Ag Instructor Vic Martin: Ag Markets, Prices, and Competition

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Great Bend Tribune
Published June 14, 2020

The six to ten day outlook (June 16 to 20) believe it or not indicates well-above normal temperatures and below normal precipitation for our area. This will speed up maturation in wheat and likely negatively affect yield and test weight in areas where wheat is behind the wheat in our area, especially Northwest Kansas. Looking out eight to fourteen days (June 18 to 24) indicates normal to a slight chance of above normal precipitation and above normal temperatures. The drought monitor indicates intensification of drought conditions, especially in Southwest part of the state.  Barton is still mostly in moderate drought with the eastern third abnormally dry. And the areas which had benefitted from rain are now back to abnormally dry and the area of moderate drought. With a fair amount of agricultural news revolving around the chicken and beef industry and price fixing on the producer and consumer ends, let’s discuss markets and their purpose a bit as we wait for wheat harvest.

Today let’s explore what a market is and what they are designed to do. This will by necessity be condensed and have to leave items out. We have a market economy which is defined as “an economic organization where prices determine how resources and goods are allocated. Consumers in a market economy base decisions on how much to buy on the price of goods.”  In a free market with perfect competition there are several guiding principles. A key principle is numerous buyers and sellers. This is key for two main reasons.  First, sellers and buyers are “price takers.” They can take or leave the price. Second, they are price takers since there are numerous buyers and sellers so neither can set the price.  A lack of either and the few can become “price makers.”  A price maker has some, but not absolute control, over the price which is where next week, we will discuss the current problems in the poultry and meat industry.  All of this revolves around to economic laws and their relationship to each other.

The “Law of Supply” states “The quantity of goods offered to a market varies directly with the price of the good, holding everything else constant.” In plain English, the amount a seller is willing to sell increases as the price they are offered increases, and vice-versa. The “Law of Demand” states “The quantity of a good demanded varies inversely with the price of the good, holding everything else constant.” Again, in plain English, the amount a buyer is willing to purchase goes down as price goes up and vice-versa. Putting these together, both buyer and seller are looking for the same thing – to maximize their satisfaction or to do the best they can with limited resources. When this happens, equilibrium is reached – both buyer and seller are doing the best they can and there is no reason for a price to change until something happens.

We don’t have space here but it involves how surpluses and shortages (where things move away from equilibrium) eventually cause equilibrium to be reestablished. An economist often says the cure for low prices is more low prices and the cure for high prices is more high prices. We will discuss this briefly next week and how concentration in the meat and poultry industry upsets these concepts. 


Part II
Published June 20, 2020

The six to ten day outlook (June 23 to 27) believe it or not indicates average to below normal temperatures and above average precipitation for our area. Looking out eight to fourteen days (June 25 to July 1) indicates normal precipitation and above normal temperatures. The drought monitor indicates intensification of drought conditions to Extreme Drought, especially in Southwest part of the state. Barton is still mostly in moderate drought with a sliver of the east abnormally dry. The dry pattern has re-extended through central and into parts of eastern Kansas.  The heat and wind have greatly accelerated wheat maturation and depending on the unsettled weather pattern, harvest should progress rapidly. Today let’s finish the discussion of what is going on in the meat and poultry industry that has been in the headlines.  Part I from last week would be helpful as it explains perfect competition, the Laws of Supply and Demand, and the purpose of markets/auctions.

A quick reminder first, the purpose of a market/auction is to establish the price of a good. Sellers sell more as the price goes up and buyers buy more as the price goes down. The goal of a market/auction is determine an equilibrium price where both buyer and seller are doing the best they can with limited resources. This relies on the four rules of perfect competition, i.e. free markets.  These are in an ideal situation and we all realize in reality it’s not exactly like this.

  1. Numerous buyers and sellers – so many that they are price takers not price makers. They can take or leave a price but the volume of buyers and sellers is so large, an individual or small group can’t control the price.
  2. Homogeneous product – you can’t distinguish between producer A and producer Bs output.
  3. Freedom of entry and exit – there are no barriers to getting into or out of producing a given item or service.
  4. Perfect information – there are no secrets.  You are price takers so there is no value in keeping secrets.  All who want it, have access to all necessary information.

The one to focus on in our discussion is number 1 – numerous buyers and sellers. There are charges in the poultry industry of price fixing among the major chicken processors. Investigations are purportedly underway in the beef sector for the same thing and while the grumbling among producers isn’t new, what happened with the Covid-19 pandemic brought things to a head. As of now for beef it is simply am investigation. So what has happened?

Consolidation is what has happened in the processing industry. We still have numerous producers/sellers but the number of buyers/processors has concentrated into a handful in both industries as well as the pork industry. Fewer buyers for a perishable commodity that producers can only keep for so long are more at the mercy of processors for several reasons. And while there are small buyers, processors and individuals; these are dwarfed by the sheer volume of livestock out there. There are still markets/auctions for pork and beef but essentially none for poultry. And since a very few packers control the market, they can do more to set the price. In fact in the poultry and pork industry, many are contracted for before they are even born or hatched. What caused the indictments for the chicken industry was that several processors colluded to set prices.

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