Price determinationPrice determination

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

Price Discovery

is the process by which buyers and is the process by which buyers and sellers arrive a a specific price for a sellers arrive a a specific price for a given given lotlot of produce at a given of produce at a given locationlocation for a specificfor a specific timetime period.period.

Reading AssignmentReading Assignment» Understanding Livestock Pricing IssuesUnderstanding Livestock Pricing Issues

Price Discovery

A human process, subject to A human process, subject to relative bargaining power of the relative bargaining power of the buyer and seller.buyer and seller.

Two stage processTwo stage process» Evaluate S&D and PeEvaluate S&D and Pe

» Estimate the price for the specific trade.Estimate the price for the specific trade.

Price Determination and Price Discovery

S

D

P

Q

Pe

Qe

Price Discovery Concerns Under Alternative Price Determination Conditions

DemandDemand

SupplySupply StrongStrong WeakWeak

LargeLarge PotentialPotential ProbableProbable

SmallSmall UnlikelyUnlikely PotentialPotential

Price discovery systems Individual negotiationsIndividual negotiations

» Also called private treaty salesAlso called private treaty sales» Fed cattle, hogs, grainFed cattle, hogs, grain

Organized central marketsOrganized central markets» Auctions, terminal, electronicAuctions, terminal, electronic

Formula pricingFormula pricing» Eggs, wholesale meat, feeder pigs, hogs and cattle Eggs, wholesale meat, feeder pigs, hogs and cattle

Price discovery systems

Bargained pricesBargained prices» Fruits, vegetables, milkFruits, vegetables, milk

Administered pricingAdministered pricing» Government programsGovernment programs

Packer Procurement Method, 1999

HogsHogs CattleCattle

Cash marketCash market 27%27% 65%65%

FormulaFormula 3232 2020

Futures-basedFutures-based 88 44

Risk shareRisk share 1414 33

Packer ownedPacker owned 1818 55

OtherOther 11 33

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

19991999 200020002001200120022002

Hog or meat market formulaHog or meat market formula44.244.2 47.247.254.054.044.544.5

Other market formulaOther market formula 13.213.2 20.820.8 21.921.911.811.8

Other purchase arrangementOther purchase arrangement 4.64.6 4.64.6 6.66.68.68.6

Packer-soldPacker-sold 2.12.1

Packer-ownedPacker-owned 16.416.4

Negotiated – spotNegotiated – spot 35.835.8 25.725.7 17.317.316.716.7*2002 data based on USDA Mandatory Reports, *2002 data based on USDA Mandatory Reports, 1999-2001 based on industry survey. 1999-2001 based on industry survey. University of Missouri and National Pork Board*

Procurement Method, MPR IA/MN Daily Prior Day PURCHASE SWINEIA/MN Daily Prior Day PURCHASE SWINE

» Negotiated, Packer Owned, Packer SoldNegotiated, Packer Owned, Packer Sold» Market Formulas (Swine or Pork, Other) Market Formulas (Swine or Pork, Other) » Other Purchase AgreementOther Purchase Agreement

National Daily Prior Day SLAUGHTERED SWINE National Daily Prior Day SLAUGHTERED SWINE National Weekly Direct SlaughterNational Weekly Direct Slaughter

» Cattle - Formulated and Forward Contract - DomesticCattle - Formulated and Forward Contract - Domestic » Formulated and Forward Contract - ImportFormulated and Forward Contract - Import » Packer Owned CattlePacker Owned Cattle » Negotiated PurchasesNegotiated Purchases

http://http://www.ams.usda.gov/lsg/mncs/index.htm#Mandwww.ams.usda.gov/lsg/mncs/index.htm#Mandatoryatory

Performance issues

““Least cost” method of price Least cost” method of price discoverydiscovery

Effect of the mechanism on price Effect of the mechanism on price behaviorbehavior

Marketing v. pricing efficiency Marketing v. pricing efficiency

Centralized pricing

All buyers and sellers in one All buyers and sellers in one place at one time.place at one time.» Full and immediate informationFull and immediate information

» Competitive biddingCompetitive bidding

» Equalizes market power Equalizes market power

» Transaction costTransaction cost

» Physical movement of productPhysical movement of product

Decentralized Pricing

One-to-one negotiationsOne-to-one negotiations» Reduced transportation costReduced transportation cost

» Reduced transaction costReduced transaction cost

» Depends on skills and informationDepends on skills and information

» Higher search costHigher search cost

Hybrid markets

Electronic marketsElectronic markets» Centralized pricingCentralized pricing» Decentralized product movementDecentralized product movement

ExamplesExamples» Satellite auctionsSatellite auctions» Electronic auctionsElectronic auctions» Tel-o-auctionTel-o-auction» E-commerceE-commerce

