Farm and Food Prices Derived Demand AG BM 102
Introduction • Consumers rarely buy directly from farmers • Instead farmers sell to marketing service providers, who process, store, transport, and otherwise add utility, and who sell to the consumer • Hence, retail demand is not farm demand
Eggs • Farmers sell nest run eggs to packer • The packers wash, candle, inspect, and sort the eggs • The eggs are sold to the supermarket • The consumer buys the eggs • These marketing services cost about 50 cents per dozen
Egg Demand Quantity Doz/cap/yr. 17 18 Retail Price $/doz. $1. 30 $1. 20 Marketing Cost Farm Price $0. 50 $0. 80 $0. 70 19 20 21 22 23 24 25 $1. 10 $1. 00 $0. 90 $0. 80 $0. 70 $0. 60 $0. 50 $0. 40 $0. 30 $0. 20 $0. 10 $0. 00
Farm Egg Supply Quantity Price 17 $0. 00 18 $0. 10 19 $0. 20 20 $0. 30 21 $0. 40 22 $0. 50 23 $0. 60
Some Points about Graph • Equilibrium where DF and SF cross • This is P = $0. 40/doz and Q = 21 doz. /cap. • At this quantity Mc = $0. 50 and PR = $0. 90 • No incentive to move • Farm price = Retail price – marketing cost
Demand Equations
Elasticities
Some Notes • Farm Demand is derived from retail demand • When farm market is in equilibrium it defines retail market as well • Farm demand elasticity is always less elastic than retail • Farmer is separated from consumer by marketing sector • If marketing costs rise, farm price goes down and retail price goes up
Flexibility The percent change in price in response to a 1 % change in quantity
Flexibility • Applies especially to the demand for agricultural products • Useful in recognizing that quantity is predetermined and prices adjust to clear market • Strawberries, tomatoes, other non-storable products
Solve Demand Equations for P PR = $3. 00 - 0. 1 Q PF = $2. 50 – 0. 1 Q
Calculate Flexibility Since the farm level flexibility is greater farm prices move more as the quantity supplied increases
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