AGRICULTURAL PRICES AND MARKETS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
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Author: Imre Fertő Supervised by Imre Fertő
June 2011
Week 5
Marketing margin Literature
• Tomek, W. G.–Robinson, K. (2003): Agricultural Product Prices. Cornell University Press, Chapter 6
• Hudson (2007): Agricultural Markets and Prices. Blacwell, Chapter 4
• Ferris. J. N. (1997): Agricultural Prices and Commodity Market Analysis. McGraw–
Hill, Chapter 5
• Schrimper, R. A. (1995): Subtleties Associated With Derived Demand Relationships. Agricultural and Resource Economic Review, October, 241–246
• Canning, P. (2011): A Revised and Expanded Food Dollar Series. A Better Understanding of Our Food Costs. USDA ERS, ERR. No. 114
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Theory of marketing margin
• Approaches of marketing margin
• Empirical measurements of marketing margin
• Types and changes of marketing margin
• Price elasticities and marketing margin
• Market structures and marketing margin
Approaches of marketing margin
• Producers and consumers do not meet with each other directly, marketing system is between them
• Marketing margin (MM)
– Difference between the price paid by consumers and that obtained by the producers
– The price of all marketing services that occurs between the farm gate and the consumers (transport costs, packages costs, wages, profit etc.)
• MM can be described – in per cent – in absolute value
• MM
– Refers only to the price difference
– But makes no statement about quantities
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Marketing margin
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Empirical measures of marketing margin
• Marketing bill:
– This is an estimate of total marketing costs of all domestically produced farm food purchased by civilians in the domestic country
– Several ways of investigating the marketing bill
• Costs components: labour, transport, rents, profits, etc.
• Institutional costs: wholesaler, retailer, processor, etc.
• Individual commodity costs: meat, fruit, vegetables, etc.
• Farm-food market basket:
– This is a measure of average costs of fixed quantity of farm products – There are four components to the Market Basket series
• Retail price
• Farm value
• Farm-retail price spread
• Farmers share of the consumer or retail dollar
• Farm-retail price spread
– Farmers share of the consumer or retail dollar – It should measured by equivalent value
– Example
• For steers, 2,5 kg of live weight yield 1 kg of retail beef cuts
• 2000 retail beef price = €8,40/kg average all cuts
• 2000 steer price = €1,20/kg live weight
• 2000 farm-retail price spread = €5,40/kg retail cut
6 (= 8,40 – 2,5*1,20)
• Stylized fact:
– The share of producers in consumer dollar decreasing over time
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Interpretation of changing farmers share
• Is a large farm-retail price spread necessarily bad?
– Shift in consumption patterns towards food with higher value added and more food eaten-away-from-home (marketing bill)
– Factor productivity increases more rapidly in agriculture than in manufacturing, let alone services
– Could be due to growing market power
– Latter suspicion fuelled when reductions in farm prices are not passed through in lower retail prices
Real food prices are declining….
Source: Agri-Aware website
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Changes in MM
• Derived D and S shifters include factors associated marketing services – Transport costs
– Processing costs – Processing technology – Assembly costs
• Thus change in MM reflected as derived D and S shifters
• By how much?
– ∆MM=Pr-Pf
• Change in MM caused by changes in derived S and D, NOT by changes in primary S and D
• Why?
• Consider primary D and S shifters?
• How does change in marketing costs affect primary D and primary S?
• Primary D – Income – Population
– Price other goods – Tastes
• Primary S
– Price/profit competing products
– Technology – Input costs Weather
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E.g. The growth of transport costs
Effect of changing MM
• Incidence of transportation costs: farmers and consumers
• Depends on
– Relative own-price elasticity of S and D
• What happens if D is more elastic than S
• What happens if S is more elastic than D
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Perfectly inelastic D
Perfectly inelastic S
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Types of MM
• Fixed percentage MM
– MM=aPr, where 0≤a ≤1
– Ed=Er
– Unlikely entire margin would be like this
• Proof:
– If Pr=kPf, where k is a constant and Qr=Qf – Er=dQ/dkPf*kPf/Q=dQ/dPf*Pf/Q=Ed
• Constant MM
– MM=c, where c≥0 and constant – Paralel D curves
– Ed=Er(Pd/Pr) where,
• Ed: derived demand (farm) elasticity
• Er: retail demand elasticity Pd: derived demand (farm) price Pr: retail price
• Proof:
– For any ∆Q,
• ∆Pr=∆Pf andQr=Qf
• Ed/Er=dQ/dPr*Pr/Q*dPf/d Q*Q/Pf=Pd/Pr
• Properties
– Ha Pd/Pr<, |Ed|>Er
– Dd is more inelastic than Dp
Larger margins between d and r mean larger differences in prices elasticities between d and r
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Percentage MM
Marketing firm high fix costs + economies of scale
Types of MM
• Combination of absolute and percent MM:
– MM linear combination of constant absolute amount (c) and constant per cent of retail price (a)
– MM=c+aPr, where c>0 and 0≤a ≤1
– Unit margin decreases with lower prices as quantity marketed increases – Ed=Er(1-(c/(1-a)*Pr)
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Combined MM
Price elasticities and incidence of MM
• Rf=1/(1+(Pr*Es)/Pf*|Ed|)), where
– Rf= total price changes at the farm level
• Proof:
– If ∆MM= ∆Pr– ∆Pf,then % changes at the farm level – But |Ed|=dQ/dPr*Pr/Q and Es=dQ/dPf*Pf/Q
– Thus dPr=dQ/Ed*Pr/Q and dPf=dQ/Es*Pf/Q – Thus Rf=dQ/Es*Pf/Q/((dQ/Ed*Pr/Q)+dQ/Es*Pf/Q))
– dQ/Q simplify and * Es/Pf – Rf=1/(1+(Pr*Es)/Pf*|Ed|))
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• Rf=1/(1+(Pr*Es)/Pf*|Ed|)), if
– Es=0, then Rf=1, producers pay entirely the changes of MM
– Ed=0, then Rf→0, consumers pay entirely the changes of MM Es= |Ed|, Rf= Pf/(Pf+Pr)
– Es>|Ed|, Rf<Pf/(Pf+Pr) – Es<|Ed|, Rf>Pf/(Pf+Pr)
Joint products
• X: basic commodity
• X1 and X2: joint products
• W1 and w2: fixed yields per unit X
• X1=w1X, X2=w2X
• P1 and P2 unit prices of joint products
• Ex=(P1w1+P2w2)/(1/E1(P1w1)+(1/E2(P1w2)
– If P1w1 or P2w2=0, then Ex=E1 or E2
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MM with variable ratio
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MM and imperfect competition
Conclusions
• Marketing margin can be defined by the price differences between two market levels (producer and consumer)
• Theoretical models suggest that marketing margin depends on:
• Changes in factor prices
• Efficiency in marketing sector
• Changes in supply of agricultural products
• Changes in derived demand
• The impacts of market power in processing and retail sector on marketing margin are not unambiguous
