Economics of Agricultural Markets

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9780137757763: Economics of Agricultural Markets

Agricultural Marketing examines the principles and practices of economic analysis to cultivate an understanding of how agricultural and food markets operate. After an introduction that discusses some of the most frequently encountered economic measurements of market status, a basic framework is presented for the analysis of economic activities that link agricultural production with food consumption. Coverage then explores both the spatial and temporal dimensions of agricultural markets. For those interested in international agricultural and food marketing, economics, and production.

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From the Inside Flap:

PREFACE

Economics of Agricultural Markets is about world agricultural and food markets. It includes useful principles and concepts of economic analysis that facilitate understanding how markets for agricultural and food products operate. Many of the analytical concepts and processes are equally applicable for understanding how markets for products other than agricultural and food products work, however the latter have some distinct characteristics worthy of special attention. For example, all of the world's 6 billion plus people are affected daily by how well markets provide a linkage between the production of agricultural products and food consumption. The use of agricultural and food products to illustrate economic principles and concepts as much as possible is appropriate because the kind of approach to market analysis contained in this book is most frequently offered in agricultural colleges.

This book has evolved over several years from a set of notes used for teaching an upper-level undergraduate course. The primary purpose of the course is to help students develop analytical tools for thinking about the overall business environment in which they will operate in some fashion for the rest of their lives. Even if students do not intend to make their livelihood from the sale of agricultural or food products, they will definitely be spending some of their income in these markets. Hopefully, the kind of skills and knowledge provided by the material in this book will equip students to better understand opportunities and challenges that those markets will provide. Economic history clearly indicates that markets are very dynamic institutions and are likely to continue to change.

Getting individuals to think about the environment in which they will be making future buying and selling decisions is a useful starting point for identifying all kinds of marketing issues. All too often the emphasis of marketing textbooks is on selling from an individual firm's perspective and adequate attention is not given to the overall environment in which transactions occur, including purchasing decisions. Thus the focus of this book is more on markets than on marketing; emphasizing the effects of group behavior more so than how individual transactions can be made. Consequently, this book is intended to complement other courses that concentrate primarily on an individual firm's marketing strategies and decisions.

One of the goals of the book is to help students understand the mysterious and marvelous nature of how agricultural markets influence the variety of food and other agricultural products produced and transformed into many alternative forms on a daily basis for consumers around the world. Also, hopefully, students will obtain an increased appreciation for the important role that agricultural markets play in the world economy.

The book has four major parts. Part I of the book contains three chapters. Chapter 1 describes what the subject matter of agricultural markets is all about. Chapter 2 describes several economic measures frequently encountered in discussions about agricultural and food markets. Finally, Chapter 3 contains a discussion of how different kinds of index numbers are computed and used to summarize and analyze changes in prices for different groups of products.

Part II contains five chapters designed to build a basic framework for thinking about how production and consumption activities are linked together. Chapter 4 describes key analytical concepts underlying the demand for products while Chapter 5 focuses on supply concepts. Chapter 6 combines the concepts of the previous two chapters to show how changes in prices and quantities of products at the farm and retail levels are linked together even though there is considerable modification in the form of products as well as spatial and temporal separation between the production and consumption activities. This framework is developed initially assuming a competitive market structure, but modifications associated with alternative market structures are considered in Chapter 7. Finally, Chapter 8 discusses the variety of ways that buyers and sellers discover a mutually satisfactory price at which they are willing to exchange ownership of commodities.

Part III consists of four chapters that examine the spatial dimensions of agricultural markets. Chapter 9 introduces the importance of the spatial dimension that arises from the geographical distribution of agricultural producers and consumers, and the distances that products are moved between initial production and consumption. Chapter 10 introduces a two-region trading model to illustrate how interregional trading affects producers and consumers. Chapters 11 and 12 extend the basic ideas of interregional trade to international trade. These two chapters include some of the additional complexities of international trade and show how the two-region interregional trade model can be adapted to analyze the effects of adjustments in exchange rates and governmental policies on the flow of commodities between countries.

