Farm and Ranch Business
Management
Chapter 7
By Larry Stine
What is Marketing?
• All the economic activities involved in
preparing and positioning the product for
the final consumer
What is Utility?
• Customer satisfaction
• Consumer needs
Form Utility
• In what form is a product available
– Whole chicken
– Chicken parts
– Cooked chicken
• Each step adds value
Place Utility
• Where is a product available
• Convenience
Time Utility
• When is a product available
What percentage of the final product
does the producer receive?
• Dairy farmer = 34% for milk
• Grain products = 9%
What is the Law of Demand?
• At any point in time, the rational consumer will
take more only at a lower price.
• Ex: How many hamburgers would you buy at $2?
• How many hamburgers would you buy at $1?
• How many hamburgers would you buy at 50
cents?
• How many hamburgers would you buy at 25
cents?
Law of Demand
Price Demand
Quantity
What is the Law of Supply?
• Producers are willing to offer more only at a
higher price
• Ex: How many acres of wheat will you
plant if wheat is worth $2 / bu.?
• How many acres of wheat will you plant if
wheat is worth $4 / bu.?
• How many acres of wheat will you plant if
wheat is worth $8 / bu.?
Law of Supply
Supply
Price
Quantity
Law of Supply & Demand
Supply
Price
Demand
Quantity
What is Equilibrium Price?
• Price is determined where supply and
demand curves intersect
Law of Supply & Demand
Supply
Price
Demand
Quantity
What is Price Discovery?
• The process of searching for the
Equilibrium Price
• Many things involved that can alter supply
and demand
– Government incentives
– Weather
– World Trade
– Surplus
How does change in supply affect
price, if demand stays the same?
Supply 1
Price Supply 2
Demand
Quantity
Economies of Size
• Within Limits, larger businesses (farms) can
produce at a cheaper cost per unit of
production
• Eventually, as business becomes too large,
costs increase
Futures Contract
• Futures Contract = a contract calling for
delivery of a carefully described commodity
at some later time
• Not intended for actual delivery of
commodity, but price discovery for later
period
• Method of transferring risk of cash market
of producer to speculator in futures market
Basis
• The difference between cash market and
futures market
• Cash - Futures = Basis
– Usually negative
Forward Pricing
• Forward Contract = a contract which locks
in a price for later delivery
• Forward Price = Futures Price + Basis
– Ex: Futures Contract = $3.10
– Basis = -20 cents
– Forward Price = $3.10-.20 = $2.90
What are Put Options?
• The Right to sell futures contracts at specific
prices.
• Strike Prices offered in 10 cent intervals for corn
• Want to buy a Put Option for $3.10 corn
• Basis = -.20 Premium = .12
• Price Floor = Strike Price + Basis - Premium
• Price Floor = $3.10 - .20 - .12 = $2.78
What are Put Options?
• What if price goes up?
• Futures = $3.50 Cash = $3.30
• Net Price = Cash Price + Option Value -
Premium
• Net Price = $3.30 + 0 - .12 = $3.18
• What has the Put Option accomplished?
What are Put Options?
• What if the price goes down?
• Futures = $2.50 Cash = $2.70
• Net Price = Cash Price + Option Value -
Premium
• Net Price = $2.70 + .20 - .12 = $2.78
• What has the Put Option accomplished?