Standardization grading market information and contracts
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Standardization, Grading, Market Information, and Contracts. AG BM 102. Introduction. Livestock judging Watermelons Used cars Good decisions require good information Two problems – source of information & what does it mean Three interrelated themes Standardization and Grading

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Presentation Transcript

Introduction
Introduction

  • Livestock judging

  • Watermelons

  • Used cars

  • Good decisions require good information

  • Two problems – source of information & what does it mean

  • Three interrelated themes

  • Standardization and Grading

  • Market Information

  • Contracts


Grading- the subdivision of a commodity into classes, each of which has distinct acceptability to a group of buyer


Benefits of a grading system
Benefits of a grading system of which has distinct acceptability to a group of buyer

  • lower transaction costs

  • improved price signal

  • lower risk

  • allows common storage

  • increases recognition of value differences


Benefits of a grading system1
Benefits of a grading system of which has distinct acceptability to a group of buyer

  • allocates product according to demand - juice vs fresh

  • better market news

  • allows futures trading & other forward contracts

  • broadens markets - distant markets - buffalo


Problems with grading systems
Problems with grading systems of which has distinct acceptability to a group of buyer

  • subjective

  • may ignore important differences – historically, protein in milk & cheese production

  • deterioration

  • honesty

  • definition


Example beef grades
Example – beef grades of which has distinct acceptability to a group of buyer

  • Eight quality grades for beef

  • The criterion is the amount of marbling – the higher the fat content of the meat, the higher the grade

  • But what if consumers want leaner meat?


Example corn grades
Example – corn grades of which has distinct acceptability to a group of buyer

  • 5 grades based on test weight, moisture content, broken corn and foreign material, and damaged kernels

  • Grade may affect storability

  • But feeding value is largely unrelated to these grades since this is determined by total digestible nutrients and crude protein


Bulgarian tomato plant
Bulgarian Tomato Plant of which has distinct acceptability to a group of buyer

  • New owners bought old government tomato cannery

  • Wanted to contract with farmers – most of whom are newly independent farmers

  • What goes in contract?

  • Price, Quantity, chemicals, variety

  • Did not include quality


Bulgarian tomato plant1
Bulgarian Tomato Plant of which has distinct acceptability to a group of buyer

  • Worried farmers would believe factory downgraded quality to pay farmers less

  • A legitimate concern

  • Incentive to cheat is high

  • But without quality minimums who can produce high quality tomato products?

  • Why spend more to produce high quality when you aren’t paid for it?


Market information
Market Information of which has distinct acceptability to a group of buyer

  • Grades & standards

  • Cash markets

  • Futures markets

  • Role of government


Market news
Market News of which has distinct acceptability to a group of buyer

  • Public markets distribute market news to broaden market

  • Lancaster Farming prints it because readers want it

  • Limit to what market news the private sector will provide

  • Newspapers don’t publish minor markets

  • Internet offsets this somewhat


Private transactions
Private transactions of which has distinct acceptability to a group of buyer

  • Most cattle sales are private transactions

  • Not in interest of packer to distribute prices

  • Congress is trying to require reporting

  • Minor commodities a problem

    • Especially a problem because it is difficult to even find a market

    • Goats, ducks, rabbits, emus, millet


The value of information
The value of information of which has distinct acceptability to a group of buyer

  • Information is key to good decisions

  • Need to know what market is paying

  • Need to be able to interpret price

  • If you have to see the product, news isn’t as valuable

  • Two extremes – wheat futures markets – horses


What is a contract
What is a contract? of which has distinct acceptability to a group of buyer

A contract is a legally binding agreement between two parties to do something, e.g., to exchange a product with specific characteristics at an agreed price


Introduction1
Introduction of which has distinct acceptability to a group of buyer

  • Two end points – independence & ownership

  • In between some agreement to work together

  • These agreements are contracts


Some forms of contracting
Some forms of contracting of which has distinct acceptability to a group of buyer

  • Poultry

    • Grower provides

      • housing,

      • labor

      • a few other things

    • Integrator

      • owns the birds,

      • provides the feed

      • makes most of the management decisions.


Fruit and vegetables
Fruit and Vegetables of which has distinct acceptability to a group of buyer

  • more management decisions to the grower

  • the processor controls

    • variety

    • planting schedule

    • harvesting schedule

    • spraying restrictions


Hogs of which has distinct acceptability to a group of buyer

  • Driven by technological advances that allow larger-scale production

  • Require greater coordination between units and better management

  • Similar to poultry


Other contracts
Other Contracts of which has distinct acceptability to a group of buyer

  • Cooperatives - try offset market power and help achieve goals beyond individuals

    • SW Vegetables Cooperative

    • Tuscarrora Organic Growers

  • High-oil corn, etc. -used to ensure supply

  • Corn - fix price in advance

  • Dairy - forward contract on price


Why contracts
Why contracts? of which has distinct acceptability to a group of buyer

  • Advantages to processor

    • coordination of flow of inputs

    • More control of quality

    • food safety - pesticides

    • costs - adoption of technology - advances in genetics

    • adequate supply

    • can lock in margins with input and output contracts

    • economies of scale

    • bargaining power


Why contracts1
Why Contracts? of which has distinct acceptability to a group of buyer

  • Advantages to grower

    • guaranteed market

    • price known beforehand

    • technical help

    • financing

    • more bargaining power


Things to agree on
Things to agree on of which has distinct acceptability to a group of buyer

  • quality

  • quantity

  • price

  • delivery time and conditions.

  • management practices

  • system of penalties and premiums for below or above the specified quality

  • What happens if crop fails?


How do you find the price
How do you find the price? of which has distinct acceptability to a group of buyer

  • easy for corn

  • green beans - what do you need to get growers?

  • poultry - bargaining power important here

  • hogs – bargaining power


Concluding comments
Concluding comments of which has distinct acceptability to a group of buyer

  • Quality is not automatic

  • Describing product makes transactions work better

  • Grades make market news & contracts possible

  • Some are processor driven - vegetables, poultry

  • Some are customer driven - some dairy contracts – Pizza Hut

  • Some are producer driven - feed contracts, many dairy contracts


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