Analysis Presentation: Price Of Agricultural Products

Price of Agricultural Products Presentation Material 01 Theory of Agricultural Product Price Formation 02 Government Policies Affecting Marketing Demand and supply Market equilibrium Pricing Market structure 03 Changes in Agricultural Product Prices Changes Inquiry and Supply Long-term and Short-term Seasonal Factors Market Shock Market Adjustments Price Cycles 1. Theory of Agricultural Product Price Formation a) Demand & Supply Demand The concept of individual demand explains the amount of goods/services purchased by individual households/companies at a certain price level. The amount that consumers want to buy is not always the same as the amount that consumers actually buy (demand). Economists are not only concerned with what individuals want but what individuals choose within the constraints of budget-constrained purchasing power and prices of goods/services. Supply The concept of individual supply explains the amount of goods/services sold by individual producers/firms at a certain price level. The amount offered may not equal the amount actually sold (supply) by the producer. Amount sold (by seller) = Amount bought (by buyer) 🡪 Amount exchanged 1. Theory of Agricultural Product Price Formation cont... a) Demand & Supply Market Demand The concept of Market demand is the horizontal sum of all the demands of individual market members at a given price level. Market Supply The concept of market supply is the horizontal sum of all individual market members' offers at a given price level. 1. Theory of Agricultural Product Price Formation a) Demand & Supply Factors Determining Demand (Qd) Supply Determinants (Qs) Qd= f(P; PO, I, T, FS, ...........) Price of the product (Own Price = P) Price of other related products (Others Price = PO) Consumer income (Income = I) Tastes Number of consumer household members (Family Size/FS) Other factors Qs= f(P; PO, TC, Tn, ...........) Price of the product (Own Price = P) Price of other related products (Others Price = PO) Cost of Production (Total Cost = TC) 🡪 Input Price Technology (Mr.) Other factors Shift nt e m e v Mo 1. Theory of Agricultural Product Price Formation cont... a) Demand & Supply Example: Movement of Demand and Supply Curves Sugar Price (Thousand IDR/Kg) Sugar Price (Thousand IDR/Kg) 3.00 4.00 B 2.50 2.00 S 1.50 A 2.00 1.00 D1 0 12 20 Sugar Quantity 0.50 0 1 2 34 5 (Kg) Demand Curve Shift Shift of Supply Curve Sugar Quantity (Kg) 1. Theory of Agricultural Product Price Formation cont... a) Demand & Supply Example: Shift of Demand and Supply Curves P New S SS New S P P P P New D D New D D Old QD New QD Q New QD Old QD New QS Q New QS Old QS (QS = quantity supplied) (QD = quantity demanded) Demand Curve Shift Shift of Supply Curve Old QS 1. Theory of Agricultural Product Price Formation cont... a) Demand & Supply Demand Elasticity P Own-Price Elasticity of Demand (ED ) Inelastic Demand (% Change Quantity Demanded) ED = Elastic Demand P Inelastic Demand P S' Demand is: S' P1 S Elastic Demand P2 S Q Perfectly Inelastic Demand D D Q Perfectly Elastic Demand Q Source: Bailey Norwood, Jayson Lusk (2007) Inelastic if |ED | < 1 Unit elastic if |ED | = 1 Elastic if |ED | > 1 P Q (% Change in Price) Perfectly inelastic if the demand curve is a vertical line. Perfectly elastic if the demand curve is a horizontal line. 1. Theory of Agricultural Product Price Formation cont... a) Demand & Supply Supply Elasticity Own-Price Elasticity of Supply (ES) (% Change Quantity Supplied) ES = (% Change in Price) P P Elastic Supply P Inelastic Supply Inelastic Supply Supply is: S Elastic Supply P2 P1 Inelastic if ES < 1 Unit elastic if ES =1 Elastic S if ES > 1 D D P D D Q Q Perfectly Inelastic Supply Q Perfectly Elastic Supply Q Perfectly inelastic if the supply curve is a vertical line. Perfectly elastic if the supply curve is a horizontal line. 1. Theory of Agricultural Product Price Formation cont... b) Market Equilibrium P and Q that happens at market by Demand (D) and Supply (S) of commodities. 