Study ApEc 3411 midterm Flash Cards

 
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ApEc 3411 midterm

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If markets were truly "perfect" there would be no need for government regulation and policy. T/F
True
Grades have what 4 impacts of markets?
1. allow for marketing by description rather than inspection
2. improves the ability to aggregate and sort products according to defined grades -- creates larger volumes of homogeneous products
3. provides info to producers and consumers about which characteristics are important to quality and how they can be improved
4. reduces incentives and ability for cheating and fraud
grades
are usually an attempt to rank or identify products bases on observability qualitative and quantitative factors
standards
are usually an agreed upon measure or criteria for production
Government regulation typically falls under three activities
1. facilitative
2. regulatory
3. price supportive and stabilization
Reasons for government regulation or intervention in marketing
1. unfair competitive practices
2. not enough economic incentive for firm to undertake necessary function of market
3. externalizes
current changes and causes of change in the packing industry
number of packers has declined, while firm size and plant size has increased dramatically. In addition, there has been continuing trend of decentralization and specialization (one species - one plant)
key drivers of change in the swine industry affecting marketing
a. improved genetics
b. vertical coordination
c. contracting between producers
d. value based marketing and branded product merchandising
Key changes in swine industry
1. increased production efficiency
2. changing location
3. larger farms and fewer farms
major structure and marketing issues in beef production
a. improvements in genetics and minimize variability
b. streamline production channel - animals change hands too many times
c. grading system improvements
The 4 forms of competition
1. perfect
2. monopolistic
3. oligopolistic or oligopsonistic
4. monopolistic or monopsonistic
Why is the HHI a better indicator of the market than the CR4?
the problem with the CR4 ratio is that it can't tell you how dominant one of the top 4 firms might be in the market.
What are the variables often considered in studies of ag market structure?
number of firms, size of firms, location of firms, business organization of firms, product differentiation or form
The four market problems are condensed into what two types of market performance?
1. operational efficiency
2. pricing efficiency
What are the four potential market problems?
1. determination of consumer demand or preferences
2. accurate reflection of demands back through the system to others
3. equitable distribution of income generated from market process
4. efficient physical movement and transformation of product
Law of one price
given a perfect market there will be a single price (equilibrium price) which will clear the market (quantity supplied will be equal to quantity demanded)
List the three classifications of market functions and give specific examples of each
a. exchange functions
1. buying (assembling product)
2. selling
ex. Chicago Board of Trade, Auction House/barn

b. Physical Functions
1. Storage
2. Transportation (form changing)
3. Processing (form changing)
ex. Cargill Elevator Terminal, Meat processing (Hormel), Wheat Milling (Gen Mills)

c. facilitating
1. standardization -- sorting and grading
2. financing
3. risk bearing -- production (insurance) and price (futures)
3. information
ex. banks/lenders (AgStar), USDA - Grading
Oligopsony describes a market with a few large buyers of a commodity. T/F
True
The futures or stock markets are very close approximations to perfect markets. T/F
True
Farmers are often said to be price takers. This implies that farmers cannot affect the price they receive for a product and that markets are competitive. T/F
True
The CR4 ratio will be equal to the HHI index if the top four firms have equal market shares.
False
Market share is always defined based on the level of a firm’s sales. T/F
False
15. Farm policies on which payment does not depend on production of a specific commodity are said to be ‘decoupled’. T/F
True
The existence of oligopolies in commodity markets is due to the fact that economies of scale reduce costs and can improve profits. T/F
True
Vertical integration can raise concerns regarding competition because it may
prevent easy entrance into markets by other competititors who must enter at least two stages of production to compete. T/F
True
The law of one price means that prices for the same commodity in two different markets can differ only by the cost of transportation between the two markets. T/F
True
Demand enhancement programs benefit consumers but not producers. T/F
False
Market price reports provided by USDA provide what function for efficient markets?

a. Exchange
b. Facilitation
c. Transport
d. Regulatory
d. Regulatory
Which of the following does not define a relevant market?

a. Location
b. Time
c. Number of buyers and sellers.
d. Product form.
C. Number of buyers and sellers
What is the market action that assures that prices for a single commodity in two markets separated by space, time, product form or level will differ only by the cost of moving the products to the same market?

a. Supply and demand
b. Minimum costs
c. Operational efficiency
d. Arbitrage
d. Arbitrage
Suppose that in the pork industry, 30 percent of operations account for 15 percent of inventories and in the beef feedlot industry 5 percent of operations account for 25 percent of inventories. Which industry is more concentrated?

