AEC 305 Final

What do producers want from our food marketing system?
Fair(high) prices and profit
Market information on consumer demand and prices
Availability of inputs at a “reasonable cost
Access to markets both domestic and abroad
Close proximity to deliver products
Ability to add value to capture a greater share of food marketing dollar
“reasonable” regulations
What do consumers want from our food marketing system?
Fair(low) prices
Abundant supplies at all times of the year
Variety of products/product forms/sizes
Quality/Fresh Food
Safe/Nutritious/Healthy Food
Nutrition Labels
Multiple payment options
Organic/NonGMO/No antibiotic
Acceptable animal care measures
Environmentally friendly production methods
Conventional Mass Food Production VS Local/Small/Sustainable Food Producers
Non-Organic VS Organic
Antibiotic use and animal care standards in livestock/meats
Provide some examples of how the government can influence what food/drinks/ag products we consume and the price we pay
Buy surplus items
Restrict consumption, production, advertising, and imports and exports
Promote substitutes for healthy foods/drinks, trade, and competition
Legislate and fund
Marketing Bill
Represents the annual cost for the food sector’s marketing services, including transporting, processing, and distributing domestic farm foods. It is the difference between total consumer expenditures for domestically produced foods and the corresponding farm value of raw US agriculture commodities
Marketing Margin
The difference between the retail price and the farm value of a particular food item
Market Basket
The value of a FIXED quantity of US farm-originated food to track US food price changes in grocery stores
Index Numbers
A unitless summary statistic that allows one to compare changes in for a given variable over a given time period
To construct an index number, one makes decisions on:
Items to include
Weights (must add up to 100%)
Base period
Nominal Prices
Actual observed prices
Real Prices
Nominal prices adjusted by the rate of inflation
Selected Factors Impacting Food Price Inflation
Biofuel production
World crop supplies
Consumer incomes
Value of the US dollar
Ag commodity prices
Energy/Transporting costs
Consumer Demand
A demand schedule represents the quantities that an individual will consume at alternative prices at a given time and a given place, holding all other factors constant
Factors of Demand
Individual Income
Individual tastes and preferences
Prices of substitutes and commodities
Number of consumers
Movement along the Demand Curve
A change in the own price of the good or service (i.e change in the quantity demanded)
Shift of the Demand Curve
A change in income, taste and preference, and/or the prices of substitutes and commodities (i.e change in demand)
Own Price Elasticity of Demand
Measures the responsiveness of changes in the quantity demanded to small changes in price, holding all other factors constant.
Quantity Response for a Given Price Change
Inelastic Demand: % change in quantity is LESS than the % change in price (quantity demanded is not very responsive to price changes)
Elastic Demand: % change in quantity is GREATER that the % change in price (quantity demanded is very responsive to price changes)
Factors Affecting the Magnitude of Own-Price Elasticities
Availability of substitutes
Proportion of budget spent on item
Time horizon (adjustment period)
Degree of Necessity
Relationship of Price Elasticity of Demand to Changes in TR
Elastic: Increase price = decrease in TR / Decrease price = increase in TR
Inelastic: Increase price = increase TR / Decrease price = decrease TR
Cross Price Elasticity
Measures how the quantity demanded of one commodity responds to changes in the price of another commodity, holding all other factors constant.
Income Elasticity
Measures the responsiveness of quantity demanded to income changes, holding all other factors constant
Normal Good
Income greater than 0
Inferior Good
Income less than 0
Supply Schedules
An individual supply schedule represents the quantities that an individual firm will produce at alternative prices at given place and time, holding all other factors constant.
Inelastic Supply
% change in quantity is LESS than the % change in price (quantity supplied is not very responsive to price changes)
Elastic Supply
% change in quantity is GREATER than the % change in price (quantity supplied is very responsive to price changes)
Factors Affecting Supply Elasticities
Available resources
Ability to store the commodity for later sale
Risk and Ease of entry and exit
Prices of alternative commodities competing for resources
Government Policies
Derived Demand
The derived (farm level) demand is derived from the primary (consumer or retail) demand
I.E the farm level demand for wheat is derived from the retail level primary demand for bread and other bakery products
Derived Supply
The derived (consumer or retail ) supply is derived from the primary (farm level) supply
I.E the supply of peaches at the consumer level is derived from the farm level supply
Market STructure
Number of buyers and sellers
Product similarity
Ease of entry/exit
Info available
Market Conduct
Price decisions
Non-Price Decisions
Quantity decisions
Market Performance
Pricing efficiency
Operational efficiency
Consumer Preferences
Know the charts of Comparisons of Industry Market Structures
Perfect competition
Monopolistic Competition
Benefits of Imperfect Competitions
Consumers: Product Variety/Economic of scale can lead to lower prices
Producers: Access to improved technologies to lower costs/more markets for producers
Concerns of Imperfect Competitions
Market Power can lead to lower producer prices and higher consumer prices
Limits entry/innovations of new firms
Excess capacity
Excessive advertising
Limited information
Excessive profits
Eliminate producers
Accounting Profits
represent total revenue less “accounting costs” which represents items such as labor, rent, interest expenses
Economic Profits
Represents total revenue less “economic costs” where economic costs are explicit “accounting costs” PLUS implicit “opportunity costs” which accounts for a rate of return on all resources (land, labor, capital and management) interested in the business
single buyer
few buyers who closely monitor and react to the purchasing behavior of their competitors
What is concentration?
