chapter 5-agricultural prices

7/27/2019 Chapter 5-Agricultural Prices

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Norwood and Lusk: Agricultural

Marketing & Price Analysis

2008 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.

Chapter 5

Agricultural Prices


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Purpose of the Chapter

To extend our supply and demand model to

incorporate specific features of agriculture to

better understand agriculture prices.

Covers four determinants of agricultural pricechanges

Shows how to construct time-series diagrams in

the presence of seasonality, market shocks, and

production lags

Reviews the causes and nature of price cycles


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Understanding Agricultural Prices

Changes in Agricultural prices are caused by:

Changes in long-run supply and demand

Seasonality Supply and demand (or market) shocks

Market adjustments


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Changes in Long-Run Supply and

Demand

Successful agribusinesses develop their

strategies with a long-run view.

When long-run supply increases, the long-run

supply curve shifts downward and the pricebegins a decline.

Figure 5.1. Over Many Years,

Agricultural Prices are Determined

by the Intersection of Long-Run

Supply and Demand


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Figure 5.2. Corn Through the Years

Example: Corn Market Over the Last Century


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Figure 5.3. Fed-Cattle Market Through the Years

Example: Fed-Cattle Market Over the

Last Century


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Norwood and Lusk: AgriculturalMarketing & Price Analysis



Figure 5.4. Time Series Diagram of Long-Run Prices


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Seasonality

The impact of seasonality is most obviously seen incrop production.

Like in Chapter 1, price should continually rise in the

months between harvest to provide incentives for

people to store the grain. Think back to the Indifference Principle.

The price rise each month between harvests to

compensate those who incur storage costs.

Convenience Yield: It is more convenient to secureones crop supplies early than have to scramble around

in search of more of the crop should supplies run low.


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Figure 5.5. The Price of a Crop Should Continually Rise Between Harvests

Example of Seasonality

Prices rise in the

months after

harvest up until the

next harvest tocompensate for

storing the grain

for consumer use.


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Figure 5.6. U.S. Corn Prices Between Harvests

(corn is harvested around November)

Source: LMICb.

Notes: Prices reported for each month are the average monthly price between 1990 and 2005.

Corn Prices do not behave like the predictor slide previous

states. Prices rise until May, to compensate for storage,

then steadily decline until the next harvest because grain

can be bought cheaper in August and not have to paystorage costs.


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Figure 5.7. Nebraska Wheat Prices Between Harvests (wheat is harvested around July)

Source: NASS.

Notes: Prices reported for each month are the average monthly price between 1990 and 2005.


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Figure 5.8. Time-Series Diagram of Crop Prices With Long-Run Equilibrium and Seasonal Variation


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Figure 5.9. Stocker-Calf Prices By Month

Source: LMIC Notes: Prices are the average Oklahoma feeder cattle prices 400-500 lbs,

1992-2001.

Most Stocker-Calves are born from end-January to beginning-March. This is

because of the nutritional needs of cow and calf. These calves would be

ready to sell in September/October. In these months the price for calves is

lower. To make the Indifference Principle hold true, prices should be indifferent

to sellers, making the prices in the early months of the year greater.


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Market (Supply and Demand) Shocks

Some aspects of agricultural prices areunpredictable and appear somewhat random.

Market Shocks:

Posi t ive Demand Shoc k: unexpected, temporary

increase in demand (i.e. USSR buying US grain) Negative Demand Shock: unexpected, temporary

decrease in demand (i.e. Hurricane Katrina affected grain

ports)

Posi t ive Supply Shock: unexpected, temporary increase

in supply (i.e. Good weather increasing supply)

Negative Supp ly Shock: unexpected, temporary

decrease in supply (i.e. events that temporarily decrease

supply)


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2008 Pearson Education, Upper Saddle River, NJ 07458.All Rights Reserved.

Figure 5.10 Time-Series Diagram of Market Shocks


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Market Adjustments

When temporary price changes occur,

markets have to rediscover their long-run

equilibrium, which can take time.

Markets must adjust to shocks because ofagricultural production experiences production

lags: time lags between the time production

decisions are made and the output is produced.

Cows: 2 years from when the cow is bred to the time hercalf is ready for slaughter.

Chickens: little more than a month


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Figure 5.11. The Cobweb Model in 2007


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Cobweb Model

Assumptions of Cobweb Model

Production lag

Producers make production decisions for the

future based on current prices


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Figure 5.15. Time-Series Diagram with Market Shock and Market Adjustments


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Figure 5.16. Time-Series Diagram with Market Shock, Seasonality, Market Adjustments, and

a Declining Long-Run Equilibrium Price


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Price Cycles

Prices go up, then prices go down.

Expansion Phase: producers are building up their

breeding stock to produce more stock in the future.

Liquidation orContraction Stage: planning to

produce fewer stock in the future

Figure 5.17. Illustration of

Livestock Price Cycles


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Source: Feedstuffs 2005.

Figure 5.18. Profits from Cow-Calf Production

How Livestock Cycles Affect Profits


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Figure 5.19


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Figure 5.20


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Figure 5.21


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Figure 5.22


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Figure 5.23


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Figure 5.24


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Figure 5.19. answer


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Figure 5.20. answer


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Figure 5.21. answer


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Figure 5.22. answer


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Figure 5.23. answer


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Norwood and Lusk: Agricultural 2008 Pearson Education Upper Saddle River NJ 07458

Figure 5.24. answer

chapter 5-agricultural prices

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