Chapter 4Chapter 4

Price Determination:Price Determination:

Matching QuantitiesMatching Quantities

Supplied and DemandedSupplied and Demanded

Effects of Demand ShiftsEffects of Demand Shifts

Demand Shifts for FoodDemand Shifts for Food

Domestic demands fairly steady; Domestic demands fairly steady; unexpected shifts unusualunexpected shifts unusual

Some increase seasonally for certain Some increase seasonally for certain productsproducts

Foreign demand more variable, less Foreign demand more variable, less predictablepredictable

Market ClearingMarket Clearing

Process of the market price adjusting Process of the market price adjusting so that all buyers and sellers currently so that all buyers and sellers currently wishing to trade at that price can do so.wishing to trade at that price can do so.

The more perishable the commodity, The more perishable the commodity, the less able sellers are to wait for a the less able sellers are to wait for a better price.better price.

Perishable CropsPerishable Crops

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

Variations in VegetableVariations in Vegetableand Fruit Pricesand Fruit Prices

Nonperishable CropsNonperishable Crops

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

Example of Seasonal PriceExample of Seasonal PricePattern for Storable CommodityPattern for Storable Commodity

For Kansas City No. 1 hard red winter For Kansas City No. 1 hard red winter wheat, 1995-2004 wheat, 1995-2004 (DTN Ag Dayta, 2005).(DTN Ag Dayta, 2005).

Other Seasonal Price PatternsOther Seasonal Price Patterns

Flow Commodities:Flow Commodities:Livestock and PoultryLivestock and Poultry

Marketed every week of the yearMarketed every week of the year Storage possible but expensive and Storage possible but expensive and

impractical due to continuous impractical due to continuous productionproduction

Expectations regarding short-term Expectations regarding short-term price changes may influence price changes may influence producers’ willingness to sellproducers’ willingness to sell

Price as a FeedbackPrice as a FeedbackSignal to ProductionSignal to Production

Outlook information: data and projections Outlook information: data and projections about market demand, supply, and prices about market demand, supply, and prices provided by private agenciesprovided by private agencies

Producers plan to increase production Producers plan to increase production when anticipating profitable prices, cut when anticipating profitable prices, cut production when prices go downproduction when prices go down

Adjustments of amounts supplied are Adjustments of amounts supplied are limited by production lag timeslimited by production lag times

Cobweb ModelCobweb Model

A theoretical description of how prices of A theoretical description of how prices of a commodity could cycle even if its a commodity could cycle even if its demand and supply curves are stabledemand and supply curves are stable

Introduces continual disequilibrium, a Introduces continual disequilibrium, a set of prices that keep changing over set of prices that keep changing over time even though basic supply and time even though basic supply and demand schedules are stabledemand schedules are stable

Continuous DisequilibriumContinuous DisequilibriumCobweb ModelCobweb Model

Modified Cyclical ModelModified Cyclical Model

Inventory of Cattle and CalvesInventory of Cattle and Calvesby Cycles in U.S.by Cycles in U.S.

Pricing:Pricing:Farm-to-Retail Price SpreadFarm-to-Retail Price Spread

The difference between the prices farmers The difference between the prices farmers receive and those that consumers payreceive and those that consumers pay

Also called price spreadAlso called price spread Compiled and published for numerous Compiled and published for numerous

farm commodities and the “market basket”farm commodities and the “market basket” Price spread easier to calculate for Price spread easier to calculate for

products with less processing (e.g., eggs)products with less processing (e.g., eggs)

Pricing: Long-term TrendPricing: Long-term Trendof Farmer’s Shareof Farmer’s Share

For period 1920-1990, farmer’s share For period 1920-1990, farmer’s share of market basket averaged 40%of market basket averaged 40%

Today farmer’s share below 20%Today farmer’s share below 20%

Factors Affecting Price SpreadFactors Affecting Price Spread

Amount of processing neededAmount of processing needed Amount of commodity supplied to Amount of commodity supplied to

processorsprocessors Dollars needed to cover costsDollars needed to cover costs Costs of marketingCosts of marketing

– Rising as processing costs fall (less Rising as processing costs fall (less automation in food service)automation in food service)

– Food-marketing bill calculated by USDAFood-marketing bill calculated by USDA

What a Dollar Spent for FoodWhat a Dollar Spent for FoodPaid for in 2000Paid for in 2000

What a Dollar Spent for FoodWhat a Dollar Spent for FoodPaid for in 2000 Paid for in 2000 (continued)(continued)

Class ExerciseClass Exercise

Using the agricultural commodity assigned Using the agricultural commodity assigned in Chapter 1:in Chapter 1:– Collect five years of monthly price dataCollect five years of monthly price data– Graph the data over the entire time period, Graph the data over the entire time period,

using one graph spanning one year and five using one graph spanning one year and five lines representing the five yearslines representing the five years

– Establish whether the commodity is Establish whether the commodity is perishable or nonperishableperishable or nonperishable

– Determine what caused price fluctuationsDetermine what caused price fluctuations