mktg 442 farm prices and costs lars perner, instructor 1 farm prices and costs cost, prices, and...

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FARM PRICES AND COSTS Lars Perner, Inst FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting prices and costs Farmer’s share of consumer food expenditures

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Page 1: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1

FARM PRICES AND COSTS

• Cost, prices, and investment decisions

• Influences on costs and prices

• Predicting prices and costs

• Farmer’s share of consumer food expenditures

Page 2: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 2

Food Prices

FARMER

RETAILER

WHOLESALER

MANUFACTURER

CONSUMER

SUPPLY

DEMAND

DEMAND

SUPPLY

SUPPLY

DEMAND

DEMAND

OTHERFARMERS

IMPORTS SUBSTITUTES

Page 3: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 3

Some Realities

• Farmers are price takers who usually sell to buyers with greater bargaining power

• Supply make change quickly to– Quantity of current harvest– Exports– Change in supply of substitute product (e.g.,

corn vs. sugar cane)

• Many price changes are not readily predictable

Page 4: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 4

Market Changes

• Relatively predictable– Effects of phased-in

trade agreements– Long term diet trends– Trends in growth of

substitute products– Changes in cost

structure and productivity from technology

• Relatively unpredictable– Supply from current

harvest– Attractiveness of

foreign products due to exchange rate fluctuations

Page 5: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 5

Consumer Expenditures vs. Farm Value

• Farm value as a proportion of consumer spending depends on amount of value added

• Strong trend toward greater value added • Changes in price have been driven by

greater value added and farm value has stayed more constant

Page 6: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 6

Farm Value Ratios

LOWFARMVALUERATIO

HIGHFARMVALUERATIO

GRAINSCORN

INGREDIENTVEGGIES

FORPROCESSED

FOOD

FRESHVEGGIES

INGREDIENTMEATS

CANNING/FREEZINGVEGGIES

FRESHMEATS

Page 7: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 7

Influences on Farm Value

• Degree of processing• Perishability• Seasonality of

– Supply– Demand

• Transportation costs• Bulk-to-value ratio

Page 8: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 8

Food Marketing Costs

• Labor (48%)• Rent, depreciation,

interest, repairs (19%)

• Advertising (5%)• Transportation (5%)• Packaging (10%)

• Profits (5%)• Taxes (4%)• Energy (4%)

Page 9: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 9

Fluctuations vs. Trend

0

100

200

300

400

500

1 5 9 13 17 21 25 29

Price

Year Price

Trended price

Page 10: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 10

Trends

• Magnitude of trend vs. random fluctuation (“clean” vs. “noisy” data)

• Linear vs.– Non-linear (curved or exponential)—i.e., rate

of change changes – Non-lasting trend– Reversing trend

Details not important

for the final exam

Page 11: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 11

Some Types of Trends

0

100

200

300

400

500

600

700

1 5 9 13 17 21 25 29

Price

Yea

r

Trended price

Non-linear

Non-lasting

Reversing

Details not important

for the final exam

Page 12: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 12

A Trend With Seasonality

0

20

40

60

80

100

120

140

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Price

Trend

Details not important

for the final exam

Page 13: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 13

HIGHER PRICES

LOWER PRICESGREATEROUTPUT

INVESTMENTCAPACITY

ADDED

DISINVESTMENTCAPACITY LOWERED

Cause and Effect Among All Farmers

LAG TIME

LAG TIME

LAG TIME

LAG TIME

LAG TIME

Page 14: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 14

Lag Time Needed For

• Recognition of increased price• Increasing production

– Financing– Construction– Growth of stocks

• Increase in supply to affect prices through complete channel

• Recognition of decreased prices• Decrease capacity

Page 15: MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting

MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 15

“Real” vs. unadjusted prices

• Inflation significantly reduces the value of money over time

• “Real” dollars index money value against a “reference” year

• Indexing is usually based on Consumer Price Index—an estimate of the cost of buying a “basket” of goods

• Farm costs may not rise at that same rate