1 🡪 determined P that occurs in the market 🡪 Equilibrium Price (P*) = P that balances/equalizes S and D. 2 3 Q that occurs in the market 🡪 Equilibrium quantity (Q*) = Q that balances/equalizes S and D. 1. Theory of Agricultural Product Price Formation cont... b) Market Equilibrium In the graph, the equilibrium P is the P resulting from the intersection of Curve D and Curve S. In the graph, the balance Q is the Q resulting from the intersection of the D and S curves. Market equillibrium 🡪 QD = QS 🡪 Q* and P* occur The importance of agricultural prices Agricultural commodity prices play an important role both economically and politically Agricultural commodity prices affect farmers' income Agricultural commodity prices in many countries are an important determinant of people's welfare Price commoditiesagriculture have volatility high compared to prices in other sectors 1. Theory of Agricultural Product Price Formation cont... c) Pricing and Market Structure Pricing PRICE DETERMINATION Market Structure MARKET STRUCTURE a. How big/many sellers & buyers or big/small the market is b. Share of each market c. How much/much of the product is differentiated or homogenized d. The ease/difficulty of a firm's entry into the market e. Market information 1. Theory of Agricultural Product Price Formation cont... C) Pricing and Market Structure higher price, lower total surplus many buyers, one seller Monopoly Market Structure relates to market behavior which is different in each market. Price Oligopoly competitive price, high total surplus Perfect Competition many buyers, many sellers Oligopsony lower price, lower total surplus Monopsony Source: Bailey Norwood, Jayson Lusk (2007) one buyer, many sellers A thin market has few buyers and few sellers. Whether the price is high or low depends on their relative negotiating power. 1. Theory of Agricultural Product Price Formation cont... c) Pricing and Market Structure Perfectly Competitive Market (PPS) 1. Many sellers and buyers 2. Market share of each seller is relatively small/no dominant one < money in the market 3. The product is homogeneous 4. No barrier 5. Easy and cheap market information Monopoly Mono = one; Polein = Seller Characteristics: 1. One seller, many buyers 2. Price-setting monopolist (Price Setter) 3. Unique/differentiated product 4. Available Barrier (already determined), include; large capital, technology, economies of scale, licenses (e.g. ATPM) 5.Market information is difficult to obtain 1. Theory of Agricultural Product Price Formation Cont... Curve I MC AC Profit maximization: P = MC; P = product price; MC = Marginal Cost / Marginal Cost Curve II Maximizing Profit on PPS AC AVC P* MC AC* AVC AC** Q* P** MR= P Profit (ɳ) = TR - TC TR = P* Q* TC = AC* Q* TR > TC Q** Loss (TR < TC) Profit TR = P** Q** TC = AC** Q** TR < TC If TVC < TR < TC -----> Keep selling/ producti on If TR < TVC ------> Company/ seller Close Loss 2. Government Policies Affecting Marketing Marketing policy focuses on regulating the marketing system and its institutions, so as to create an efficient and effective marketing system so that farmers have high competitiveness. Marketing policy Agricultural products are very strategic to agricultural development in Indonesia. Price is an incentive instrument for business actors in the agricultural sector in making production and marketing decisions. 2. Government Policies Affecting the Marketing of Cont... The price factor is often the benchmark for improving farmers' income welfare. Input and output prices determine the level of efficiency of production costs and revenue. Prices of agricultural products that occur through market mechanisms are often uncontrollable (price fluctuations) and tend to harm farmers. Agricultural policy intervention by the government is necessary in regulating prices, especially for strategic food agricultural products. 