a. The pork industry.
b. The beef industry.
c. The two industries are equally concentrated.
d. Requires more information to answer.
b. The beef industry.
Which of the following describes ‘loan deficiency payments’?

a. Farmers growing corn receive a direct payment regardless of the price.
b. Farmers can market their crop for a target price if prices are too low.
c. The farmer can accept a loan price and then either deliver the crop for that price if the market price doesn’t rise or take the market price and repay the loan.
d. None of these describe loan deficiency payments.
c. The farmer can accept a loan price and then either deliver the crop for that price if the market price doesn’t rise or take the market price and repay the loan.
What is the maximum price difference for a product in two different time periods?

a. The cost of transportation.
b. The cost of storage.
c. The cost of processing.
d. In efficient markets all prices will always be equal across time.
b. The cost of storage.
Which of the following is the only way to improve profitability in a perfectly competitive market?

a. Raise the price of your product.
b. Collaborate with your competitors to raise prices.
c. Gain better information than your competitors.
d. Reduce your cost of production.
d. Reduce your cost of production.
Which of the following is not a role government plays in markets and policy?

a. Legal framework.
b. Regulatory functions.
c. Income stabilization and price supports.
d. Determining production levels.
d. Determining production levels.
Marketing cooperatives were established by which legislative act?

a. The Sherman Anti-trust Act.
b. The Capper-Volstead Act.
c. The Cooperative Adjustment Act.
d. The Farm Bill Act.
b. The Capper-Volstead Act.
Which of the following represents monopolistic competition?

a. Many firms with no differentiable products.
b. A few large firms with no differentiable products.
c. Many firms with slightly differentiable products.
d. A single firm controlling the market for a product.
c. Many firms with slightly differentiable products.
Suppose you have the following information related to storing corn.

Future Prices = $6/bushel

Current Cahse price = $5.50/bushel

interest rate = 5%

Facility cost = 10 cents/bushel

Shrink = 10 cents/bushel

Dpereciation = 5 cents/bushel

Time to store = 6 months

1. What is the formula for additive storage costs?

2. Using the formula, calculate the breakeven price for storage. Should you store the commodity?

3. Why might the futures price be different from the expected breakeven price?
1. E(Pf) = (Pc + C) e^(r*t)

2. (5.5 + 0.25)*e^(.05*(6/12))= $5.896

3. The futures price includes time as well as location - here we're only factoring time
For storable commodities with a single harvest period, as in the case of most
crops, you would expect prices to decrease within a given crop year, all else equal.
False
The futures or stock markets are very close approximations to perfect markets.
True
The existence of oligopolies in commodity markets is due to the fact that economies of scale reduce costs and can improve profits. T/F
True
Government grading programs are increasingly being used because there is
no way to enforce claims from private grading or branding. T/F
False
A characterization of markets based on concepts of market power and rivalry
would be an example of a behavioral approach to commodity marketing.
True
Direct payments are considered to be “decoupled”. T/F
True
In commodity markets all participants are said to be ‘price takers’ because
they cannot influence the prices the pay or receive. T/F
True
Vertical integration means that a firm owns only a single stage of the supply chain. T/F
False
Standards (as opposed to grades) are used to define production processes which are pre-defined to determine a product quality. T/F
True
The law of one price allows for the idea that prices may differ but only by the costs of transferring or transforming the product. T/F
True
Whate are the three approaches to studying commodity marketing?
Institutional, functional, and behavioral
Which of the following modes of transportations is the lowest cost?

a. rail
b. truck
c. barge
d. truck and rail are equal
c. barge
Which of the following marketing activities link space, time and product form?

a. Transportation, labor and product placement.
b. Farm production, marketing and finance.
c. Transportation, storage and manufacturing.
d. Finance, exchange and production.
c. Transportation, storage and manufacturing.
Suppose the top four firms in an industry control 25%, 20%, 10% and 5% of total sales. What is the Herfindahl-Hirshman Index for this industry?
1150
Which of the following would imply a failure of the assumptions of a perfect market?

a. There is no product differentiation.
b. Market prices are reported and everyone has the same information.
c. You can buy or sell in the market for a $500 investment.
d. There is only a single seller in the market.
d. There is only a single seller in the market.
What is the maximum price difference for a product in two different time periods?

a. The cost of transportation.
b. The cost of storage.
c. The cost of processing.
d. In efficient markets all prices will always be equal across time.
b. The cost of storage.
In the case of grains, which payment occurs regardless of high or low market prices?

