Agriculture Reference
In-Depth Information
Physical Commodity
Price
Discovery
Producer
Farm Level
Local Elevator
FOB Origin
Chicago Board of
Trade (CBT)
Kansas City
Board of Trade
(KCBT)
FOB Destination
Subterminal Elevator
Terminal Elevator
FOB Origin
FOB Destination
Exporter
Speculator
Brokers
Brokers
Minneapolis Grain
Exchange
(MGEX)
FOB Destination
Domestic User
(Flour, feed, seed)
Fig. 23.1 Wheat marketing
system participants, price dis-
covery, and product fl ow.
Legend
Physical Commodity
Price
Production is at one end of the marketing system,
while domestic users are at the other end. Some
players in the marketing system are not involved
in the physical ownership or movement of wheat
but are instrumental in the price discovery
process. These players include commodity
exchange pit traders, brokers, and speculators.
Other players provide the services necessary to
assemble, store, and move wheat from the pro-
duction level to the fi nal user level. These players
include producers, elevator managers, merchan-
disers, and end users. Elevator managers may
reside at local elevators (fi rst handlers), subtermi-
nals (assembling wheat for large shipments), and
terminal elevators that sell to end users (such as
exporters or fl our millers). Merchandisers are
normally employed by elevators to buy and sell
wheat and to schedule transportation services, or
they may be employed by fl our mills to buy wheat
and sell fl our and wheat mids.
Producers use expected price to allocate land,
labor, capital, and management practices to
wheat production, thereby to produce the highest
expected profi t. Expected prices come from com-
modity exchange futures contract prices, which
may be used to estimate harvest prices.
Price discovery and determination
Since prices determine what is produced (whether
wheat or other cereal crops), what form (wheat
class; hard red winter versus hard white winter)
is produced, where it is delivered, and who owns
the product throughout the marketing system,
the fi rst discussion will be about price discovery.
Economic theory suggests that price is deter-
mined by supply and demand. This theory is
illustrated in Fig. 23.2, where the vertical axis
represents price per unit, and the horizontal axis
represents quantity per unit of time. As price
increases, the quantity demanded declines and
the quantity produced increases. The demand
curve (the straight line in this example) refl ects
how much wheat would be consumed (demanded)
at each price level. The supply curve refl ects how
much farmers would produce (supply) at each
price level. Price equilibrium is obtained where
the demand and supply curves intersect.
The real world is not as simple as the theoreti-
cal world. In the real world, both supply and
demand are unknown. At any point in time, no
one knows precisely how much wheat is in storage,
and no one knows how much wheat will be
 
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