Farm and Food Prices

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Farm and Food Prices
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Farm and Food Prices

• Who or what determines prices?
• Farm level?
• Retail Level?
• Consumer demand, farm supply and the food
  marketing system

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Pricing Efficiency

• Time
• Amount of Processing
• Number of Products

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Farm vs. NonFarm Prices

• Farm and Nonfarm Prices Move Together Over
  Long-Run
• Food Marketing Costs 75 of Retail Value
• Farmers Buy from Nonfarm Sector
• Similar Supply and Demand Forces
• Farm Prices More Variable (Inelastic Demand)
• Farm Prices Flexible Downward

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Farm and Retail Food Prices

• Farm and Retail Food Prices Move Together Over
  Long-Run
• Correlation Stronger For Fresh Products
• Asymmetrical Relationship
• Slow response when farm prices fall
• Rapid response when farm prices rise

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Observations on Pricing Efficiency

• Farm and retail food prices do move together, but
  the degree of association is affected by the
  amount of processing
• Effects of changes in food prices on farm prices
  is distributed through time
• Retail and wholesale prices respond to both
  rising and declining farm prices
• Food in stores reflect more closely short-term
  changes in price than restaurants

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Agriculture and the Macro Economy
The Business Cycle
Exchange Rates
Farm Prices, Incomes
Employment
Inflation, Price Stability
Interest Rates
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Agriculture and the Business Cycle
S
P
P
D
D
S
S
recession
D
D
Less Price Reduction!
No supply Shift!
Deep Price Cut
Q
Q
Industry
Agriculture
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Farm Prices and the Business Cycle

• Farmers Do Not Shift Supply Curve In Recession
  (Keep Producing)
• Farm Prices, Incomes Decline In Recession
• Industry Cuts Output In Recession (Layoffs,
  Reduced Work Week)
• Industry Prices Dont Decline Much
• Farm Prices Fall More Than Farm Costs Cost Price
  Squeeze

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Agricultural Price Cycles
Production Cycle
Price Cycle
(Common For Livestock)
Time
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Sources of Cycles
Decreased Marketings
High Prices, Profits
Expand Production
Producers Reduce Production
Low, Unprofitable Prices
Increased Marketings
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Causes of Price Cycles

• Production Cycles High SupplyLow Prices Low
  SupplyHigh Prices
• Producers Respond to Current Prices
• Biological Lag Time Needed for Production
  Decisions To Reach Market
• Psychological Lag Time Needed for Farmers to
  Change Their Mind About Supplies

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The Hog/Pork Cycle
Profits For 12 months
Increased Breeding Herd Reduced Sow, Gilt
Slaughter
Decreased Breeding Herd Increased Sow, Gilt
Slaughter
Losses For 12 months
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Cyclical Lags
Price
(Biological Lag)
High Price
Producers Decide to Expand Output
Production Decisions Come to Market
(Psychological Lag)
Low Price
Months/years
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The Cobweb Theorem
D
S
Expansion
P Hi
Rising Prices
Falling Prices
P Lo
Contraction
Q Hi
Q Lo
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The Cobweb Theorem
Farmers tend to react as if the prices they
observe today are the best indicator of the
prices they will experience next year, and often
fail to consider the effect which their and their
neighbors production changes will have on prices
then
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The Cobweb Theorem

• In agricultural commodity markets, a pattern of
  high prices now causes higher production and
  lower prices later, followed by lower production
  and higher prices

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Producer Responses ToPrice Cycles

• Follow the Cycle
• Normal Behavior Expand When Prices Are Good,
  Contract When Prices Are Low
• Perfectly Competitive Behavior
• Ignore the Cycle (Average Lows and Highs)
• Produce Counter-Cyclically
• Expand When Prices Are Low?

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Seasonal Price Patterns

• Occur Within Marketing Year
• Lowest At Harvest, Rising Into Year
• Biologically (Dairy, Grains)
• Demand-Related (Turkey)
• May Be Smoothed With Storage

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Seasonal Soybean Prices(1986-1996 Ave.)
(Oct-June 84 cents)
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Seasonal Corn Prices(1986-1996 Ave.)
(Oct-June 53 cents)
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Irregular (Non Systematic)Price Variations

• Weather (El Nino)
• Export Demand (Russia, China)
• Demand Shocks (Alar on Apples)
• Government Actions (Embargoes)
• Labor Strikes
• These Are Unpredictable!

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Farm Income and Prices

• Farm income affected by three factors
• the volume of farm products sold
• the price of farm products
• farm costs of production and marketing costs

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Net Farm Income