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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Standardization grading market information and contracts

Standardization, Grading, Market Information, and Contracts

AG BM 102


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


Standardization grading market information and 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

  • 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

  • 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

  • subjective

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

  • deterioration

  • honesty

  • definition


Example beef grades

Example – beef grades

  • 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

  • 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

  • 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

  • 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

  • Grades & standards

  • Cash markets

  • Futures markets

  • Role of government


Market news

Market News

  • 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

  • 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

  • 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?

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

  • Two end points – independence & ownership

  • In between some agreement to work together

  • These agreements are contracts


Some forms of contracting

Some forms of contracting

  • 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

  • more management decisions to the grower

  • the processor controls

    • variety

    • planting schedule

    • harvesting schedule

    • spraying restrictions


Standardization grading market information and contracts

Hogs

  • Driven by technological advances that allow larger-scale production

  • Require greater coordination between units and better management

  • Similar to poultry


Other contracts

Other Contracts

  • 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?

  • 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?

  • Advantages to grower

    • guaranteed market

    • price known beforehand

    • technical help

    • financing

    • more bargaining power


Things to agree on

Things to agree on

  • 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?

  • easy for corn

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

  • poultry - bargaining power important here

  • hogs – bargaining power


Concluding comments

Concluding comments

  • 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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