3. Price Changes of Agricultural Products a) Changes Inquiry term and Short-term b) Seasonal Factors c) Market Shock d) Market Adjustments e) Price Cycles and Supply Long- 3. Price Changes of Agricultural Products a) Long-term and Short-term Changes in Demand and Supply ▪ Price changes are caused by movements in the long-term supply and demand curves. ▪ When long-term supply increases, the long-term supply curve shifts downward and prices start to fall, and vice versa. ▪ When long-term demand decreases, the long-term demand curve shifts downward and prices fall, and vice versa. Price LRS = LongRun Supply P LRD = LongRun Demand Q Quantity 3. Price Changes of Agricultural Products Cont... a) Long-term and Short-term Changes in Demand and Supply The Case of Corn Farmers and Cattle Raisers (United States Department of Agriculture, National Agricultural Statistics Service, USA, 2004). Q 40.00 FedCattle Price 20.00 LRS LRD 0.00 New LRD Q Index of Consumer Beef Demand Over the years, consumer Over the for years, demand beefconsumer has fallen, demand for beef has fallen, possibly due to health probably to health concerns,due leading to a concerns, a downwardleading trend in to cattle downward trend in cattle prices. prices. 140.00 120.00 100.00 80.00 60.00 40.00 20.00 1998 1994 1996 1992 1988 1990 1986 1982 1984 1980 0.00 1976 and an upward trend in maize production. 60.00 1978 Over the theyears, years,technological Over improvements technological have made producing corn less improvements have made expensive. Consequently, maize production cheaper. the long-run supply curve As a result, the long-term keeps shifting right, supply curve continues to causing a downward trend shift to the causing a in prices andright, an upward downward in prices trend in corntrend production. 80.00 1972 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 thousand bushels 13,000,000 12,000,000 11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 FedCattle Supply 100.00 1974 Trend Line U.S. Corn Production 1960-2006 120.00 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 LRD P Fed-Cattle Prices and Supplies 1970 New LRS 20,000 19,500 19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,500 15,000 14,500 $/cwt LRS 1,000 Head Steers P Index (1970 = 100) 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 $/bushel U.S. Corn Prices 1960-2006 (Real 1982 Dollars) 3. Price Changes of Agricultural Products Cont... a) Long-term and Short-term Changes in Demand and Supply Price Long-Run Equilibrium Price Time A long-term increase in demand, or a long-term decrease in supply, causes prices to trend upwards Source: Bailey Norwood, Jayson Lusk (2007) Long-Run Equilibrium Price Time If the long-run supply and demand curves do not shift, long-run prices will remain unchanged. Long-Run rium Equilibrium Price Time A long-term decrease in demand, or a long-term increase in supply, causes prices to trend downwards. 3. Price Changes of Agricultural Products Cont... b) Seasonal Factors • The majority of the agricultural sector is seasonal, although some can produce continuously throughout the year, but it still fluctuates, with bumper harvests and droughts. • During the rainy season, there is a relative decrease in harvest compared to the dry season. • Determined by: farmers' response to price levels, government programs on commodity development (commodity distribution, production increase, etc.), external influences that are difficult to control (floods, erosion, earthquakes, typhoons, fires, pest outbreaks, etc.). • Affects variations in product value or price throughout the year 3. Price Changes of Agricultural Products Cont... Time Series Diagram of Crop Prices with Long-Term Equilibrium and Seasonal Variation Price crop prices Long-Run Equilibrium Long-Run Equilibrium Harvest Time Harvest Harvest Constant long-run equilibrium price Decreasing long-run equilibrium price Constant Long Run Equilibrium Price: • Long-term supply and demand do not change, so the long-term equilibrium price is the horizontal line. Notice how the price changes between harvests. During harvest, prices are at their lowest, and between harvests, prices are at their lowest. harvest prices reached their highest point. Decreasing Long Run Equilibrium Price • The long-term price of maize decreases as the longterm supply curve continues to shift to the right. This means that the long-run equilibrium price tends to decrease. • Maize prices still show their seasonal cycle. Within a year, prices are lowest during harvest and highest between harvests. In any given month, however, prices are lower than last year due to the long-term decline in equilibrium prices. 