Price determination Ø is the broad forces of

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

Price Discovery Ø 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. Ø Reading Assignment » Understanding Livestock Pricing Issues

Price Discovery Ø A human process, subject to relative bargaining power of the buyer and seller. Ø Two stage process » Evaluate S&D and Pe » Estimate the price for the specific trade.

Price Determination and Price Discovery S P Pe D Qe Q

Price Discovery Concerns Under Alternative Price Determination Conditions Demand Supply Strong Weak Large Potential Probable Small Unlikely Potential

Price discovery systems Ø Individual negotiations » Also called private treaty sales » Fed cattle, hogs, grain Ø Organized central markets » Auctions, terminal, electronic Ø Formula pricing » Eggs, wholesale meat, feeder pigs, hogs and cattle

Price discovery systems Ø Bargained prices » Fruits, vegetables, milk Ø Administered pricing » Government programs

Packer Procurement Method, 1999 Hogs Cattle Cash market 27% 65% Formula 32 20 Futures-based 8 4 Risk share 14 3 Packer owned 18 5 Other 1 3

Percent of U. S. Hogs Sold Through Various Pricing Arrangements, January 1999 -2002* 1999 2000 2001 2002 Hog or meat market formula 44. 2 47. 2 54. 0 44. 5 Other market formula 13. 2 20. 8 21. 9 11. 8 Other purchase arrangement 4. 6 6. 6 8. 6 Packer-sold 2. 1 Packer-owned 16. 4 *2002 data based on USDA Mandatory Reports, 1999 -2001 Negotiated – spot 35. 8 25. 7 17. 3 16. 7 based on industry survey. University of Missouri and National Pork Board*

Procurement Method, MPR Ø IA/MN Daily Prior Day PURCHASE SWINE » Negotiated, Packer Owned, Packer Sold » Market Formulas (Swine or Pork, Other) » Other Purchase Agreement Ø Ø National Daily Prior Day SLAUGHTERED SWINE National Weekly Direct Slaughter » » Ø Cattle - Formulated and Forward Contract - Domestic Formulated and Forward Contract - Import Packer Owned Cattle Negotiated Purchases http: //www. ams. usda. gov/lsg/mncs/index. htm#Mandatory

Performance issues Ø “Least cost” method of price discovery Ø Effect of the mechanism on price behavior Ø Marketing v. pricing efficiency

Centralized pricing Ø All buyers and sellers in one place at one time. » Full and immediate information » Competitive bidding » Equalizes market power » Transaction cost » Physical movement of product

Decentralized Pricing Ø One-to-one negotiations » Reduced transportation cost » Reduced transaction cost » Depends on skills and information » Higher search cost

Hybrid markets Ø Electronic markets » Centralized pricing » Decentralized product movement Ø Examples » Satellite auctions » Electronic auctions » Tel-o-auction » E-commerce

Electronic markets Ø Marketing agency » Lends credibility » Settle disputes » Aids collection and payment Ø Examples » http: //www. superiorauction. com/ » http: //www. cattlesale. com/ » http: //www. e-markets. com/

Information and markets Ø 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

Price reporting Iowa Dept of Ag and Land Stewardship Ø Regional cash grain prices Ø Auction market prices

Price reporting USDA Agricultural Marketing Service http: //www. ams. usda. gov/lsg/mncs/index. htm Terminal of large auctions Ø Farmer to packer trade » IA-S. MN Hogs » Western Cornbelt pork carcass » Iowa Direct Trade Cattle Ø Meat trade » Boxed beef » Carlot pork prices

Mandatory Price Reporting Ø Passed Congress October 1999 Ø Scheduled to start January 30, 2001 » Delayed due technical difficulties Ø Started April 2, 2001 » Little or no beta test » Technical difficulties » One report – no backup plan Ø Scheduled to end Oct 1, 2004? ?

“ 3/60” Guideline Ø Commonly used standard to protect confidentiality of reporting firms Ø At least 3 reporting firms and no one firm with 60% or more of volume Ø OMB imposed guideline » Implemented on a line-by-line, report-by-report basis » Nearly one-third of scheduled daily cattle and swine reports were withheld from publication between April 2 and June 14, 2001

“ 3/70/20” Guideline Ø Began August 20, 2001 Ø Implement on for most recent 60 -day period Ø At least three entities must provide data at least 50 percent of the time Ø No one entity may provide more than 70 percent of the data Ø No one entity may provide data more than 20 percent of the time, as the only entity

91 reports Ø Time, region, commodity, and type of purchase Ø Hogs, 15 reports Ø Cattle, 43 reports Ø Lamb, 8 reports Ø Boxed–Beef and Lamb, 25 reports Ø NOT wholesale pork

Summary Ø Mountains of new reports and data Ø Not as timely Ø More transparent after the fact

Homework assignment Due next class Ø One page Ø Find prices in three related markets. Ø Define the 4 dimensions of each market. Ø Discuss the “marketing margins” between each market.

Where to find? Ø Newspaper, radio, DTN Ø Internet » Look for USDA-AMS » http: //www. ams. usda. gov/ » Determine a commodity » Choose a location

Market Regulation Ø Grain Inspection, Packers and Stockyards Administration » GIPSA » Division of USDA » Regulation of markets and trade

So What? ? ? Ø Why is price reporting important? Ø Why do taxpayers fund price reporting and market regulators?