price discovery systems organized markets decentralized individual negotiations
TRANSCRIPT
Price Discovery Systems
Organized Markets
Decentralized Individual Negotiations
Price Discovery is the process of buyers and sellers arriving at prices.
Organized Markets
Farmer’sAuctionsTerminalFutures
Organized Markets
Normally open to the publicbuyers, sellers and the commodity are
often at the same location.
Prices are transparent
In general Organized Markets have been declining in importance.
Example: Livestock Terminal Markets
TERMINAL MARKETS DERIVE NAME BECAUSE THEY ARE LOCATED NEAR
RAIL TERMINALS
Chicago Stockyards 1866
Chicago Stockyard 1880 -- 40 acres
BEGAN THEIR DECLINE IN THE 1930'S
SHIFT TO TRUCK TRANSPORT
DECENTRALIZED PACKERS
ABOUT 80 IN 1937ABOUT 6 TODAY
WITH A TERMINAL MARKET PRODUCERS MUST CONSIGN
THEIR ANIMALS TO A COMMISSION FIRM
COST IS FAIRLY HIGH
BIG LABOR COMPONENT TO COST --
THEY OFTEN LACK CONVENIENCE
MAY NOT RESULT IN BEST PRICE
AUCTION MARKETSBY THE MID 90'S THERE
WERE ONLY ABOUT 1000 – ABOUT 1500 LESS THAN IN
1947
ORGANIZED MARKETSNORMALLY OPERATED BY THIRD
PARTIES
ORGANIZED MARKETSNORMALLY OPERATED BY THIRD
PARTIESTHE OPERATORS OF THE MARKET
RECEIVE A FEE
ORGANIZED MARKETSNORMALLY OPERATED BY THIRD
PARTIESTHE OPERATORS OF THE MARKET
RECEIVE A FEEELECTRONIC MARKETS ARE A TYPE
OF ORGANIZED MARKET.
LESS FORMALIZEDLESS PUBLICLESS STRUCTUREINCREASINGLY IMPORTANT IN
AGRICULTURE
DECENTRALIZED INDIVIDUAL NEGOTIATION
ADVANTAGES OF DIN
CONVENIENCE AND LOWER TRANSACTION COST
– LOWER FEES, SHRINKAGE, TRANSPORTATION
PRODUCERS MAY HAVE MORE CONTROL
CAN BE TRANSACTED ANYWHERE AT ANY TIME
OFFER-ACCEPTANCE PRICING
USUALLY DONE BY LARGE BUYERS OR SELLERS
A RETAILER MAY ASK FOR BIDS FROM PACKERS
FORMULA PRICING
MARKET PARTICIPANT USUALLY ARE CONTINUOUSLY DEALING WITH EACH OTHER
THE PRICE IS BASED UPON SOME FORMULA
USDA REPORTED OR FUTURES PRICE FOR LIVESTOCK
LIVESTOCK PRICING
MOST FORMULAS ARE BASED ON A REPORTED
NEGOTIATED PRICE
Percent of Hogs Sold Through Various Pricing Arrangements
Year 1999 2000 2001 2002
Hog or Meat Formula
44.2 47.2 54.0 44.5
Other Market Formula
13.2 20.8 21.9 11.8
Negotiated 35.8 25.7 17.3 16.7
A MAJOR ISSUE OR CONCERN IN LIVESTOCK PRICING IS THE DECLINE IN NEGOTIATED PRICES
NEGOTIATED PRICES DRIVE THE FORMULA
PRICING
THE PRICE A PRODUCER RECEIVES FOR HIS HOGS WILL BE THE FORMULA PRICE WITH PREMIUMS
OR DISCOUNTS BASED ON YIELD
COORDINATION IN THE MARKETING CHANNELWITHOUT EXCHANGE(PRODUCT DOES NOT ENTER THE MARKET)
CONTRACTUAL EXCHANGE ARRANGEMENTS
VERTICAL INTEGRATION A FIRM OWNING TWO OR MORE
LEVELS OF PRODUCTION OR MARKETING
– A FEED COMPANY THAT FEEDS ITS OWN LIVESTOCK
– A FOOD PROCESSOR THAT RETAILS FOOD
MARKETING PROCUREMENT CONTRACTS
AN AGREEMENT BETWEEN A SELLER AND A BUYER COVERING THE PRODUCT, TIME, NATURE OF DELIVERY, AND PRICE
PRODUCTION CONTRACT
A PRODUCER WILL RAISE ANIMALS THAT ARE OWNED BY A CONTRACTOR.
MOTIVATIONS FOR VERTICAL INTEGRATION
PROFIT– MARKET POWER– EFFICIENCIES