3. Price Changes of Agricultural Products c) Market ShockCont... ▪ Some aspects of agricultural prices are predictable, such as downward trends and seasonal variations. Other aspects are unpredictable and random. Price Actual Prices ▪ Supply shock in the USSR wheat market causes demand shock in the US wheat market. ▪ This unexpected event that causes a temporary drop in supply is called a negative supply shock. On the contrary, if excellent weather temporarily increases the supply of wheat, it is referred to as a positive supply shock. Long-Run Equilibrium Price This depicts a market with a constant long-run equilibrium price that undergoes a positive demand shock or negative supply shock that temporarily raises prices. Time Market Shock Price Long-Run Equilibrium Price Actual Prices Market Shock This depicts a market with an increasing long-run equilibrium price that undergoes a negative demand shock or positive supply shock that temporarily reduces prices. Time Time-Series Diagram of Market Shocks. 3. Price Changes of Agricultural Products Cont... The Cobweb Model d) Market Adjustments ▪ Temporary price changes, then the price will soon jumps back to its long-run equilibrium price. This is not the case in most agricultural markets. ▪ At reality, the market must find long-term equilibrium again. ▪ Reason why market should adjust with P shocks are due to agricultural production experiencing production lags: the time lag between when production decisions are made and output is produced. ▪ For example: It takes about two years between the time a cow is bred and its offspring are ready for slaughter. This two-year production lag has important implications. It means that the beef we consume today is largely based on farmer decisions and market prices. two years earlier. Production pause for more pigs short, about a year, and chickens a little over a month. P self The footprint of beef price over years in the presence of a twoyear production lag Long-Run Supply 2009 PLR P2011 P2007 Long-Run Demand Q Assumptions of The Cobweb Model 1. Production delays 2. Producers make production decisions for the future based on current prices 3. Price Changes of Agricultural Products Cont... d) Market Adjustments P Long-Run Equilibrium Price P Long-Run Supply PLR P2007 Long-Run P Demand P Long-Run Supply P 2009 LR P2007 Q2009 QLR Long-Run Demand Q Long-Run Supply P2009 PLR P2011 P2007 The Cobweb Model in 2007 Q2009 Q2011 Long-Run Demand Q The Cobweb Model in 2009 Q2011 The Cobweb Model in 2011 Q 3. Price Changes of Agricultural Products Cont... d) Market Adjustments Time-Series Diagram with Market Shock and Market Adjustments Price Market Shock Time Series Diagram with Market Shock, Seasonality Market Adjustments, and a Declining Long-Run Equilibrium Price Price Long-Run Equilibrium Price Time Market Shock Long-Run Equilibrium Price Time ▪ Some market shocks are in the form of price spikes, these shocks are temporary and the market returns to its long-term equilibrium. ▪ At first, the price will adjust, reducing the long-term equilibrium. Then it will overshoot, then undershoot again and continue to change. Eventually, the market adjustment will diminish and the price will equal its long-run equilibrium. 3. Price Changes of Agricultural Products e) Price CyclesCont... Illustration of Livestock Price Cycles ▪ Agricultural prices, and especially livestock prices, are known for indicating price cycles beyond those explained by seasonality. Prices go up, then they go down, and the ups and downs are partly predictable. Livestock cycle is about 10 years Because of higher prices, animals are held from sale to increase breeding stock, reducing supplies and driving up prices further. More breeding stock allows them to expand hog production in the future. Price Large hog supplies due to the industry expansion caused prices to start falling. Turnaround exp ans ion ▪ tion trac con Turnaround Low hog supplies due to the industry contraction causes prices to start rising. Falling prices lead producers to reduce their breeding stock, leading to an industry contraction Time ThankYou!