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Price Discovery Systems Organized Markets Decentralized Individual Negotiations.

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Presentation on theme: "Price Discovery Systems Organized Markets Decentralized Individual Negotiations."— Presentation transcript:

1 Price Discovery Systems Organized Markets Decentralized Individual Negotiations

2 Price Discovery is the process of buyers and sellers arriving at prices.

3 Organized Markets Farmers Auctions Terminal Futures

4 Organized Markets Normally open to the public buyers, sellers and the commodity are often at the same location. Prices are transparent

5 In general Organized Markets have been declining in importance.

6 Example: Livestock Terminal Markets

7 TERMINAL MARKETS DERIVE NAME BECAUSE THEY ARE LOCATED NEAR RAIL TERMINALS

8 Chicago Stockyards 1866

9 Chicago Stockyard acres

10 BEGAN THEIR DECLINE IN THE 1930'S SHIFT TO TRUCK TRANSPORT DECENTRALIZED PACKERS

11 ABOUT 80 IN 1937 ABOUT 6 TODAY

12 WITH A TERMINAL MARKET PRODUCERS MUST CONSIGN THEIR ANIMALS TO A COMMISSION FIRM

13 COST IS FAIRLY HIGH BIG LABOR COMPONENT TO COST -- THEY OFTEN LACK CONVENIENCE MAY NOT RESULT IN BEST PRICE

14 AUCTION MARKETS BY THE MID 90'S THERE WERE ONLY ABOUT 1000 – ABOUT 1500 LESS THAN IN 1947

15 ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIES

16 ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIES THE OPERATORS OF THE MARKET RECEIVE A FEE

17 ORGANIZED MARKETS n NORMALLY OPERATED BY THIRD PARTIES n THE OPERATORS OF THE MARKET RECEIVE A FEE n ELECTRONIC MARKETS ARE A TYPE OF ORGANIZED MARKET.

18 LESS FORMALIZED LESS PUBLIC LESS STRUCTURE INCREASINGLY IMPORTANT IN AGRICULTURE DECENTRALIZED INDIVIDUAL NEGOTIATION

19 ADVANTAGES OF DIN n CONVENIENCE AND LOWER TRANSACTION COST – LOWER FEES, SHRINKAGE, TRANSPORTATION n PRODUCERS MAY HAVE MORE CONTROL n CAN BE TRANSACTED ANYWHERE AT ANY TIME

20 OFFER-ACCEPTANCE PRICING n USUALLY DONE BY LARGE BUYERS OR SELLERS n A RETAILER MAY ASK FOR BIDS FROM PACKERS

21 FORMULA PRICING MARKET PARTICIPANT USUALLY ARE CONTINUOUSLY DEALING WITH EACH OTHER THE PRICE IS BASED UPON SOME FORMULA USDA REPORTED OR FUTURES PRICE FOR LIVESTOCK

22 LIVESTOCK PRICING

23 MOST FORMULAS ARE BASED ON A REPORTED NEGOTIATED PRICE

24 Percent of Hogs Sold Through Various Pricing Arrangements Year Hog or Meat Formula Other Market Formula Negotiated

25 A MAJOR ISSUE OR CONCERN IN LIVESTOCK PRICING IS THE DECLINE IN NEGOTIATED PRICES

26 NEGOTIATED PRICES DRIVE THE FORMULA PRICING

27 THE PRICE A PRODUCER RECEIVES FOR HIS HOGS WILL BE THE FORMULA PRICE WITH PREMIUMS OR DISCOUNTS BASED ON YIELD

28 COORDINATION IN THE MARKETING CHANNEL WITHOUT EXCHANGE (PRODUCT DOES NOT ENTER THE MARKET)

29 CONTRACTUAL EXCHANGE ARRANGEMENTS VERTICAL INTEGRATION è A FIRM OWNING TWO OR MORE LEVELS OF PRODUCTION OR MARKETING – A FEED COMPANY THAT FEEDS ITS OWN LIVESTOCK – A FOOD PROCESSOR THAT RETAILS FOOD

30 MARKETING PROCUREMENT CONTRACTS n AN AGREEMENT BETWEEN A SELLER AND A BUYER COVERING THE PRODUCT, TIME, NATURE OF DELIVERY, AND PRICE

31 PRODUCTION CONTRACT n A PRODUCER WILL RAISE ANIMALS THAT ARE OWNED BY A CONTRACTOR.

32 MOTIVATIONS FOR VERTICAL INTEGRATION PROFIT – MARKET POWER – EFFICIENCIES


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