Transcript Livestock Pricing

ECON 337:
Agricultural Marketing
Chad Hart
Associate Professor
[email protected]
515-294-9911
Econ 337, Spring 2014
Lee Schulz
Assistant Professor
[email protected]
515-294-3356
Today’s Topic
Livestock Pricing
Econ 337, Spring 2014
Price Determination and
Discovery
Price Determination
is the broad forces of supply and demand
establishing a market clearing price for a
commodity.
Price Discovery
is the process by which buyers and sellers
arrive at a transaction price for a given quality
and quantity of product at a given time and
place.
Econ 337, Spring 2014
Price Determination
 Supply determinants or factors affecting quantity
produced
 Input prices (feed, feeder cattle, weaned/feeder pigs)
 Technology (growth promotants, etc.)
 Expected price of outputs produced from inputs (finished
cattle, finished hogs)
 Demand forces or factors affecting quantity
consumed
 Prices of products produced (beef, pork)
 Prices of competing products (chicken, turkey, beef, pork)
 Consumer income
 Tastes and preferences
Econ 337, Spring 2014
Price Discovery
 A human process, subject to relative bargaining
power of the buyer and seller.
 Involves several interrelated concepts:
 Market structure (number, size, location, and
competitiveness of buyers and sellers),
 Market behavior (buyer procurement and pricing methods),
 Market information and price reporting (amount, timeliness,
and reliability of information), and
 Futures markets and risk management alternatives.
 Two stage process
 Evaluate supply, demand, and market prices.
 Estimate the price for the specific trade.
Econ 337, Spring 2014
Price Determination
and Price Discovery
S
P
Pe
D
Qe
Econ 337, Spring 2014
Q
Futures Markets in Price Discovery
Centralized pricing
Global forces in one location
Predominate price discovery for grains
Still have local price discovery for basis
Livestock price discovery more
complicated
Variability – basis a bigger issue
Growing inventory problem
Econ 337, Spring 2014
Centralized Pricing
All 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
Econ 337, Spring 2014
Important Market Functions
Assembly function
Feeder cattle
Cull cows
Sorting function
 Feeder cattle grade and condition
 Weight
 Intended use/destination
Econ 337, Spring 2014
Decentralized Pricing
One-to-one negotiations
+ Reduced transportation cost
+ Reduced transaction cost
- Depends on skills and information
- Higher search cost
Econ 337, Spring 2014
Where to Sell
 Terminal markets have declined
 Auction markets important when assembly is
needed
 Feeder cattle and cull cows
 Growing interest in fed cattle in fringe areas
 Direct sales
 Slaughter cattle and hogs
 Weaned and feeder pigs
 Growing in feeder cattle where source verification is
important
Econ 337, Spring 2014
Feeder Cattle Sales
 Live weight sales
 Various weight classes
 In general, lower $/# and heavier weights
 Auction is major market
 Assembly function important
 Video auctions
 Direct trade
 Premium paid for
 Large uniform lots
 Certification/verification ??????
Econ 337, Spring 2014
Slaughter Cattle and Hogs
 Direct sales most common
 Animals are delivered directly to the packing plant
 Spot or cash market
 Seller contacts buyer when ready to sell
 Negotiate price and terms on each group
 Contract market
 May be for one group or an ongoing agreement
between buyer and seller
 Terms and pricing method determined ahead of
marketing date
Econ 337, Spring 2014
Hybrid Markets
 Electronic markets
 Centralized pricing
 Decentralized product movement
 Examples
 Satellite auctions
 Electronic auctions
 Tel-o-auction
 E-commerce
Econ 337, Spring 2014
Formula Pricing
Price discovery from elsewhere
Formula contracts
Spot market
Cutout price
Futures
Cost of production
Do you trust the underlying market for
price discovery?
Econ 337, Spring 2014
Cash/Spot market price
Often through a broker
USDA report
Econ 337, Spring 2014
Formula price
Based on observable price
Spot market
Hog futures, maybe corn & SBM
Example: 50% of 5-month-out LH futures
Econ 337, Spring 2014
Econ 337, Spring 2014
Econ 337, Spring 2014
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Performance Issues
“Least cost” method of price discovery
Effect of the mechanism on price behavior
Marketing vs. pricing efficiency
Econ 337, Spring 2014
Information and Markets
Price 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
Econ 337, Spring 2014
Packer Offering Price
Starts with derived demand from wholesale
and retail markets
Time 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
Econ 337, Spring 2014
Derived Demand
S
Vertical distance is the difference
in price at 3 levels
There is cost associated with
moving from one level to the next
Px
Pretail
Pwholesale
Pfarm
Dretail
Cuts of meat
Dwholesale
Carcasses
Dfarm
Q
Econ 337, Spring 2014
Animals
Qx
Derived Demand for Pork
Average retail price $/lb
Value of trim and scrap $/lb
Costs from whlse-retail $/lb
The most retail will pay $/lb
Retail pounds per carcass
The most retail will pay $/head
Econ 337, Spring 2014
$2.50
$0.10
-$1.00
$1.60
100
$160
Derived Demand for Hogs
Wholesale carcass value $/hd
Value hide and offal $/hd
Costs to slaughter and fab $/hd
The most packer will pay $/hd
Wholesale pounds per carcass
The most packer will pay $/cwt.
(or think of it as ¢/lb.)
Econ 337, Spring 2014
$160
$25
-$20
$165
200
$82.50
Producer Asking Price
Starts with cost of production
Reflects current market conditions
Time is a huge factor for livestock
Marginal revenue may decrease
Marginal cost increases at increasing rate
Farmer has longer time period than packer
from start of process to end.
Econ 337, Spring 2014
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2015/
Econ 337, Spring 2014