt. $82.50
(or think of it as ¢/lb.)
Econ 337, Spring 2014
Producer Asking Price
Starts with cost of productionReflects current market conditionsTime is a huge factor for livestock
Marginal revenue may decreaseMarginal cost increases at increasing rate Farmer has longer time period than packer
from start of process to end.