AGRICULTURAL PRICES
AND MARKETS
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
AGRICULTURAL PRICES AND MARKETS
Author: Imre Fertő
Supervised by Imre Fertő June 2011
ELTE Faculty of Social Sciences, Department of Economics
AGRICULTURAL PRICES AND MARKETS
Week 6
Price differences and spatial relationships
Imre Fertő
Literature
• Theory:
– Tomek, W. G.–Robinson, K. (2003): Agricultural Product Prices. Cornell University Press, Chapter 9
– Hudson (2007): Agricultural Markets and Prices. Blackwell, Chapter 7
– Ferris. J. N. (1997): Agricultural Prices and Commodity Market Analysis. McGraw–Hill, Chapter 14
– Applications:
– Lajos Zoltán Bakucs–Imre Fertő (2008): Horizontal Integration on the Hungarian Milk Market . Agricultural Economics and Transition: “What was expected, what we observed, the
lessons learned. 342–352 Studies on the Agricultural and Food Sector in Central and Eastern Europe Vol. 44. Leibniz Institut für Agrarentwicklung in Mittel and Osteurope, Halle
Outline
• Intramarket price structures
• Interregional market relationships
• Market boundaries
• Spatial equilibrium models
Intramarket price structures
• Prices are changing between any two places
– Within city
– Within country
– Between countries
• because:
– Transport costs
– Differences in demand and supply
– Natural and artificial barriers
Weekly paprika prices in four consumer markets in Budapest (ft/kg)
0 200 400 600 800 1000 1200
2008/1 2008/33 2009/15 2009/47
bp fehérvári bp fény bp fővám bp lehel
Weekly boxed milk prices in three Hungarian regions
90 100 110 120 130 140
2005M01 2005M07 2006M01 2006M07 ALFOLD_D DUNANTUL_D EMAGY_D
Monthly producer milk prices in Hungary (PPH) and in Poland (PPP)
.10 .15 .20 .25 .30 .35 .40
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
PPH PPP
Law of one price
• Law of one price:
– If perfect competition does exist, there are not
externalities trade barriers and transport costs, then law of one price holds, because arbitrage ensures that price of a good is the same between spatial markets (city, region country)
– P1=P2+TC
• Where TC depicts the transfer costs
• TC=f (fixed costs, distance, quantity)
• TC may be relative large for agricultural commodities because
– Perishability – Bulk nature
Determining intraregional price structures
• Assume:
– Perfect competition, – Homogeneous goods – No trade barriers
– Traders with good information
• No trade between spatial markets
– Interregional price structures can not be determined by only TC
• One central market: all surplus producing areas delivery their products to the market
– P=Pcentral-TCi, where i is surplus producing market
• More surplus producing areas, more consumer markets – Price determination is more complex
More surplus producer areas, more consumer markets
A=300
B=330 X=290
Y=310
30
50 20
40 10
A, B: consumer markets; X, Y: surplues producing regions; _ _ _=TC
More surplus producer areas, more consumer markets
• Lowest cost producing area determines the market price (X) in surplus regions
• Producers delivery their product where they receive the highest net income
• In surplus producing areas the price is
equal to the price in deficit regions minus
transfer costs to there
Determining intraregional price differences
• Depends on lowest cost means of
transportation
• Depends on distance
trucks
rail ship
distance TC
Determining intraregional price differences
• Perishability of goods may affect on spatial price differences
• E.g. TCmilk products<TCfluid milk
– Processors are located close to producers
P
distance
fluid milk
cream butter
Pfluid milk
Pcream Pbutter
fluid milk cream
butter
Price surfaces
50 40 30 20 10
100 200 300 400
Km distance from market
Producer prices 50
10
400 P
T P=50-0,1km
Price surfaces
10 20 30 40 50
100 200 300 400
Km distance from market
Producer prices 50
10
400 P
T P=10+0,1km
Location of boundary between areas
6
5,5
5 4,5
4 3,5
5 4,5
4 3,5
PA–TA=PB–TB
A
B
Spatial boundaries of market
A B
6
4
2
5
3
400 600
Two markets: A; B Distance: 600 km PA=6
PB=5
TC=0,5/100 km
Y=km distance from A 6-Y=km distance from B PA=6–0,5Y
PB=5–0,5(6–Y) 6–0,5Y=5-0,5(6–Y) 4=Y
A→400 km; B→200 km
Spatial boundaries of market
A B
6
4
2
5
3
400 600
Spatial boundaries of market may change if
•Relative prices change
•TC changes Assume:
•PB=5→PB=6
•TC=0,4/100km 3
6
267 4,67
Introduction of world market Excess demand curve
Pw
Qp Qc
ED
Qt
Excess demand curve
1. M=D–S /first derivative P/
2. dM/dP=dD/dP–dS/dP /multiple P/M/
3. dM/dP* P/M =dD/dP* P/M -dS/dP *P/M/multiple D/D and S/S/
4. dM/dP* P/M =dD/dP* P/M*D/D –dS/dP *P/M*S/S 5. m= d*D/M- s*S/M consequence: |m | > | d |
Introduction of world market Excess supply curve
Pw
Qp Qc
ES
Qt
Excess supply curve
1. X=S–D / first derivative P/
2. dX/dP=dS/dP–dD/dP /multiple P/X/
3. dX/dP* P/X =dS/dP* P/X–dD/dP *P/X/ multiple D/D and S/S/
4. dX/dP* P/X =dS/dP* P/X*S/S–dD/dP *P/X*D/D 5. x= s*S/X– d*D/X Consequence: x > s
The impact of drought in import
countries
Introduction of transport costs
• Arbritage guarantees that Pi-Pet,
• If trade does exist than Pi=Pe+t
t t
