Ag_Econ 2183 Exam 2

How do you calculate the price spread? Ex) Egg's retail price is $2.35 per dozen and the farm price per dozen is $1.75. What is the farmers share per dozen?

$1.75 per dozen (farm price) / $2.35 per dozen (retail) The farmers share per dozen is 74%

Market

(1) All of the possible buyers and sellers of a product or commodity. Usually involves firms as sellers and firms or consumers as buyers (2) In the eyes of a seller, the potential buyers and their potential demand for the seller's product or commodity.

1) What is the difference between a price maker and a margin maker? 2) What are the conditions a processor must meet to enable her to price her products independently of the supplies and prices of relevant farm products?

1) A margin maker- has little power to set their sale prices and instead focus on maintaining a margin between sales prices and purchase prices for the commodity. Price maker- can set prices to an extent 2) Successful product branding & The cost of the farm ingredients represents only a small part of the processor's product costs.

1) Why are agricultural transportation costs significant? 2) Are they necessary or unnecessary? Why?

1) Because unit costs of transportation are relatively low, regional specialization in production has been highly developed. Transportation of long distances is expensive. Market prices guide agribusinesses in their transportation decisions. 2) Transportation is expensive, but worth doing. Livestock are assembled from farms, scattered from Florida to Washington and then hauled to slaughter. The resulting meat products are transported hundreds of miles to distribution centers. Then, they are delivered over congested city streets to thousands of retailers.

Food-Marketing Bill

A breakdown of how the consumer dollar is allocated between farm and marketing costs and the costs of the services and materials required to market the food.

Why doesn't the farmer advertise in the same manner as the manufacturer? Is it sensible for farmers to advertise at all?

A farmer selling a commodity to a firm, has no need to advertise due to the large amount of other farmers selling the same commodity. -----> **the manufacturer adds value in numerous ways there for making it profitable to advertise to consumers** A farmer selling a differentiated product, because he controls the supply of the item, he can price it and reap the benefits of promotion.

Conglomerate

A firm doing business in several (or many) unrelated markets Ex) Altria is a major player in cigarettes, beer, groceries, cheese and ice cream, baked goods, coffee, breakfast cereals, and many other manufactured items.

What constraints does a margin maker face?

A margin maker has limited control over short-term swings in farm and commodity prices. *it is not surprising that many marketing-oriented firms seek to reduce uncertainty by developing differentiated products and opting out of commodities.*

Market Basket

A representative group of domestically produced foods (excluding fish and beverages) that is sold in food stores.

Seasonal Price Pattern

A set of prices within a year that varies somewhat regularly as a result of the regular influence of the seasons on production, marketing, and demand.

What are some factors affecting the price spread? & how does it affect the price spread?

Amount of processing needed Amount of commodity supplied to processors Dollars needed to cover costs Costs of marketing -----Rising as processing costs fall (less automation in food service) -----Food-marketing bill calculated by USDA

Commodity

An economic good (such as corn or wheat) that can be legally produced and sold by almost anyone.

For production on the farm level, why do we think of the supply curve as being highly inelastic?

Because of the biological lag feature of agriculture. It takes time to adjust quantity supplied due to price changes.

For end-user consumption, why do we think of the demand cover as being highly elastic?

Because of the large number of substitutes end-users have they will switch away from the product for large changes price. Because consumers have so many choices, the demand curve is nearly flat.

Risk Bearing

Being in a position to experience gain or loss as a result of externally controlled changes in the amount or price of one's holdings of commodities or other assets.

1) Agribusinesses engage in two different types of marketing. Discuss each and their relationship to one another. Discuss differentiated and undifferentiated products as they affect the activities of each of the two types of firms.

Commodity Handling & Product Marketing Commodity Handling- The marketing of commodities, such as fresh meant or vegetables, tends to be highly price competitive because the commodities offer few or no profitable opportunities for advertising and promotion. Product Marketing- The marketing of most processed foods (such as canned fruits, cake mixes, and frozen entrees) provides profitable opportunities for promotion and reduces the emphasis on price competition. 1)* Commodity handling- firms specialize in milk, eggs, fresh fruit, and even fresh meat. Product marketing- agribusinesses transform raw commodities into bread, frozen entrees, baby food, etc.* 2) *Agribusiness firms handling undifferentiated commodities generally experience great amounts of price competition* *the marketers of differentiated food products experience low price competition, have the market security of loyal customers ], and have more latitude as price makers.*

What factors affect a producer's set of marketing decisions?

He chooses the most profitable, given the degree of risk he is willing to take: Distance to Market Economies of Size- whether or not he can attain an economic size of unit/cheaper or as cheap as another producer) Biological Lag- in agricultural production cause farmers to make decisions on the basis of expected prices rather than realized prices. Perishability- if perishable, must be marketed quick before the commodity loses its value *typically he engages in production without knowing the price that will be realized. He bases his production on Expected Prices(prices estimated months or years before harvest or production of a commodity*

What happens to the farm's supply curve in the long run? Why?

