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 6
Price differences and spatial relationships 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
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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
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Weekly paprika prices in four consumer markets in Budapest (ft/kg)
Weekly boxed milk prices in three Hungarian regions
90 100 110 120 130 140
2005M01 2005M07 2006M01 2006M07 ALFOLD_D DUNANTUL_D EMAGY_D
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Monthly producer milk prices in Hungary (PPH) and in Poland (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)
.10 .15 .20 .25 .30 .35 .40
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
PPH PPP
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• 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
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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
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Determining intraregional price differences
• Depends on lowest cost means of transportation
• Depends on distance
• Perishability of goods may affect on spatial price differences
• E.g. TCmilk products<TCfluid milk
– Processors are located close to producers
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Price surfaces
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Location of boundary between areas
Spatial boundaries of market
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
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Introduction of world market Excess demand curve
Excess demand curve
1. M=D–S /first derivative P/
2. dM/dP=dD/dP–dS/dP /multiple P/M/
Spatial boundaries of market may change if
• Relative prices change
• TC changes Assume:
• PB=5→PB=6
• TC=0,4/100km
12 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. εm= εd*D/M- εs*S/M consequence: |εm | > | εd |
Introduction of world market Excess supply curve
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. εx= εs*S/X– εd*D/X Consequence: εx > εs
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The impact of drought in import countries
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Introduction of transport costs
Arbritage guarantees that Pi-Pe≤t, If trade does exist than Pi=Pe+t
Issues of spatial price determination
• Goods are not homogeneous
• The lack of information in some regions
• Time constraints of dynamic adjustments
• Trade agreements may limit free movement of goods
• Natural and artificial barriers between regions
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Conclusions
• The lack barriers and in the case of free movements of goods prices in different regions reflect to the changes of demand and supply and transfer costs
• In certain regions changes in demand and supply may affect on those regions’
price without direct connections
• Change of transfer costs affect on comparative advantage of producers in different regions
