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Price Discovery Systems Organized Markets Decentralized Individual Negotiations
Price Discovery is the process of buyers and sellers arriving at prices.
Organized Markets Farmer’s Auctions Terminal Futures
Organized Markets Normally open to the public buyers, sellers and the commodity are often at the same location. Prices are transparent
In general Organized Markets have been declining in importance.
Example: Livestock Terminal Markets
TERMINAL MARKETS DERIVE NAME BECAUSE THEY ARE LOCATED NEAR RAIL TERMINALS
Chicago Stockyards 1866
Chicago Stockyard 1880 -- 40 acres
BEGAN THEIR DECLINE IN THE 1930'SSHIFT TO TRUCK TRANSPORT DECENTRALIZED PACKERS
ABOUT 80 IN 1937 ABOUT 6 TODAY
WITH A TERMINAL MARKET PRODUCERS MUST CONSIGN THEIR ANIMALS TO A COMMISSION FIRM
COST IS FAIRLY HIGH BIG LABOR COMPONENT TO COST THEY OFTEN LACK CONVENIENCE MAY NOT RESULT IN BEST PRICE
AUCTION MARKETS BY THE MID 90'S THERE WERE ONLY ABOUT 1000 – ABOUT 1500 LESS THAN IN 1947
ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIES
ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIESTHE OPERATORS OF THE MARKET RECEIVE A FEE
ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIESTHE OPERATORS OF THE MARKET RECEIVE A FEE ELECTRONIC MARKETS ARE A TYPE OF ORGANIZED MARKET.
DECENTRALIZED INDIVIDUAL NEGOTIATIONLESS FORMALIZED LESS PUBLIC LESS STRUCTURE INCREASINGLY IMPORTANT IN AGRICULTURE
ADVANTAGES OF DIN CONVENIENCE AND LOWER TRANSACTION COSTLOWER FEES, SHRINKAGE, TRANSPORTATION PRODUCERS MAY HAVE MORE CONTROL CAN BE TRANSACTED ANYWHERE AT ANY TIME
OFFER-ACCEPTANCE PRICINGUSUALLY DONE BY LARGE BUYERS OR SELLERS A RETAILER MAY ASK FOR BIDS FROM PACKERS
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
MOST FORMULAS ARE BASED ON A REPORTED NEGOTIATED PRICE
Percent of Hogs Sold Through Various Pricing ArrangementsYear 1999 2000 2001 2002 Hog or Meat Formula 44.2 47.2 54.0 44.5 Other Market Formula 13.2 20.8 21.9 11.8 Negotiated 35.8 25.7 17.3 16.7
A MAJOR ISSUE OR CONCERN IN LIVESTOCK PRICING IS THE DECLINE IN NEGOTIATED PRICES
NEGOTIATED PRICES DRIVE THE FORMULA PRICING
THE PRICE A PRODUCER RECEIVES FOR HIS HOGS WILL BE THE FORMULA PRICE WITH PREMIUMS OR DISCOUNTS BASED ON YIELD
COORDINATION IN THE MARKETING CHANNEL WITHOUT EXCHANGE (PRODUCT DOES NOT ENTER THE MARKET)
CONTRACTUAL EXCHANGE ARRANGEMENTSVERTICAL INTEGRATION 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
MARKETING PROCUREMENT CONTRACTSAN AGREEMENT BETWEEN A SELLER AND A BUYER COVERING THE PRODUCT, TIME, NATURE OF DELIVERY, AND PRICE
PRODUCTION CONTRACT A PRODUCER WILL RAISE ANIMALS THAT ARE OWNED BY A CONTRACTOR.
MOTIVATIONS FOR VERTICAL INTEGRATIONPROFIT MARKET POWER EFFICIENCIES
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