In the long-run the supply curve is less inelastic because firms can respond by changing up their production methods (expand facilities, switch acres, expand herd, more stores, etc.)

Inelastic Supply

Large changes in price are needed to change quantity supplied.

Relate MARKET CLEARING & PERISHABLITY

MARKET CLEARING is the process of the market price adjusting so that all buyers and sellers currently wishing to trade at that price can do so. Therefor The more PERISHABLE a commodity is, the less able sellers are to wait to sell at a MARKET CLEARING price.

Explain the supply and demand graph of a non-perishable commodity at harvest time.

Non-perishable commodities such as wheat, can now be stored. This alternative open to farmers gives some positive slope to the supply curve. *farmers are able to wait for their desired price level*

Explain price as a feedback signal to production and production adjustments.

Outlook information (data and projections about market demand and supply and prices) is available to all farmers. ---------> Producers use outlook information to plan to increase production when anticipating profitable prices, cut production when prices go down ----------> Adjustments of amounts supplied are limited by production lag times(the period it takes to increase or reduce production of a commodity)

Expected Prices

Prices estimated months or years before actual harvest or production of the commodity.

Market Clearing

Process of the market price adjusting so that all buyers and sellers currently wishing to trade at that price can do so.

Explain THE FARM-TO-RETAIL PRICE SPREAD. Include MARKET BASKET.

THE FARM-TO-RETAIL PRICE SPREAD (also called Price Spread) is the difference between the prices farmers receive and those that consumers pay for equivalent amounts of food. --------> THE PRICE SPREAD is compiled and published regularly for numerous farm commodities & also a representative group of domestically produced foods bought in food stores called the MARKET BASKET

Explain the cobweb model

The CobWeb Model Introduces continual disequilibrium, a set of prices that keep changing over time even though basic supply and demand schedules are stable

Explain the supply and demand graph of an extremely perishable commodity at harvest time.

The Horizontal arm of the supply curve indicates the minimum price that covers harvest. The vertical of the supply curve represents the maximum total amount available for harvest. *the position of the supply curve varies from season to season as a result of natural causes such as weather or changes in acres planted.*

Marketing

The action or business of promoting and selling products or services, including market research and advertising.

Marketing Intelligence

The data about current volumes of sales, current and future prices, and events (such as disturbances in weather or politics) that may influence upcoming prices and sales.

Standardization

The development and use of constant measures of quantity and quality.

Farm-To-Retail Price Spread

The difference between the prices farmers receive and those that consumers pay for equivalent amounts of a food.

Economies of Size

The economic concept that cost per unit of production decreases as the size of the business increases.

Price Cycle

The long-term repetitive movement of prices. Ex) Cobweb Model

Commodity Handling

The marketing of commodities, such as fresh meant or vegetables, tends to be highly price competitive because the commodities offer few or no profitable opportunities for advertising and promotion.

Product Marketing

The marketing of most processed foods (such as canned fruits, cake mixes, and frozen entrees) provides profitable opportunities for promotion and reduces the emphasis on price competition.

Concentration Ratio

The percentage of industry sales (or purchases) made by its 4 largest firms. Data on _________ are provided by the U.S. Census and are widely used as one measure of industry structure.

Biological Lags

The period between a decision to produce and the actual harvest or collection of output.

Business Logistics

The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.

Perishability

The quality of food that loses its desirable characteristics (thus its value) over time The speed of such quality deterioration varies among commodities and among methods of handling.

Convenience Yield

The value that motivates the processor to store or offer incentives for input suppliers to store or market a product, even though there is a negative expected return to storage.

Margin Maker

Those commodity handlers that have little or no power to set their sales prices may focus on maintaining a margin, or specific differential, between sales prices and purchase prices. Ex) a grain elevator may set its offer prices to farmers by subtracting a margin from the daily futures closing price.

Explain seasonal price patterns of a storable commodity like wheat.

Wheat is storable. Storage costs money in terms pop space rental, interest on the inventory being stored, product deterioration, and other factor. *Thus, a normal seasonal price pattern of a once-a-year harvested storable commodity suggests that prices will be lowest at harvest (due to the increase in supply) and then steadily rise to cover the month-to-month accumulation of storage costs, until price peaks just before the new harvest (when supply of wheat is lowest)

Why does a firm handling commodities often have more influence on its buying prices than its selling prices?

a commodity handling firm is a margin maker, therefore when buying inputs it negotiates a price based on the margin of the input buying price, and a final product selling price. They have less control over their selling prices because they are in a highly competitive environment.