Price determination

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

2. Price Discovery • is the process by which buyers and sellers arrive a a specific price for a given lotof produce at a given locationfor a specifictimeperiod. • Reading Assignment • Understanding Livestock Pricing Issues

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

4. Price Determination and Price Discovery S P Pe D Q Qe

5. Price Discovery Concerns Under Alternative Price Determination Conditions Demand SupplyStrong Weak Large Potential Probable Small Unlikely Potential

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

7. Price discovery systems • Bargained prices • Fruits, vegetables, milk • Administered pricing • Government programs

8. 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

9. 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 4.6 6.6 8.6 Packer-sold 2.1 Packer-owned 16.4 Negotiated – spot 35.8 25.7 17.3 16.7 *2002 data based on USDA Mandatory Reports, 1999-2001 based on industry survey. University of Missouri and National Pork Board*

10. Procurement Method, MPR • IA/MN Daily Prior Day PURCHASE SWINE • Negotiated, Packer Owned, Packer Sold • Market Formulas (Swine or Pork, Other) • Other Purchase Agreement • National Daily Prior Day SLAUGHTERED SWINE • National Weekly Direct Slaughter • 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

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

12. Centralized pricing • 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

13. Decentralized Pricing • One-to-one negotiations • Reduced transportation cost • Reduced transaction cost • Depends on skills and information • Higher search cost

14. Hybrid markets • Electronic markets • Centralized pricing • Decentralized product movement • Examples • Satellite auctions • Electronic auctions • Tel-o-auction • E-commerce

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

16. 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

17. Price reporting Iowa Dept of Ag and Land Stewardship • Regional cash grain prices • Auction market prices

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

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

20. “3/60” Guideline • Commonly used standard to protect confidentiality of reporting firms • At least 3 reporting firms and no one firm with 60% or more of volume • 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

21. “3/70/20” Guideline • Began August 20, 2001 • Implement on for most recent 60-day period • At least three entities must providedata at least 50 percent of the time • No one entity may provide more than 70 percent of the data • No one entity may provide data more than 20 percent of the time, as the only entity

22. 91 reports • Time, region, commodity, and type of purchase • Hogs, 15 reports • Cattle, 43 reports • Lamb, 8 reports • Boxed–Beef and Lamb, 25 reports • NOT wholesale pork

23. Summary • Mountains of new reports and data • Not as timely • More transparent after the fact

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

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

26. Market Regulation • Grain Inspection, Packers and Stockyards Administration • GIPSA • Division of USDA • Regulation of markets and trade

27. So What??? • Why is price reporting important? • Why do taxpayers fund price reporting and market regulators?