Part IV concentrates on the temporal dimensions of agricultural markets. Chapter 13 considers explicit and implicit storage decisions associated with agricultural and food products because of the amount of time that occurs between production and consumption. The two-region model introduced in Part III is modified to illustrate how storage decisions depend on current and future market conditions. The final three chapters of the book are devoted to a discussion of futures and options markets that have become increasingly important to buyers and sellers of agricultural and food products. Chapters 14 and 15 are devoted to futures markets and Chapter 16 considers options markets. Chapter 14 introduces some specialized vocabulary and describes some of the basic mechanics of how futures markets operate. Chapter 15 shows how futures markets can be used for hedging purposes or to target price anticipated production of commodities. After students have an understanding of futures markets and how they can be used, the similarities and differences between futures and options markets and their uses are handled in Chapter 16.

In developing this book for teaching purposes, it has been assumed that students would either have had one basic economics course or at least be familiar with some basic economic vocabulary. Basic demand and supply concepts are introduced in Part II of the book assuming little carryover from previous coursework. Demand and supply concepts are introduced as abstract representations of producers' and consumers' behavior without developing all of the underlying theoretical principles of maximization behavior usually contained in an intermediate microeconomics course. The only mathematical tools required for certain parts of the book are a basic understanding of algebra and geometry, since no calculus is used. Diagrams are used to graphically represent economic relationships that can also be expressed algebraically, to determine the unknown values for quantities and prices of commodities.

I have found that following the chapters in the order presented in the book has been a good process for helping students develop an analytical framework before concentrating on spatial and temporal aspects of markets. Chapter 8 can be skipped without much loss in continuity if there is not enough time for all the material in the book. Some instructors also may decide to skip Chapter 3 if there are other courses at their institution that are specifically designed to expose students to index numbers. It is important, however, for students to be able to distinguish between nominal and real price changes in doing market analysis, and to feel comfortable using price indices.

In addition to reading the material in the various chapters, students need to be given ample homework assignments that provide opportunities to practice using the concepts and tools introduced in each of the chapters. In addition to a set of questions included at the end of each chapter, an Instructor's Manual contains some suggested homework exercises.

Finally, I want to express appreciation to many individuals who have contributed in numerous ways to the final product, but are in no way responsible for any shortcomings or remaining errors. First, a debt of gratitude is owed to the many students who have been guinea pigs for earlier versions of the chapters in this book and who made suggestions for improvements in exposition. Valuable suggestions have also been received from several reviewers including: James Beierlein, Penn State University; Michael Boland, Kansas State University; Donald Larson, Ohio State University; and Gary White, Dickinson State University. Thank you. Also, I want to express appreciation for the support of family, friends, and university administrators who have encouraged and supported the development of this book. I want to especially acknowledge the comments and suggestions received from N. Piggott and J. Russ on earlier drafts of several chapters. The hard work of Dawn Hartley, Pam Speight, and other support staff' in the Department of Agricultural and Resource Economics at North Carolina State who assisted in this project is deeply appreciated. This book would never have occurred, however, were it not for the intellectual stimulation received from several of my colleagues and instructors over the years. A special gratitude is owed to George E. Brandow who first introduced me to some of the concepts contained in this book as well as to Richard A. King who reinforced the importance of thinking about time, space, and form dimensions of agricultural markets.

R. A. Schrimper

From the Back Cover:

This text is about world agricultural and food markets and is written to give the reader a solid understanding of their mysterious and marvelous nature. Demonstrating the critical role agricultural markets play in the world economy, this book explores the influence of these markets on a variety of food and agricultural products used by consumers on a daily basis.

Economics of Agricultural Markets is intended for use in Agricultural Marketing or Agricultural Economics courses, and is written in four major sections for clarity and ease of study: I. Introductory Topics; II. Production and Consumption Activities and How They Are Linked Together; III. Spatial Dimensions of Agricultural Markets; and, IV. Temporal Dimensions of Agricultural Markets.

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