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.听 Barton is still mostly in moderate drought with the eastern third abnormally dry.听And the areas which had benefitted from rain are now back to abnormally dry and the area of moderate drought.听With a fair amount of agricultural news revolving around the chicken and beef industry and price fixing on the producer and consumer ends, let鈥檚 discuss markets and their purpose a bit as we wait for wheat harvest.
Today let鈥檚 explore what a market is and what they are designed to do.听This will by necessity be condensed and have to leave items out.听We have a market economy which is defined as 鈥渁n 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.鈥澨 In a free market with perfect competition there are several guiding principles.听A key principle is numerous buyers and sellers.听This is key for two main reasons.听 First, sellers and buyers are 鈥減rice takers.鈥澨齌hey can take or leave the price.听Second, they are price takers since there are numerous buyers and sellers so neither can set the price.听 A lack of either and the few can become 鈥減rice makers.鈥 听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.听 All of this revolves around to economic laws and their relationship to each other.
The 鈥淟aw of Supply鈥 states 鈥淭he quantity of goods offered to a market varies directly with the price of the good, holding everything else constant.鈥澨齀n plain English, the amount a seller is willing to sell increases as the price they are offered increases, and vice-versa. The 鈥淟aw of Demand鈥 states 鈥淭he quantity of a good demanded varies inversely with the price of the good, holding everything else constant.鈥澨鼳gain, in plain English, the amount a buyer is willing to purchase goes down as price goes up and vice-versa.听Putting these together, both buyer and seller are looking for the same thing 鈥 to maximize their satisfaction or to do the best they can with limited resources.听When this happens, equilibrium is reached 鈥 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鈥檛 have space here but it involves how surpluses and shortages (where things move away from equilibrium) eventually cause equilibrium to be reestablished.听An economist often says the cure for low prices is more low prices and the cure for high prices is more high prices.听We will discuss this briefly next week and how concentration in the meat and poultry industry upsets these concepts.听
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Part II
Published听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.听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.听Barton is still mostly in moderate drought with a sliver of the east abnormally dry.听The dry pattern has re-extended through central and into parts of eastern Kansas.听 The heat and wind have greatly accelerated wheat maturation and depending on the unsettled weather pattern, harvest should progress rapidly.听Today let鈥檚 finish the discussion of what is going on in the meat and poultry industry that has been in the headlines.听 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.听Sellers sell more as the price goes up and buyers buy more as the price goes down.听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.听This relies on the four rules of perfect competition, i.e. free markets.听 These are in an ideal situation and we all realize in reality it鈥檚 not exactly like this.
- Numerous buyers and sellers 鈥 so many that they are price takers not price makers.听They can take or leave a price but the volume of buyers and sellers is so large, an individual or small group can鈥檛 control the price.
- Homogeneous product 鈥 you can鈥檛 distinguish between producer A and producer Bs output.
- Freedom of entry and exit 鈥 there are no barriers to getting into or out of producing a given item or service.
- Perfect information 鈥 there are no secrets.听 You are price takers so there is no value in keeping secrets.听 All who want it, have access to all necessary information.
The one to focus on in our discussion is number 1 鈥 numerous buyers and sellers.听There are charges in the poultry industry of price fixing among the major chicken processors.听Investigations are purportedly underway in the beef sector for the same thing and while the grumbling among producers isn鈥檛 new, what happened with the Covid-19 pandemic brought things to a head.听As of now for beef it is simply am investigation.听So what has happened?
Consolidation is what has happened in the processing industry.听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.听Fewer buyers for a perishable commodity that producers can only keep for so long are more at the mercy of processors for several reasons.听And while there are small buyers, processors and individuals; these are dwarfed by the sheer volume of livestock out there.听There are still markets/auctions for pork and beef but essentially none for poultry.听And since a very few packers control the market, they can do more to set the price.听In fact in the poultry and pork industry, many are contracted for before they are even born or hatched.听What caused the indictments for the chicken industry was that several processors colluded to set prices.