Chapter 4 Price Determination: Matching Quantities Supplied and Demanded

Effects of Demand Shifts

Demand Shifts for Food  Domestic demands fairly steady; unexpected shifts unusual  Some increase seasonally for certain products  Foreign demand more variable, less predictable

Market Clearing  Process of the market price adjusting so that all buyers and sellers currently wishing to trade at that price can do so.  The more perishable the commodity, the less able sellers are to wait for a better price.

Perishable Crops  Demand and supply curves of strawberries at harvest: suppliers’ alternatives extremely limited.

Variations in Vegetable and Fruit Prices

Nonperishable Crops  Storage alternatives open to suppliers give positive slope to the supply curve.

Example of Seasonal Price Pattern for Storable Commodity For Kansas City No. 1 hard red winter wheat, (DTN Ag Dayta, 2005).

Other Seasonal Price Patterns

Flow Commodities: Livestock and Poultry  Marketed every week of the year  Storage possible but expensive and impractical due to continuous production  Expectations regarding short-term price changes may influence producers’ willingness to sell

Price as a Feedback Signal to Production  Outlook information: data and projections about market demand, supply, and prices provided by private agencies  Producers plan to increase production when anticipating profitable prices, cut production when prices go down  Adjustments of amounts supplied are limited by production lag times

Cobweb Model  A theoretical description of how prices of a commodity could cycle even if its demand and supply curves are stable  Introduces continual disequilibrium, a set of prices that keep changing over time even though basic supply and demand schedules are stable

Continuous Disequilibrium Cobweb Model

Modified Cyclical Model

Inventory of Cattle and Calves by Cycles in U.S.

Pricing: Farm-to-Retail Price Spread  The difference between the prices farmers receive and those that consumers pay  Also called price spread  Compiled and published for numerous farm commodities and the “market basket”  Price spread easier to calculate for products with less processing (e.g., eggs)

Pricing: Long-term Trend of Farmer’s Share  For period , farmer’s share of market basket averaged 40%  Today farmer’s share below 20%

Factors Affecting Price Spread  Amount of processing needed  Amount of commodity supplied to processors  Dollars needed to cover costs  Costs of marketing –Rising as processing costs fall (less automation in food service) –Food-marketing bill calculated by USDA

What a Dollar Spent for Food Paid for in 2000

What a Dollar Spent for Food Paid for in 2000 (continued)

Class Exercise  Using the agricultural commodity assigned in Chapter 1: –Collect five years of monthly price data –Graph the data over the entire time period, using one graph spanning one year and five lines representing the five years –Establish whether the commodity is perishable or nonperishable –Determine what caused price fluctuations