Transcript Farm and Food Prices

Farm and Food Prices Derived Demand
AG BM 102
Introduction
• Consumers rarely buy directly from
farmers
• Instead farmers sell to marketing service
providers, who process, store, transport,
and otherwise add utility, and who sell to
the consumer
• Hence, retail demand is not farm demand
Eggs
• Farmers sell nest run eggs to packer
• The packers wash, candle, inspect, and
sort the eggs
• The eggs are sold to the supermarket
• The consumer buys the eggs
• These marketing services cost about 50
cents per dozen
Egg Demand
Quantity
Doz/cap/yr.
17
18
19
Retail Price
$/doz.
$1.30
$1.20
$1.10
Marketing
Cost
Farm Price
$0.50
$0.50
$0.50
$0.80
$0.70
$0.60
20
21
22
$1.00
$0.90
$0.80
$0.50
$0.50
$0.50
$0.50
$0.40
$0.30
23
24
25
$0.70
$0.60
$0.50
$0.50
$0.50
$0.50
$0.20
$0.10
$0.00
Farm Egg Supply
Quantity
Price
17
$0.00
18
$0.10
19
$0.20
20
$0.30
21
$0.40
22
$0.50
23
$0.60
Some Points about Graph
• Equilibrium where DF and SF cross
• This is P = $0.40/doz and Q = 21 doz./cap.
• At this quantity Mc = $0.50 and PR =
$0.90
• No incentive to move
• Farm price = Retail price – marketing cost
Demand Equations
QR  30  10 PR
QF  25  10 PF
Elasticities
  b( P / Q )
1
1
R  b( PR / Q)   10(0.90 / 21)   0.428
F  b( PF / Q)   10(0.40 / 21)   019
.
Some Notes
• Farm Demand is derived from retail demand
• When farm market is in equilibrium it defines
retail market as well
• Farm demand elasticity is always less elastic
than retail
• Farmer is separated from consumer by
marketing sector
• If marketing costs rise, farm price goes down
and retail price goes up
Flexibility
The percent change in price in
response to a 1 % change in
quantity
Flexibility
• Applies especially to the demand for
agricultural products
• Useful in recognizing that quantity is
predetermined and prices adjust to clear
market
• Strawberries, tomatoes, other non-storable
products
f  % change
P / % change Q
P  c  dQ
f  d (Q / P)  (1 / b)(Q / P)  1 / 
Solve Demand Equations for P
PR = $3.00 - 0.1 Q
PF = $2.50 – 0.1 Q
Calculate Flexibility
fF  d (Q / P)   01
. (21 / 0.40)   525
.
fR  d (Q / P)   01
. (21 / 0.90)   2.33
Since the farm level flexibility is greater farm
prices move more as the quantity supplied
increases
3.10
18.00
17.00
16.00
15.00
14.00
13.00
12.00
11.00
10.00
9.00
8.00
2.80
2.70
2.60
2.50
2.40
2.30
Retail Whole Milk
Ja
n03
Ja
n02
Ja
n01
Ja
n00
Ja
n99
2.20
Ja
n98
Retail $/gal
3.00
2.90
Class I Mover
Class I Mover $/cwt
Retail and Wholesale Fluid Milk Prices