Lecture outline Characteristics of ag production that make agricultural marketing different from manufacturing. Nature of product and production Cycle and season Location Farmer marketing problem

Characteristics of ag products Raw material Bulky, perishable products Quality variation Examples: Fresh produce Cattle Grains

Implications for markets Location relative to consumers weight reducing processes perishable Degree of handling assembly, sorting, grading Price elasticity substitutes

Characteristics of production Upward trend in output Increasing productivity Annual variation in production Supply and demand implications Capacity utilization problem Weather risk Market risk

Variability in Yield and Price Corn Soybeans Yield Price Yield Price Average 97.35 1.94 29.98 4.94 Std Dev 23.04 0.70 5.00 1.79 Stdev/Avg 24% 36% 17% 36% Price is inelastic and is more volatile than supplies.

Seasonal variation in weight driven by the age of the cattle and weather. Upward trend in weight driven by genetics, technology, and cost factors (cost the same to slaughter and process a large carcass as a small one).

Seasonal and cyclical prices. More variable than weights.

Characteristics of production Cyclical variation in production Psychological lag in production Biological lag in production Seasonal variation in production Grain crops Livestock marketings

Time from decision to market Beef cattle 3.5 yrs Retain heifer to slaughter steer Hogs 1 yr Retain gilt to slaughter hog Grains Annual crops Tree crops

Annual variation in production S P Cobweb Model Because of the time lag between production decisions and bringing product to the market, there is constant adjustment toward equilibrium. D Q

This graph shows the estimated profit per head in the blue line on the left axis and the percentage change from the same quarter the year before in the US breeding herd lagged 4 quarters in the red line on the right axis. The hog cycle appears to be dead if you measure it by production changes. The production cycle has dampened and the timing is not as predictable as it once was. However, if you measure the cycle by price it is alive and well. The profit changes are as wide as 30 years ago and the timing is still on schedule for a 4-year cycle.

Barrow and gilt prices follow a seasonal pattern Barrow and gilt prices follow a seasonal pattern. Prices are typically highest in the summer and lowest in the fall. Seasonal patterns reflect both seasonal supply and seasonal demand. In spite of a movement of confinement technology sow productivity and thus pigs born and pork supplied still follow a seasonal difference. Summer demand for cookouts and brats at baseball games still influence demand.

Grain prices are seasonal due to the annual harvest and storage cost throughout the year. Note than the graph starts with the start of the marketing year, September.

Characteristics of production Geographic concentration Regional advantages Varying cost of production One selling price

US Top 10 Beef Cow States Million Beef Cows, 2005 1.43 1.72 1.01 1.90 1.55 2.16 1.09 1.07 2.05 1.00 Beef cows are widely distributed. Over 750,000 farms with cows in the US. Average size less than 40 head. 5.43 10 States 58% of Total

US Top 10 Cattle Feeding States Million head on Feed, 2005 .290 .400 .920 2.47 1.10 .535 2.46 .355 .300 Much more concentrated than beef cow herds. 260 feedlots with at least 16,000 head capacity each market 60% of US fed cattle a year. 2.72 10 States 89% of Total

US Top 10 Corn States, Million Bushels, 2004 1120 353 539 2244 1319 491 929 2088 432 466 10 States 84% of Total

US Top 10 Soybean States, Million Bushels, 2004 236 40 497 220 207 499 287 223 111 124 10 States 81% of Total

US Top 10 Hog States, Million Head, 2004 6.50 16.30 2.8 1.45 3.2 4.10 1.71 2.9 9.90 2.39 Inventories listed are total hog numbers. North Carolina actually farrows more pigs than Iowa, but Iowa has more finishing hogs. Half or more of the hogs finished in Iowa are born in other states or Canada. 10 States 84% of Total

US Top 10 Egg States, Million eggs, 2004 250 569 1044 272 647 531 470 289 436 420 10 States 64% of Total

US Top 10 Milk States, Million pounds, 2004 451 675 1837 969 757 526 838 3038 560 500 10 States 71% of Total

Iowa #1 producer of Significant producer of Corn, Soybeans, Ethanol, Hogs, Eggs Significant producer of Feedlot cattle #5 Beef Cows #11 Milk #12 Iowa and Illinois will be close and in first or second in corn and soybean production depending on weather.

Characteristics of production Scale of production Economies of scale Narrow margins Market assembly problems Differing quality

Input sector Farmers are buyers and sellers Increasing reliance on purchased inputs Cost-price squeeze Move to direct purchases of large volume

Feed and livestock (feeder animals and breeding stock) are inputs to one farmer purchased from another farmer.

Farmer marketing problems Disaggregate decision making Weather and disease risk Inability to adjust supplies Price takers/hard to organize Free rider problem

Farmer marketing problems Cost-price squeeze Implications for scale Self induced as output prices increase Buyer market power Changing food market efficiency Price differentials for quality Livestock grid marketing Wheat protein Component pricing of milk

So what? Increasing economies of scale Production and cost risk Competition for inputs Single selling price