Farm and Food Prices - Derived Demand AG BM 102

Introduction Consumers rarely buy directly from farmers Instead farmers sell to marketing service providers, who process, store, transport, and otherwise add utility, and who sell to the consumer Hence, retail demand is not farm demand

Eggs Farmers sell nest run eggs to packer The packers wash, candle, inspect, and sort the eggs The eggs are sold to the supermarket The consumer buys the eggs These marketing services cost about 50 cents per dozen

Egg Demand Quantity Doz/cap/yr. Retail Price $/doz. Marketing Cost Farm Price 17$1.30$0.50$ $1.20$0.50$ $1.10$0.50$ $1.00$ $0.90$0.50$ $0.80$0.50$ $0.70$0.50$ $0.60$0.50$ $0.50 $0.00

Farm Egg Supply QuantityPrice 17$ $ $ $ $ $ $0.60

Some Points about Graph Equilibrium where DF and SF cross This is P = $0.40/doz and Q = 21 doz./cap. At this quantity Mc = $0.50 and PR = $0.90 No incentive to move Farm price = Retail price – marketing cost

Demand Equations

Elasticities

Some Notes Farm Demand is derived from retail demand When farm market is in equilibrium it defines retail market as well Farm demand elasticity is always less elastic than retail Farmer is separated from consumer by marketing sector If marketing costs rise, farm price goes down and retail price goes up

Flexibility The percent change in price in response to a 1 % change in quantity

Flexibility Applies especially to the demand for agricultural products Useful in recognizing that quantity is predetermined and prices adjust to clear market Strawberries, tomatoes, other non-storable products

Solve Demand Equations for P P R = $ Q P F = $2.50 – 0.1 Q

Calculate Flexibility Since the farm level flexibility is greater farm prices move more as the quantity supplied increases