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Chapter 5. PRICE DISCOVERY. By : Nur Baladina, SP. MP. INTRODUCTION. PRICE DETERMINATION: the process by which the broad forces of supply and demand establish a general, market-clearing, equilibrium price for a commodity.

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Chapter 5 price discovery

Chapter 5.PRICE DISCOVERY

By : Nur Baladina, SP. MP.


Introduction
INTRODUCTION

  • PRICE DETERMINATION: the process by which the broad forces of supply and demand establish a general, market-clearing, equilibrium price for a commodity.

  • PRICE DISCOVERY: the process by which buyers and sellers arrive at specific price for a given lot of produce in a given location. The equilibrium price target must be “discovered” and applied to each transaction in the marketplaces.


Five systems of price discovery
FIVE SYSTEMS OF PRICE DISCOVERY

Five systems of price discovery for farm products have been identified:

1. Individual, decentralized negotiation

2. Organized, central market trading

3. Formula Pricing

4. Bargained Prices

5. Administered Prices


Individual decentralized negotiations
INDIVIDUAL, DECENTRALIZED NEGOTIATIONS

  • Each farmer bargains separately with buyers of farm products until a price is established. Private treaty negotiations are quite common in agriculture.

  • The resulting fairness of prices depends on the information, trading skills, and relative bargaining power of buyers and sellers.



Organized central markets
ORGANIZED, CENTRAL MARKETS widely for different transactions.

  • The central markets shift the locus of price discovery from the farm gate to a central marketplace. All buyers and sellers and their supplies and demand are represented in the central market.

  • These markets generate considerably more information than private treaty markets and probably also reduce some costs of price discovery.

  • Examples: Terminal markets, auctions markets


Formula pricing systems
FORMULA PRICING SYSTEMS widely for different transactions.

  • Formula pricing system evolved in attemps to secure the benefits of central market price discovery without physically routing all produce through central markets.

  • Egg producers for example, frequently are paid a formula price by the government. These prices are adjusted, again by formula, for transport costs and quality differences.



Bargained prices
BARGAINED PRICES widely for different transactions.

  • Bargaining implies collective pricing on the part of farmers. The collective bargaining process used in labor is frequently cited as the model for farmers to follow in order to discover farm prices.

  • There are differences in labor and farm products.


Administered pricing systems
ADMINISTERED PRICING SYSTEMS widely for different transactions.

  • The government becomes a third party in the price discovery process.

  • Price supports, price ceilings, and supply control programs are the techniques of administered pricing that have been used for a number of agricultural products.



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