a. Counter-cyclical payments.
b. Marketing assistance loan payments.
c. Crop failure payment.
d. Direct payments.
d. Direct payments.
A "relevant" market is defines by what?
time, location, product form, and level
The Herfindahl-Hirshman Index (HHI) is used to measure what?
the concentration of firms in a market
In terms of market functions, what role do government grading programs serve?

a. market facilitation
b. physical functions
c. exchange functions
d. none of the above
a. market facilitation
List some activities that support commodity markets
Aggregation
Credit/Finance
Exchanges
Transportation
Storage
Government policy/regulation
Grading and Standards
What are the factors that define a relevant market and identify the marketing function associated with each one?
1. location (transport)

2. Product (form)

3. Time (Storage)

4. Level (retail, wholesale, producer)
List the 4 conditions for a perfect market
many buyers and sellers

homogeneous products

perfect information

low barriers to entry
Give three advantages to private grades or branding
Allows for greater innovation

Allows for differentiation

Greater accountablility for quality with branding
Give advantages for public grades
Creates common comparable standard

Everyone gets same information

Reduces chance for fraud

Adds fluidity to market

Tends to be lowest common denominator – discounts quality
Provide a distinction of the difference between Grades and Standards and give an example of each.
Grades are based on observable traits of the product.

Standards generally set a criteria for production process that may or may not be observable in the final product
Suppose the current price of soybeans is $5.00 per bushel, the cost of storage is $0.10 per bushel. The interest rate is 5% and you plan to store them for 6 months. What is the breakeven price you must receive for the soybeans to pay for the storage? (note: the future value of a price is P*erT. Where e is the base ten exponent function. If your calculator does not have this function, use the formula as P*(1+r)T).
$5.23
What are the four major components of carrying costs?
DIRTI - amortized fixed costs
Interests costs
Shrinkage
Direct Costs
What are the three features of markets that are important for storage?
Physical Assets, Credit Markets, Futures Markets
Storage provides the market function of moving products through time.
True
Grain shipments are increasingly going to the west coast because of demand from east Asian countries like South Korea, Japan and China
True
The form of an auction can affect the price efficiency of a market.
True
Market share is a frim's sales divided by the sales of the top 4 firms.
False
Standards are generally guidelines regarding methods of production which cannot be observed whereas grading is usually bades on observable traits of the product.
True
In addition to the size of firms it is important to consider the rivalry among firms to determine if the market is efficient.
True
In an efficient market supply chain, each participant receives a price according to their contribution to the production process.
True
Public grading systems are becoming less useful as ag firms seek to differentiate their products in the market.
True
A firm's relevant market shoul always be determined based on the product it sells. T/F
False
What are the conditions of a perfect market?
Many buyers and sellers, homogeneous products, low barriers to entry
What is the fastest growing mode of transport for agricultural products in general?

a. air transport
b. container shipments
c. bulk cargo shipments
d. bulk rail hopper cars
b. container shipments
Which transportation system accounts for the greatest volume of grain export shipments in the US?

a. barge transport
b. railroad transport
c. truck transport
d. air transport
a. barge transport
Livestock Revenue Protection represents what new innovation in government policy?

a. Government insurance mandates to avoid moral hazard.
b. Direct payments to decouple production from prices.
c. Price limits on the total payments made to producers.
d. Market based policy solutions where there is cost sharing.
d. Market based policy solutions where there is cost sharing.
Suppose you are told taht the vitamin manufacturing sector has a CR4 ratio of 64 but an HHI index of 1024. What would this imply about the structure of the firms within the industry?
There are a few large firms all of nearly equal size
Which of the following is NOT an implication of the "law of one price"?

a. prices in two regions may differ by cost of transportation
b. prices at wholesale and retail must be equal
c. prices in two time periods may differ by the cost of storage and interest
d. prices of hogs and pork may differ by the cost of processing
b. prices at wholesale and retail must be equal
Banking firms which provide credit to agribusiness marketing would be considered as providign which function?

a. regulatory
b. price supportive
c. facilitative
d. none of the above
c. facilitative
Which of the following would best represent an example of imporved operations efficiency in markets?

a. branding pork products
b. mandatory price reporting instituted by government
c. enforcement of anti-trust rules on a merger
d. improved packaging that extends shelf-life of a product
d. improved packaging that extends shelf-life of a product
Describe export enhancement programs
It increases domestic producer prices and reduces foreign market prices
Which of the following makrets is the most fundamental role of government in markets?

a. Price supportive
b. legal structure
c. information services
d. regulatory standards
b. legal structure
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