Chapter 7 Pricing and Exchange Systems and Alternatives Within the Marketing-Procurement Channel

Pricing System  A market mechanism or process (organized behavior) by which market participants discover, negotiate, or fix prices.  Net costs to buyer and seller influenced by transaction costs: those costs incurred by buyer and seller as they search for market opportunities and make and complete business deals.

Pricing Systems  Price discovery systems –Organized markets –Decentralized, individual negotiation  Price-setting systems –Firm price making –Group negotiation –Government price setting

Price Discovery Systems  Price discovery: process of buyers and sellers arriving at prices for a commodity when market conditions do not permit either group to set prices  All market participants are individually price takers or price negotiaters  Usually associated with fairly equal numbers of buyers and sellers

Price Discovery Systems: Organized Markets  Structured to give buyers and sellers access to one another  Offer free and vigorous competition  Also referred to as public markets  May be electronic

Price Discovery Systems: Decentralized, Individual Negotiation  Less formalized, less structured, less public  Also referred to as private treaty or haggling  Convenience and lower transaction costs  Offer-acceptance system  Formula pricing

Price Setting Systems  Prices may be set by any of three parties: sellers, buyers, government  May fail to equate amounts supplied and demanded  Price making by individual firms: more likely for differentiated products than commodities  Group negotiation: farmers negotiating as a group with individual buyers  Government price setting: price ceilings rare; price supports more common

Price Systems in Use for Major Commodities

Factors on Which to Compare Pricing Systems  Minimization of transaction costs  Spatial pricing efficiency  Level and stability of prices  Integrity and equity of the price-making process

Contractual Exchange Arrangements  Vertical integration: ownership of contiguous stages in the marketing channel  Vertical coordination: firms share information to improve efficiencies  Marketing-procurement contract: an agreement between buyer and seller covering product, time/nature of delivery, price, and other aspects of exchange

Agribusiness Motivations for Vertical Integration  Seeking or controlling product quality  Gaining efficiencies  Gaining market security

Farmers’ Motivations for Vertical Integration  Separating pricing decision from time of delivery  Shifting price risks to contractor  Improves access to market

Characteristics of Production Contracts  Allocation of value  Allocation of decision rights  Allocation of risk

Marketing-Pricing Alternatives (Storable Commodities)  Timing of pricing  Timing of delivery  Timing of sale  Contracting  Forward pricing in cash or futures markets  Pooling

Characteristics of Marketing-Pricing Alternatives

Class Exercise  Using the commodity assigned in Chapter 1 and the agribusiness chosen in Chapter 2, discuss to what degree the agribusiness is involved with controlling the agricultural marketing system. Discuss these characteristics: –Degree of marketing system control –Capital –Location –Corporate philosophy –Quality