Standardization, Grading, Market Information, and Contracts

1
Standardization, Grading, Market Information, and
Contracts

• AG BM 102

2
Introduction

• Livestock judging
• Watermelons
• Used cars
• Good decisions require good information
• Two problems source of information what does
  it mean
• Three interrelated themes
• Standardization and Grading
• Market Information
• Contracts

3
Grading- the subdivision of a commodity into
classes, each of which has distinct acceptability
to a group of buyer
4
Benefits of a grading system

• lower transaction costs
• improved price signal
• lower risk
• allows common storage
• increases recognition of value differences

5
Benefits of a grading system

• allocates product according to demand - juice vs
  fresh
• better market news
• allows futures trading other forward contracts
• broadens markets - distant markets - buffalo

6
Problems with grading systems

• subjective
• may ignore important differences historically,
  protein in milk cheese production
• deterioration
• honesty
• definition

7
Example beef grades

• Eight quality grades for beef
• The criterion is the amount of marbling the
  higher the fat content of the meat, the higher
  the grade
• But what if consumers want leaner meat?

8
Example corn grades

• 5 grades based on test weight, moisture content,
  broken corn and foreign material, and damaged
  kernels
• Grade may affect storability
• But feeding value is largely unrelated to these
  grades since this is determined by total
  digestible nutrients and crude protein

9
Bulgarian Tomato Plant

• New owners bought old government tomato cannery
• Wanted to contract with farmers most of whom
  are newly independent farmers
• What goes in contract?
• Price, Quantity, chemicals, variety
• Did not include quality

10
Bulgarian Tomato Plant

• Worried farmers would believe factory downgraded
  quality to pay farmers less
• A legitimate concern
• Incentive to cheat is high
• But without quality requirement who will produce
  high quality tomatoes?
• Why spend more to produce high quality when you
  arent paid for it?

11
Market Information

• Grades standards
• Cash markets
• Futures markets
• Role of government

12
Market News

• Public markets distribute market news to broaden
  market
• Lancaster Farming prints it because readers want
  it
• Limit to what market news the private sector will
  provide
• Newspapers dont publish minor markets
• Internet offsets this somewhat

13
Private transactions

• Most cattle sales are private transactions
• Not in interest of packer to distribute prices
• Congress is trying to require reporting
• Minor commodities a problem
• Especially a problem because it is difficult to
  even find a market
• Goats, ducks, rabbits, emus, millet

14
The value of information

• Information key to good decisions
• Need to know what market is paying
• Need to be able to interpret price
• If you have to see the product, news isnt as
  valuable
• Two extremes wheat futures markets horses

15
What is a contract?

• A contract is a legally binding agreement between
  two parties to do something, e.g., to exchange a
  product with specific characteristics at an
  agreed price

16
Introduction

• Two end points independence ownership
• In between some agreement to work together
• These agreements are contracts

17
Some forms of contracting

• Poultry
• Grower provides
• housing,
• labor
• a few other things
• Integrator
• owns the birds,
• provides the feed
• makes most of the management decisions.

18
Fruit and Vegetables

• more management decisions to the grower
• the processor controls
• variety
• planting schedule
• harvesting schedule
• spraying restrictions

19
Hogs

• Driven by technological advances that will allow
  larger scale production
• Require greater coordination between units and
  better management
• Similar to poultry

20
Other Contracts

• Cooperatives - try offset market power and help
  achieve goals beyond individuals
• SW Vegetables cooperative
• Tuscarrora Organic growers
• High-oil corn, etc. used to ensure supply
• Corn - fix price in advance
• Dairy - forward contract on price

21
Why contracts?

• Advantages to processor
• coordination of flow of inputs
• More control of quality
• food safety - pesticides
• costs - adoption of technology - advances in
  genetics
• adequate supply
• can lock in margins with input and output
  contracts
• economies of scale
• bargaining power

22
Why Contracts?

• Advantages to grower
• guaranteed market
• price known beforehand
• technical help
• financing
• more bargaining power

23
Things to agree on

• quality
• quantity
• price
• delivery time and conditions.
• management practices
• system of penalties and premiums for below or
  above the specified quality

24
How do you find the price?

• easy for corn
• green beans - what do you need to get growers?
• poultry - bargaining power important here
• hogs bargaining power

25
Concluding comments

• Quality is not automatic
• Describing product makes transactions work better
• Grades make market news contracts possible
• Some are processor driven - vegetables, poultry
• Some are customer driven - some dairy contracts
  Pizza Hut
• Some are producer driven - feed contracts, many
  dairy contracts