Price determinationPrice DiscoverySlide 3Price Discovery Concerns Under Alternative Price Determination ConditionsPrice discovery systemsSlide 7Packer Procurement Method, 1999Percent of U.S. Hogs Sold Through Various Pricing Arrangements, January 1999-2002* Procurement Method, MPRPerformance issuesCentralized pricingDecentralized PricingHybrid marketsElectronic marketsInformation and marketsPrice reportingSlide 18Mandatory Price Reporting“3/60” Guideline“3/70/20” Guideline91 reportsSummaryHomework assignment Due next classWhere to find?Market RegulationSo What???Price determinationPrice determinationis the broad forces of supply and is the broad forces of supply and demand establishing a market demand establishing a market clearing price for a commodity.clearing price for a commodity.Price Discoveryis the process by which buyers and is the process by which buyers and sellers arrive a a specific price for a sellers arrive a a specific price for a given given lotlot of produce at a given of produce at a given locationlocation for a specificfor a specific timetime period.period.Reading AssignmentReading Assignment»Understanding Livestock Pricing IssuesUnderstanding Livestock Pricing IssuesPrice DiscoveryA human process, subject to A human process, subject to relative bargaining power of the relative bargaining power of the buyer and seller.buyer and seller.Two stage processTwo stage process»Evaluate S&D and PeEvaluate S&D and Pe»Estimate the price for the specific trade.Estimate the price for the specific trade.Price Determination and Price Discovery SDP QPeQePrice Discovery Concerns Under Alternative Price Determination Conditions DemandDemandSupplySupplyStrongStrongWeakWeakLargeLargePotentialPotentialProbableProbableSmallSmallUnlikelyUnlikelyPotentialPotentialPrice discovery systemsIndividual negotiationsIndividual negotiations»Also called private treaty salesAlso called private treaty sales»Fed cattle, hogs, grainFed cattle, hogs, grainOrganized central marketsOrganized central markets»Auctions, terminal, electronicAuctions, terminal, electronicFormula pricingFormula pricing»Eggs, wholesale meat, feeder pigs, hogs and cattle Eggs, wholesale meat, feeder pigs, hogs and cattlePrice discovery systemsBargained pricesBargained prices»Fruits, vegetables, milkFruits, vegetables, milkAdministered pricingAdministered pricing»Government programsGovernment programsPacker Procurement Method, 1999HogsHogsCattleCattleCash marketCash market27%27%65%65%FormulaFormula32322020Futures-basedFutures-based8844Risk shareRisk share141433Packer ownedPacker owned181855OtherOther1133Percent of U.S. Hogs Sold Through Various Pricing Arrangements, January 1999-2002* '19991999200020002001200120022002Hog or meat market formulaHog or meat market formula44.244.247.247.254.054.044.544.5Other market formulaOther market formula13.213.220.820.821.921.911.811.8Other purchase arrangementOther purchase arrangement4.64.64.64.66.66.68.68.6Packer-soldPacker-sold2.12.1Packer-ownedPacker-owned16.416.4Negotiated – spotNegotiated – spot35.835.825.725.717.317.316.716.7*2002 data based on USDA Mandatory Reports, *2002 data based on USDA Mandatory Reports, 1999-2001 based on industry survey. 1999-2001 based on industry survey. University of Missouri and National Pork Board*Procurement Method, MPRIA/MN Daily Prior Day PURCHASE SWINEIA/MN Daily Prior Day PURCHASE SWINE »Negotiated, Packer Owned, Packer SoldNegotiated, Packer Owned, Packer Sold»Market Formulas (Swine or Pork, Other) Market Formulas (Swine or Pork, Other) »Other Purchase AgreementOther Purchase AgreementNational Daily Prior Day SLAUGHTERED SWINE National Daily Prior Day SLAUGHTERED SWINE National Weekly Direct SlaughterNational Weekly Direct Slaughter»Cattle - Formulated and Forward Contract - DomesticCattle - Formulated and Forward Contract - Domestic »Formulated and Forward Contract - ImportFormulated and Forward Contract - Import »Packer Owned CattlePacker Owned Cattle »Negotiated PurchasesNegotiated Purchases http://http://www.ams.usda.gov/lsg/mncs/index.htm#Mandwww.ams.usda.gov/lsg/mncs/index.htm#MandatoryatoryPerformance issues““Least cost” method of price Least cost” method of price discoverydiscoveryEffect of the mechanism on price Effect of the mechanism on price behaviorbehaviorMarketing v. pricing efficiency Marketing v. pricing efficiencyCentralized pricing All buyers and sellers in one All buyers and sellers in one place at one time.place at one time.»Full and immediate informationFull and immediate information»Competitive biddingCompetitive bidding»Equalizes market power Equalizes market power »Transaction costTransaction cost»Physical movement of productPhysical movement of productDecentralized PricingOne-to-one negotiationsOne-to-one negotiations»Reduced transportation costReduced transportation cost»Reduced transaction costReduced transaction cost»Depends on skills and informationDepends on skills and information»Higher search costHigher search costHybrid marketsElectronic marketsElectronic markets»Centralized pricingCentralized pricing»Decentralized product movementDecentralized product movementExamplesExamples»Satellite auctionsSatellite auctions»Electronic auctionsElectronic auctions»Tel-o-auctionTel-o-auction»E-commerceE-commerceElectronic marketsMarketing agency Marketing agency »Lends credibilityLends credibility»Settle disputesSettle disputes»Aids collection and paymentAids collection and paymentExamplesExamples»http://www.superiorauction.com/http://www.superiorauction.com/»http://www.cattlesale.com/http://www.cattlesale.com/»http://www.e-markets.com/http://www.e-markets.com/Information and marketsPrice reportingPrice reporting»Role of the governmentRole of the government»Collection and dissemination and timely Collection and dissemination and timely reporting of prices that were discovered.reporting of prices that were discovered.»Other private treaty buyers and sellers Other private treaty buyers and sellers incorporate new information into their incorporate new information into their negotiation.negotiation.»Facilitates formula pricingFacilitates formula pricingPrice reportingIowa Dept of Ag and Land StewardshipIowa Dept of Ag and Land StewardshipRegional cash grain pricesRegional cash grain pricesAuction market pricesAuction market pricesPrice reportingUSDA Agricultural Marketing