mktg 442 farm prices and costs lars perner, instructor 1 farm prices and costs cost, prices, and...
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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
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
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
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
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
MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 6
Farm Value Ratios
LOWFARMVALUERATIO
HIGHFARMVALUERATIO
GRAINSCORN
INGREDIENTVEGGIES
FORPROCESSED
FOOD
FRESHVEGGIES
INGREDIENTMEATS
CANNING/FREEZINGVEGGIES
FRESHMEATS
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
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%)
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
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
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
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
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
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
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