a measure of the relative size(and thus market power) of an industry’s largest firms
What is Market Power?
A firm is said to possess market power if it is able to raise(lower) its price as a seller(buyer) above(below) competitive levels – characteristics of firms who can restrict entry and possess a high degree of concentration
Concentration Ratios
To evaluate the degree of concentration, economists calculate the percentage of market share possessed by the largest firms
Higher concentration ratio
A higher concentration ratio indicated a larger degree of market concentration and raises concerns over firms abusing their market power (charging higher prices to consumers offering lower prices to producers relative to a more competitively determined price, limiting entry, constraining the degree of market information, and constraining output.
Low concentration ratio
Indicated that firms have limited market power
Types of Advertising
Brand name
Brand Name
Coke VS Pespi
Attempts to increase market share of the product
Attempts to shift and alter the shape of the demand curve
Instead of advertising a particular brand name
Attempts to increase the entire market to enhance producer profits shifting both the primary and derived demand to the right – thus may not alter the slope of the demand curve
Price Determination
Theoretically illustrating equilibrium prices and quantities by analyzing factors affecting supply and demand
Price Discovery
A mechanism (or processes) by which buyers and sellers find and agree on a mutually satisfactory price for a transfer of ownership of something.
Ag Price Discovery Systems
Individual/Private negotiations
Cash/spot markets without negotiations
Group Negotiations/Collective bargaining
Contracts and Vertical intergration
Future markets
Government intervention
Vertical Intergration
Occurs when successive stages of marketing and processing or marketing and production ar elinked together through ownership
I.E Wineries that own and operate vineyards
Production Contract
a formal agreement along buyers and sellers which specifies required production practices, along with delivery and payment terms, often agreed to before production is initiated. Contractors, NOT FARMERS, retain ownership of the commodity
Marketing Contract
A formal agreement among buyers and sellers which specifies various variables such as delivery dates, quantity levels, and a price schedule without specific guidelines on production practices.
Farmers, NOT CONTRACTORS, retain ownership of the commodity
Buyer Contract Advantages
Input supply control
Reduced price risk
Quality control
Potential to reduce competition through restricted entry
Potential to enhance profits and Market pwer
Seller Contract Advantages
Guaranteed Market
Reduced Price and Income Risk
Information about consumer preferences
Access to credit
Access to technology/Inputs to lower costs/Improve quality
Seller Contract Concerns
Loss of independence
Changes demanded by contractor
Price adjustments
Long term investments associated with short term contracts
Quantity requirements in case of crop failures/livestock deaths
Potential to great competition among growers in terms of prices and quantity levels
Reduced market information
Hurts remaining spot or cash markets
Future Trends of Contracts
Likely to continue to grow
Demand for differentiated products requires quality control
Tractability of products
Environmental and other regulations will require firms to have greater control over management of production systems
Large farms will continue to grow and depend more on contracting to minimize their price and income risks and to have access to credit
Leading US Ag Export Markets
Decline in Exports
Abundant Supplies
Stronger US $
Sluggish economic growth
Increase in Imports
Demand for Diversity
Year Round food demand
Ethnic population growth
An increase in the value of the US dollar:
Increase the amount that foreign consumers will have to pay for US goods and will decrease US exports, holding all other factors constant.
Perfect Competition
Large number of sellers
Sellers too small to affect market
each seller has an identical product
Free Entry/exit
no ability to drive the price
One producer
unique product
no substitutes
impossibly entry
complete control of price
Large number of sellers
easy entry
different products
small amount of market power
Few large producers
large market power
some barriers to entry
product can be identical or different
mutually interdependent
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