ECON 337: Agricultural Marketing Chad Hart Assistant Professor [email protected] 515-294-9911 Econ 337, Spring 2012 Today’s Topic Livestock Pricing Econ 337, Spring 2012
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Transcript ECON 337: Agricultural Marketing Chad Hart Assistant Professor [email protected] 515-294-9911 Econ 337, Spring 2012 Today’s Topic Livestock Pricing Econ 337, Spring 2012
ECON 337:
Agricultural Marketing
Chad Hart
Assistant Professor
[email protected]
515-294-9911
Econ 337, Spring 2012
Today’s Topic
Livestock Pricing
Econ 337, Spring 2012
Price Determination and
Discovery
Price Determination
is the broad forces of supply and demand
establishing a market clearing price for a
commodity.
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.
Econ 337, Spring 2012
Price Discovery
A human process, subject to relative
bargaining power of the buyer and seller.
Two stage process
Evaluate supply, demand, and market prices
Estimate the price for the specific trade.
Econ 337, Spring 2012
Price Determination
and Price Discovery
S
P
Pe
D
Qe
Econ 337, Spring 2012
Q
Futures Markets in Price Discovery
Centralized pricing
Global forces in one location
Predominate price discovery for grains
Still have local price discovery for basis
Livestock price discovery more
complicated
Variability – basis a bigger issue
Growing inventory problem
Econ 337, Spring 2012
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 2012
Decentralized Pricing
One-to-one negotiations
+ Reduced transportation cost
+ Reduced transaction cost
- Depends on skills and information
- Higher search cost
Econ 337, Spring 2012
Where to Sell
Terminal markets have declined
Auction markets important when assembly is
needed
Feeder cattle and cull cows
Growing interest in fed cattle in fringe areas
Direct sales
Slaughter cattle and hogs
Feeder pigs
Growing in feeder cattle where source verification is
important
Econ 337, Spring 2012
Feeder Cattle Sales
Live weight sales
Various weight classes
In general, lower $/# and heavier weights
Auction is major market
Assembly function important
Video auctions
Direct trade
Premium paid for
Large uniform lots
Certification/verification ??????
Econ 337, Spring 2012
Important Market Functions
Assembly function
Feeder cattle
Cull cows
Sorting function
Econ 337, Spring 2012
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 sell
Negotiate price and terms on each group
Contract market
May be for one group or an ongoing agreement
between buyer and seller
Terms and pricing method determined ahead of
marketing date
Econ 337, Spring 2012
Hybrid Markets
Electronic markets
Centralized pricing
Decentralized product movement
Examples
Satellite auctions
Electronic auctions
Tel-o-auction
E-commerce
Econ 337, Spring 2012
Formula Pricing
Price discovery from elsewhere
Formula contracts
Spot market
Cutout price
Futures
Cost of production
Do you trust the underlying market for
price discovery?
Econ 337, Spring 2012
Feeder Pig Trade
Cash/Spot market price
Often through a broker
USDA report
Econ 337, Spring 2012
Formula price
Based on observable price
Spot market
Hog futures, maybe corn & SBM
Example: 50% of 5 month out futures
Econ 337, Spring 2012
Performance Issues
“Least cost” method of price discovery
Effect of the mechanism on price behavior
Marketing v. pricing efficiency
Econ 337, Spring 2012
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
Econ 337, Spring 2012
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 2012
Derived Demand
S
Vertical distance is the difference
in price at 3 levels
There is cost associated with
moving from one level to the next
Px
Pretail
Pwholesale
Pfarm
Dretail
Cuts of meat
Dwholesale
Carcasses
Dfarm
Q
Econ 337, Spring 2012
Animals
Qx
Derived Demand for Pork
Average retail price $/lb
Value of trim and scrap $/lb
Costs from whlse-retail $/lb
The most retail will pay $/lb
Retail pounds per carcass
The most retail will pay $/head
Econ 337, Spring 2012
$2.50
$0.10
-$1.00
$1.60
100
$160
Derived Demand for Hogs
Wholesale carcass value $/hd
Value hide and offal $/hd
Costs to slaughter and fab $/hd
The most packer will pay $/hd
Wholesale pounds per carcass
The most packer will pay $/cwt.
(or think of it as ¢/lb.)
Econ 337, Spring 2012
$160
$25
-$20
$165
200
$82.50
Producer Asking Price
Starts with cost of production
Reflects current market conditions
Time is a huge factor for livestock
Marginal revenue may decrease
Marginal cost increases at increasing rate
Farmer has longer time period than packer
from start of process to end.
Econ 337, Spring 2012
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2012/
Have a great weekend!
Econ 337, Spring 2012