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Standardization, Grading, Market Information, and Contracts
AG BM 102
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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
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Grading- the subdivision of a commodity into classes, each of which has distinct acceptability to a group of buyer
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Benefits of a grading system
• lower transaction costs
• improved price signal
• lower risk
• allows common storage
• increases recognition of value differences
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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
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Problems with grading systems
• subjective
• may ignore important differences – historically, protein in milk & cheese production
• deterioration
• honesty
• definition
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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?
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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
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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
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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 minimums who can produce high quality tomato products?
• Why spend more to produce high quality when you aren’t paid for it?
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Market Information
• Grades & standards
• Cash markets
• Futures markets
• Role of government
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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 don’t publish minor markets
• Internet offsets this somewhat
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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
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The value of information
• Information is 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 isn’t as valuable
• Two extremes – wheat futures markets – horses
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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
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Introduction
• Two end points – independence & ownership
• In between some agreement to work together
• These agreements are contracts
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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.
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Fruit and Vegetables
• more management decisions to the grower
• the processor controls– variety– planting schedule– harvesting schedule– spraying restrictions
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Hogs
• Driven by technological advances that allow larger-scale production
• Require greater coordination between units and better management
• Similar to poultry
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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
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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
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Why Contracts?
• Advantages to grower– guaranteed market– price known beforehand– technical help– financing– more bargaining power
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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
• What happens if crop fails?
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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
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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