Price Discovery Systems Organized Markets Decentralized Individual Negotiations

Price Discovery is the process of buyers and sellers arriving at prices.

Organized Markets Farmer’s Auctions Terminal Futures

Organized Markets Normally open to the public buyers, 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 1937 ABOUT 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 MARKETS BY THE MID 90'S THERE WERE ONLY ABOUT 1000 – ABOUT 1500 LESS THAN IN 1947

ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIES

ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIES THE OPERATORS OF THE MARKET RECEIVE A FEE

ORGANIZED MARKETS NORMALLY OPERATED BY THIRD PARTIES THE OPERATORS OF THE MARKET RECEIVE A FEE ELECTRONIC MARKETS ARE A TYPE OF ORGANIZED MARKET.

DECENTRALIZED INDIVIDUAL NEGOTIATION LESS FORMALIZED LESS PUBLIC LESS STRUCTURE INCREASINGLY IMPORTANT IN AGRICULTURE

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 CHANNEL WITHOUT 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