Price Determination and Discovery uPrice Determination is the broad forces of supply and demand establishing a market clearing price for a commodity. uPrice 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 uA human process, subject to relative bargaining power of the buyer and seller. uTwo stage process Evaluate S&D and Pe Estimate the price for the specific trade.

Price Determination and Price Discovery S D P Q PePe QeQe

Futures Markets in Price Discovery uCentralized pricing uGlobal forces in one location uPredominate price discovery for grains Still have local price discovery for basis uLivestock price discovery more complicated Variability – basis a bigger issue Growing inventory problem

Centralized pricing uAll 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 uOne-to-one negotiations + Reduced transportation cost + Reduced transaction cost - Depends on skills and information - Higher search cost

Where to sell uTerminal markets have declined uAuction markets important when assembly is needed Feeder cattle and cull cows Growing interest in fed cattle in fringe areas uDirect sales Slaughter cattle and hogs Feeder pigs Growing in feeder cattle where source verification is important

Feeder cattle sales uLive weight sales Various weight classes In general, lower $/# and heavier weights uAuction is major market Assembly function important uVideo auctions uDirect trade uPremium paid for Large uniform lots Certification/verification ??????

Important market functions uAssembly function Feeder cattle Cull cows uSorting function

Slaughter Cattle and Hogs uDirect sales most common Animals are delivered directly to the packing plant uSpot or cash market Seller contacts buyer when ready to sell Negotiate price and terms on each group uContract 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 uElectronic markets Centralized pricing Decentralized product movement uExamples Satellite auctions Electronic auctions Tel-o-auction E-commerce

Formula pricing uPrice discovery from elsewhere uFormula contracts Spot market Cutout price Futures Cost of production uDo you trust the underlying market for price discovery?

Spot market price Often through a broker USDA report Feeder Pig Trade 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 uEffect of the mechanism on price behavior uMarketing v. pricing efficiency

Information and markets uPrice 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 uStarts with derived demand from wholesale and retail markets uTime 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 Px Qx D farm D retail S P retail P farm Q D wholesale P wholesale Cuts of meat Carcasses Animals Vertical distance is the difference is price at 3 levels There is cost associated with moving from one level to the next

Derived Demand for Pork uAverage retail price $/lb$2.50 uValue of trim and scrap $/lb$0.10 uCosts from whlse -retail $/lb-$1.00 uThe most retail will pay $/lb $1.60 uRetail pounds per carcass 100 uThe most retail will pay $/head$160

Derived Demand for Hogs uWholesale carcass value $/hd$160 uValue hide and offal $/hd$25 uCosts to slaughter and fab $/hd-$20 uThe most packer will pay $/hd $165 uWholesale pounds per carcass 200 uThe most packer will pay $/lb$82.50

Producer Asking Price uStarts with cost of production uReflects current market conditions uTime is a huge factor for livestock Marginal revenue may decrease Marginal cost increases at increasing rate uFarmer has longer time period than packer from start of process to end.