Flashcards in Lecture 7: Marketing Costs and Price Spreads Deck (11):
Factors affecting farm prices
• Supply conditions
• Demand conditions
• Food marketing sector
Why do some people argue that farm prices are determined at farm level?
Prices are ‘set’ first, based on production costs, and
then marketing costs (margins) are added to arrive at the
--> reinforced if (and when) the retail prices causally follow farm prices
Why do some people argue that farm commodity buyers determine farm prices?
Processors, wholesalers and retailers “set” the food
product prices, and then farm prices are determined
--> emphasised by the fact that prices are more easily ‘discovered’ at points of product concentration (closer to consumers) in the marketing system
What is marketing margin?
• The marketing margin is the difference between what
the consumer pays and what the farmer receives
• In a sense, the marketing margin is the price of all
utilities added by food marketing firms
Marketing margin myths
1) A small margin denotes greater marketing efficiency
2) A large marketing margin reflects too many middlemen
3) A large margin causes low farm prices
4) Marketing margin denotes profits to be gained by farmers and consumers if middlemen are eliminated
Prices tend to co-move, although farm prices fluctuate
more than non-farm prices
– Reflects degree of control over output, storage, weather
Food and commodity price trends and co-movement
– Farm and retail food prices co-move, although degree of
association depends on the amount of processing involved
– Farm – retail food price impact is the greatest in the first
month of a shock
– Retail food prices respond to rising and falling farm prices
– Supermarket food prices reflect farm price changes better
than food-service (restaurants)
How can the volatility in price cycles be explained?
Some volatility can be explained by seasonal
(environmental) or cyclical (economic) patterns
– Seasonality in prices is somewhat obvious
– Cyclicality is more complicated, the Cobweb model is a
standard attempt to explain cyclical behaviour
Cyclical patterns arise from...
Lags between decisions and
biological production processes
– High (low) prices today stimulate more (less)
– More (less) supply tomorrow means lower (higher) prices
What is 'marketing bill'
The difference between total consumer expenditures for all domestically produced food products and what farmers receive for equivalent farm products