Electronic markets

Marketing agency Marketing agency » Lends credibilityLends credibility» Settle disputesSettle disputes» Aids collection and paymentAids collection and payment

ExamplesExamples» http://www.superiorauction.com/http://www.superiorauction.com/» http://www.cattlesale.com/http://www.cattlesale.com/» http://www.e-markets.com/http://www.e-markets.com/

Information and markets

Price reportingPrice reporting» Role of the governmentRole of the government» Collection and dissemination and timely Collection and dissemination and timely

reporting of prices that were discovered.reporting of prices that were discovered.» Other private treaty buyers and sellers Other private treaty buyers and sellers

incorporate new information into their incorporate new information into their negotiation.negotiation.

» Facilitates formula pricingFacilitates formula pricing

Price reporting

Iowa Dept of Ag and Land StewardshipIowa Dept of Ag and Land StewardshipRegional cash grain pricesRegional cash grain pricesAuction market pricesAuction market prices

Price reportingUSDA Agricultural Marketing ServiceUSDA Agricultural Marketing Servicehttp://www.ams.usda.gov/lsg/mncs/index.htmhttp://www.ams.usda.gov/lsg/mncs/index.htmTerminal of large auctionsTerminal of large auctions Farmer to packer tradeFarmer to packer trade

» IA-S. MN HogsIA-S. MN Hogs» Western Cornbelt pork carcassWestern Cornbelt pork carcass» Iowa Direct Trade CattleIowa Direct Trade Cattle

Meat tradeMeat trade» Boxed beefBoxed beef» Carlot pork pricesCarlot pork prices

Mandatory Price Reporting

Passed Congress October 1999 Passed Congress October 1999 Scheduled to start January 30, 2001Scheduled to start January 30, 2001

» Delayed due technical difficultiesDelayed due technical difficulties Started April 2, 2001Started April 2, 2001

» Little or no beta testLittle or no beta test» Technical difficultiesTechnical difficulties» One report – no backup planOne report – no backup plan

Scheduled to end Oct 1, 2004????Scheduled to end Oct 1, 2004????

“3/60” Guideline Commonly used standard to protect Commonly used standard to protect

confidentialityconfidentiality of reporting firms of reporting firms At least 3 reporting firms and no one At least 3 reporting firms and no one

firm with 60% or more of volumefirm with 60% or more of volume OMB imposed guidelineOMB imposed guideline

» Implemented on a line-by-line, report-by-report Implemented on a line-by-line, report-by-report basisbasis

» Nearly one-third of scheduled daily cattle and Nearly one-third of scheduled daily cattle and swine reports were withheld from publication swine reports were withheld from publication between April 2 and June 14, 2001between April 2 and June 14, 2001

“3/70/20” Guideline

Began August 20, 2001Began August 20, 2001 Implement on for most recent 60-day periodImplement on for most recent 60-day period At least At least three three entities must provideentities must provide data at data at

least 50 percent of the time least 50 percent of the time No one entity may provide more than No one entity may provide more than 70 70

percentpercent of the data of the data No one entity may provide data more than No one entity may provide data more than 20 20

percentpercent of the time, as the only entity of the time, as the only entity

91 reports Time, region, commodity, and type Time, region, commodity, and type

of purchaseof purchase Hogs, 15 reports Hogs, 15 reports Cattle, 43 reportsCattle, 43 reports Lamb, 8 reportsLamb, 8 reports Boxed–Beef and Lamb, 25 reportsBoxed–Beef and Lamb, 25 reports NOT wholesale porkNOT wholesale pork

Summary

Mountains of new reports and dataMountains of new reports and dataNot as timelyNot as timelyMore transparent after the factMore transparent after the fact

Homework assignmentDue next class

One pageOne pageFind prices in three related markets.Find prices in three related markets.Define the 4 dimensions of each Define the 4 dimensions of each

market.market.Discuss the “marketing margins” Discuss the “marketing margins”

between each market.between each market.

Where to find?

Newspaper, radio, DTNNewspaper, radio, DTN InternetInternet

» Look for USDA-AMSLook for USDA-AMS

» http://www.ams.usda.gov/http://www.ams.usda.gov/

» Determine a commodityDetermine a commodity

» Choose a locationChoose a location

Market Regulation

Grain Inspection, Packers and Grain Inspection, Packers and Stockyards AdministrationStockyards Administration» GIPSAGIPSA

» Division of USDADivision of USDA

» Regulation of markets and tradeRegulation of markets and trade

So What???

Why is price reporting important?Why is price reporting important?Why do taxpayers fund price Why do taxpayers fund price

reporting and market regulators?reporting and market regulators?