Price determination

1
Price determination

• is the broad forces of supply and demand
  establishing a market clearing price for a
  commodity.

2
Price Discovery

• is the process by which buyers and sellers arrive
  a a specific price for a given lot of produce at
  a given location for a specific time period.
• Reading Assignment
• Understanding Livestock Pricing Issues

3
Price Discovery

• A human process subject to relative bargaining
  power of the buyer and seller.
• Two stage process
• Evaluate SD and Pe
• Estimate the price for the specific trade.

4

Price Determination and Price Discovery

S
P

Pe
D
Q
Qe
5
Price Discovery Concerns Under Alternative Price
Determination Conditions

• Demand
• Supply Strong Weak
• Large Potential Probable
• Small Unlikely Potential

6
Price discovery systems

• Individual negotiations
• Also called private treaty sales
• Fed cattle hogs grain
• Organized central markets
• Auctions terminal electronic
• Formula pricing
• Eggs wholesale meat feeder pigs hogs and
  cattle

7
Price discovery systems

• Bargained prices
• Fruits vegetables milk
• Administered pricing
• Government programs

8
Packer Procurement Method 1999

• Hogs Cattle
• Cash market 27 65
• Formula 32 20
• Futures-based 8 4
• Risk share 14 3
• Packer owned 18 5
• Other 1 3

9
Percent of U.S. Hogs Sold Through Various Pricing
Arrangements January 1999-2002  

• 1999 2000 2001 2002
• Hog or meat market formula 44.2 47.2 54.0 44.5
• Other market formula 13.2 20.8 21.9 11.8
• Other purchase arrangement 4.6 4.6 6.6 8.6
• Packer-sold 2.1
• Packer-owned 16.4
• Negotiated spot 35.8 25.7 17.3 16.7

2002 data based on USDA Mandatory Reports
1999-2001 based on industry survey. University
of Missouri and National Pork Board
10
Procurement Method MPR

• IA/MN Daily Prior Day PURCHASE SWINE
• Negotiated Packer Owned Packer Sold
• Market Formulas (Swine or Pork Other)
• Other Purchase Agreement
• National Daily Prior Day SLAUGHTERED SWINE
• National Weekly Direct Slaughter
• Cattle - Formulated and Forward Contract -
  Domestic
• Formulated and Forward Contract - Import
• Packer Owned Cattle
• Negotiated Purchases
• http//www.ams.usda.gov/lsg/mncs/index.htmMandato
  ry

11
Performance issues

• Least cost method of price discovery
• Effect of the mechanism on price behavior
• Marketing v. pricing efficiency

12
Centralized pricing

• All buyers and sellers in one place at one time.
• Full and immediate information
• Competitive bidding
• Equalizes market power
• Transaction cost
• Physical movement of product

13
Decentralized Pricing

• One-to-one negotiations
• Reduced transportation cost
• Reduced transaction cost
• Depends on skills and information
• Higher search cost

14
Hybrid markets

• Electronic markets
• Centralized pricing
• Decentralized product movement
• Examples
• Satellite auctions
• Electronic auctions
• Tel-o-auction
• E-commerce

15
Electronic markets

• Marketing agency
• Lends credibility
• Settle disputes
• Aids collection and payment
• Examples
• http//www.superiorauction.com/
• http//www.cattlesale.com/
• http//www.e-markets.com/

16
Information and markets

• Price reporting
• Role of the government
• Collection 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

17
Price reporting

• Iowa Dept of Ag and Land Stewardship
• Regional cash grain prices
• Auction market prices

18
Price reporting

• USDA Agricultural Marketing Service
• http//www.ams.usda.gov/lsg/mncs/index.htm
• Terminal of large auctions
• Farmer to packer trade
• IA-S. MN Hogs
• Western Cornbelt pork carcass
• Iowa Direct Trade Cattle
• Meat trade
• Boxed beef
• Carlot pork prices

19
Mandatory Price Reporting

• Passed Congress October 1999
• Scheduled to start January 30 2001
• Delayed due technical difficulties
• Started April 2 2001
• Little or no beta test
• Technical difficulties
• One report no backup plan
• Scheduled to end Oct 1 2004

20
3/60 Guideline

• Commonly used standard to protect confidentiality
  of reporting firms
• At least 3 reporting firms and no one firm with
  60 or more of volume
• OMB imposed guideline
• Implemented on a line-by-line report-by-report
  basis
• Nearly one-third of scheduled daily cattle and
  swine reports were withheld from publication
  between April 2 and June 14 2001

21
3/70/20 Guideline

• Began August 20 2001
• Implement on for most recent 60-day period
• At least three entities must provide data at
  least 50 percent of the time
• No one entity may provide more than 70 percent of
  the data
• No one entity may provide data more than 20
  percent of the time as the only entity

22
91 reports

• Time region commodity and type of purchase
• Hogs 15 reports
• Cattle 43 reports
• Lamb 8 reports
• BoxedBeef and Lamb 25 reports
• NOT wholesale pork

23
Summary

• Mountains of new reports and data
• Not as timely
• More transparent after the fact

24
Homework assignmentDue next class

• One page
• Find prices in three related markets.
• Define the 4 dimensions of each market.
• Discuss the marketing margins between each
  market.

25
Where to find

• Newspaper radio DTN
• Internet
• Look for USDA-AMS
• http//www.ams.usda.gov/
• Determine a commodity
• Choose a location

26
Market Regulation

• Grain Inspection Packers and Stockyards
  Administration
• GIPSA
• Division of USDA
• Regulation of markets and trade

27
So What

• Why is price reporting important
• Why do taxpayers fund price reporting and market
  regulators