Price Determination and Discovery u Price Determination is

Price Determination and Discovery u. Price Determination • is the broad forces of supply and demand establishing a market clearing price for a commodity. u. Price Discovery • 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.

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

Futures Markets in Price Discovery u. Centralized pricing u. Global forces in one location u. Predominate price discovery for grains • Still have local price discovery for basis u. Livestock price discovery more complicated • Variability – basis a bigger issue • Growing inventory problem

Centralized pricing u. 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

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

Where to sell u. Terminal markets have declined u. Auction markets important when assembly is needed • Feeder cattle and cull cows • Growing interest in fed cattle in fringe areas u. Direct sales • Slaughter cattle and hogs • Feeder pigs • Growing in feeder cattle where source verification is important

Feeder cattle sales u. Live weight sales • Various weight classes • In general, lower $/# and heavier weights u. Auction is major market • Assembly function important u. Video auctions u. Direct trade u. Premium paid for • Large uniform lots • Certification/verification ? ? ?

Important market functions u. Assembly function • Feeder cattle • Cull cows u. Sorting function

Slaughter Cattle and Hogs u. Direct sales most common • Animals are delivered directly to the packing plant u. Spot or cash market • Seller contacts buyer when ready to sell • Negotiate price and terms on each group u. Contract market • May be for one group or an ongoing agreement between buyer and seller • Terms and pricing method determined ahead of marketing date

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

Formula pricing u. Price discovery from elsewhere u. Formula contracts • • Spot market Cutout price Futures Cost of production u. Do you trust the underlying market for price discovery?

Feeder Pig Trade Spot market price Often through a broker USDA report Formula pricing Based on observable price Spot market Hog futures maybe corn & SBM Formula ex: 53% of 5 month out futures

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

Information and markets u. 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

Packer Offering Price u. Starts with derived demand from wholesale and retail markets u. 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 S Vertical distance is the difference is price at 3 levels There is cost associated with moving from one level to the next Px Pretail Pwholesale Pfarm Dretail Cuts of meat Dwholesale Carcasses Dfarm Q Animals Qx

Derived Demand for Pork u. Average retail price $/lb $2. 50 u. Value of trim and scrap $/lb $0. 10 u. Costs from whlse -retail $/lb -$1. 00 u. The most retail will pay $/lb $1. 60 u. Retail pounds per carcass 100 u. The most retail will pay $/head $160

Derived Demand for Hogs u. Wholesale carcass value $/hd $160 u. Value hide and offal $/hd $25 u. Costs to slaughter and fab $/hd -$20 u. The most packer will pay $/hd $165 u. Wholesale pounds per carcass 200 u. The most packer will pay $/lb $82. 50

Producer Asking Price u. Starts with cost of production u. Reflects current market conditions u. Time is a huge factor for livestock • Marginal revenue may decrease • Marginal cost increases at increasing rate u. Farmer has longer time period than packer from start of process to end.