1. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 1 FARM PRICES AND COSTS Cost, prices, and investment decisions Influences on costs and prices Predicting prices and costs Farmer’s share of consumer food expenditures

2. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 2 Food Prices FARMER RETAILER WHOLESALER MANUFACTURER CONSUMER SUPPLY DEMAND SUPPLY DEMAND OTHER FARMERS IMPORTSSUBSTITUTES

3. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 3 Some Realities Farmers are price takers who usually sell to buyers with greater bargaining power Supply make change quickly to –Quantity of current harvest –Exports –Change in supply of substitute product (e.g., corn vs. sugar cane) Many price changes are not readily predictable

4. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 4 Market Changes Relatively predictable –Effects of phased-in trade agreements –Long term diet trends –Trends in growth of substitute products –Changes in cost structure and productivity from technology Relatively unpredictable –Supply from current harvest –Attractiveness of foreign products due to exchange rate fluctuations

5. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 5 Consumer Expenditures vs. Farm Value Farm value as a proportion of consumer spending depends on amount of value added Strong trend toward greater value added Changes in price have been driven by greater value added and farm value has stayed more constant

6. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 6 Farm Value Ratios LOW FARM VALUE RATIO HIGH FARM VALUE RATIO GRAINS CORN INGREDIENT VEGGIES FOR PROCESSED FOOD FRESH VEGGIES INGREDIENT MEATS CANNING/ FREEZING VEGGIES FRESH MEATS

7. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 7 Influences on Farm Value Degree of processing Perishability Seasonality of –Supply –Demand Transportation costs Bulk-to-value ratio

8. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 8 Food Marketing Costs Labor (48%) Rent, depreciation, interest, repairs (19%) Advertising (5%) Transportation (5%) Packaging (10%) Profits (5%) Taxes (4%) Energy (4%)

9. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 9

10. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 10 Trends Magnitude of trend vs. random fluctuation (“clean” vs. “noisy” data) Linear vs. –Non-linear (curved or exponential)—i.e., rate of change changes –Non-lasting trend –Reversing trend Details not important for the final exam

11. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 11 Some Types of Trends Details not important for the final exam

12. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 12 A Trend With Seasonality Details not important for the final exam

13. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 13 HIGHER PRICES LOWER PRICES GREATER OUTPUT INVESTMENT CAPACITY ADDED DISINVESTMENT CAPACITY LOWERED Cause and Effect Among All Farmers LAG TIME

14. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 14 Lag Time Needed For Recognition of increased price Increasing production –Financing –Construction –Growth of stocks Increase in supply to affect prices through complete channel Recognition of decreased prices Decrease capacity

15. MKTG 442 FARM PRICES AND COSTS Lars Perner, Instructor 15 “Real” vs. unadjusted prices Inflation significantly reduces the value of money over time “Real” dollars index money value against a “reference” year Indexing is usually based on Consumer Price Index—an estimate of the cost of buying a “basket” of goods Farm costs may not rise at that same rate