Agriculture Reference
In-Depth Information
Chapter 23
US Wheat Marketing System and
Price Discovery
Kim B. Anderson and B. Wade Brorsen
SUMMARY
are used by pit traders in the commodity
exchanges to determine futures contract
prices. Owners of wheat may use wheat
futures contract prices to determine
whether to sell wheat or hedge wheat for
future delivery.
(1) The wheat marketing system and price
discovery process is a complex system with
many players. An effi cient and mostly
transparent system has evolved. A price
change at any point in the system creates
price changes at all other points. The
system is like a spider web where each con-
necting point depends on all other con-
necting points.
(3)
Cash prices originate with the end users.
Prices paid for wheat between end users
and producers are determined by subtract-
ing transportation and handling costs and
profi t margins for each handler.
(2)
A futures contract price is used as the base
price for negotiating a price between buyers
and sellers for the sale and purchase of
wheat. Supply and demand expectations
(4)
Competition between sellers and between
buyers, and the transparency of the futures
market, ensure that no market player has a
signifi cant advantage over another player.
INTRODUCTION
This chapter describes the US wheat market-
ing system. How prices determine the form, the
place, the time, and the player who holds posses-
sion of a commodity will be addressed. Discus-
sion will also focus on how the wheat marketing
system facilitates the simultaneous discovery of
price at each level, and how prices determine the
allocation of resources to produce the commodity
that is most desired by consumers. Adam Smith's
invisible hand involves a complex system of price
discovery and product fl ow from the point of
initial production to the point of consumption.
In the topic
An Inquiry into the Nature and Cause
of the Wealth of Nations
, Adam Smith (1776)
introduces the economic principle called “the
invisible hand.” Smith's economic principle stip-
ulates that entrepreneurs use resources under
their control to produce the commodity that will
maximize profi t. Relating this to a free economy,
entrepreneurs react only to their needs (profi t)
and are not concerned with the good of society as
a whole. However, consumer demand alters com-
modity price relationships such that the good of
society is met. The result is that, by reacting to
prices and maximizing profi t, entrepreneurs max-
imize consumer satisfaction. Price is the invisible
hand that directs resource allocation for commod-
ity production and distribution.
MARKETING SYSTEM
As shown in Fig. 23.1, many players are required
to make the wheat marketing system function.
