Econ 337, Spring 2014 ECON 337: Agricultural Marketing Chad Hart Associate Professor [email protected] 515-294-9911 Lee Schulz Assistant Professor [email protected]

Econ 337, Spring 2014

ECON 337:Agricultural Marketing

Chad HartAssociate [email protected]

Lee SchulzAssistant [email protected]


Today’s Topic

Livestock Pricing


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.


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


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.


Price Determination and Price Discovery

S

D

P

Q

Pe

Qe


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


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


Important Market FunctionsAssembly function

Feeder cattle Cull cows

Sorting function Feeder cattle grade and condition Weight Intended use/destination


Decentralized PricingOne-to-one negotiations

+ Reduced transportation cost+ Reduced transaction cost- Depends on skills and information- Higher search cost


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


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 ??????


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


Hybrid Markets Electronic markets

Centralized pricingDecentralized product movement

ExamplesSatellite auctionsElectronic auctionsTel-o-auctionE-commerce


Formula Pricing

Price discovery from elsewhereFormula contracts

Spot marketCutout priceFuturesCost of production

Do you trust the underlying market for price discovery?


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



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



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



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


Performance Issues“Least cost” method of price discoveryEffect of the mechanism on price behaviorMarketing vs. pricing efficiency


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


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


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


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


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.)


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.


Class web site:http://www.econ.iastate.edu/~chart/Classes/

econ337/Spring2014/

Documents

Econ 337, Spring 2014 ECON 337: Agricultural Marketing Chad Hart Associate Professor [email protected] 515-294-9911 Lee Schulz Assistant Professor [email protected]