Pricing and Exchange Systems

1
Chapter 7

• Pricing and Exchange Systems
• and Alternatives Within the
• Marketing-Procurement Channel

2
Pricing System

• A market mechanism or process (organized
  behavior) by which market participants discover,
  negotiate, or fix prices.
• Net costs to buyer and seller influenced by
  transaction costs those costs incurred by buyer
  and seller as they search for market
  opportunities and make and complete business
  deals.

3
Pricing Systems

• Price discovery systems
• Organized markets
• Decentralized, individual negotiation
• Price-setting systems
• Firm price making
• Group negotiation
• Government price setting

4
Price Discovery Systems

• Price discovery process of buyers and sellers
  arriving at prices for a commodity when market
  conditions do not permit either group to set
  prices
• All market participants are individually price
  takers or price negotiaters
• Usually associated with fairly equal numbers of
  buyers and sellers

5
Price Discovery SystemsOrganized Markets

• Structured to give buyers and sellers access to
  one another
• Offer free and vigorous competition
• Also referred to as public markets
• May be electronic

6
Price Discovery SystemsDecentralized,
Individual Negotiation

• Less formalized, less structured, less public
• Also referred to as private treaty or haggling
• Convenience and lower transaction costs
• Offer-acceptance system
• Formula pricing

7
Price Setting Systems

• Prices may be set by any of three parties
  sellers, buyers, government
• May fail to equate amounts supplied and demanded
• Price making by individual firms more likely for
  differentiated products than commodities
• Group negotiation farmers negotiating as a group
  with individual buyers
• Government price setting price ceilings rare
  price supports more common

8
Price Systems in Usefor Major Commodities
9
Factors on Which toCompare Pricing Systems

• Minimization of transaction costs
• Spatial pricing efficiency
• Level and stability of prices
• Integrity and equity of the price-making process

10
Contractual ExchangeArrangements

• Vertical integration ownership of contiguous
  stages in the marketing channel
• Vertical coordination firms share information to
  improve efficiencies
• Marketing-procurement contract an agreement
  between buyer and seller covering product,
  time/nature of delivery, price, and other aspects
  of exchange

11
Agribusiness Motivationsfor Vertical Integration

• Seeking or controlling product quality
• Gaining efficiencies
• Gaining market security

12
Farmers Motivationsfor Vertical Integration

• Separating pricing decision from time of delivery
• Shifting price risks to contractor
• Improves access to market

13
Characteristics ofProduction Contracts

• Allocation of value
• Allocation of decision rights
• Allocation of risk

14
Marketing-Pricing Alternatives(Storable
Commodities)

• Timing of pricing
• Timing of delivery
• Timing of sale
• Contracting
• Forward pricing in cash or futures markets
• Pooling

15
Characteristics ofMarketing-Pricing Alternatives
16
Class Exercise

• Using the commodity assigned in Chapter 1 and the
  agribusiness chosen in Chapter 2, discuss to what
  degree the agribusiness is involved with
  controlling the agricultural marketing system.
  Discuss these characteristics
• Degree of marketing system control
• Capital
• Location
• Corporate philosophy
• Quality