Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle...

Norwood and Lusk: Agricultural Marketing & Price Analysis

© 2008 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.

Chapter 1

About Economics




The Exxon Valdez oil spill in 1989 dumped 11 million gallons of oil into Prince William Sound. As this photo shows, much of the oil was carried to shore. Economists were asked to measure in dollars how much people value cleaning up the sound.

Image courtesy of Office of Response and Restoration, National Ocean Service, National Oceanic and Atmospheric Administration.

Figure 1.1. Result of the Exxon Valdez Oil Spill




Figure 1.2 The Three I’s of Economic Theory : Incentives, Interactions and Indifference




Figure 1.3. Wren is indifferent between farming and industry labor




Figure 1.4. With the government subsidy, Wren prefers being a farmer




Figure 1.5. The government subsidy raises land rent, leaving Wren indifferent once again.




Figure 1.6. Price differences for wheat in selected Midwest states. All differences are relative to river ports in Eastern Kansas and Oklahoma ( a negative difference means the price is lower relative to river ports).

Map made available by Agmanager, Department of Agricultural Economics at Kansas State University. Available at http://www.agmanager.info. Accessed September 20, 2005.




Tim Cassidy, a native of Wyoming, graduated with a bachelor’s degree in Agricultural Economics from Oklahoma State University in 2005. Soon after graduation he went to work for the Archer Daniels Midland (ADM) Company as a commodity trader. Tim earns his salary by arbitraging for ADM. Each day at work, Tim scouts the differences in soybean, corn, wheat, and soybean meal prices across regions, and if profit opportunities present themself, he places orders to buy or sell thousands of dollars of a commodity. Not every arbitrage will make money, but if one understands market forces, significant profits can be made over time.

Figure 1.7. Meet Tim Cassidy

“Within weeks of my first job out of college I was managing thousands of dollars of soybeans at one time. At first I was overwhelmed with the responsibility, but by holding fast to the principles I learned in agricultural economics, I have learned to do my job well and have a lot of fun in the process!” --Tim Cassidy

Archer Daniels Midland Company, an industry leader in agricultural processing and fermentation technology, recruits qualified candidates for internship and entry-level positions. Our internships are designed to give students meaningful work experience and business exposure through a global leader in the agricultural industry. We actively recruit for positions in the following areas: Accounting, Commodity Trading/Elevator Management, Engineering, Grain Terminal Operations Management, Internal Audit, Information Technology and Specialty Areas (i.e., Finance, Marketing, R&D, Human Resources). To learn more about opportunities at ADM, please visit us at http://www.admworld.com under Careers.

A Word from ADM




Figure 1.8. Price of winter wheat in Kansas City




Figure 1.9. A Few Words From the Father of Economics

Image made available by the Adam Smith Institute. Available at http://www.adamsmith.org/.




Figure 1.10. Change in Calories Per Day Consumed for U.S. Males

1977-1978 1994-1996 Percent of Total Changea

Breakfast 384 420 13%

Lunch 517 567 19%

Dinner 918 859 -22%

Snacks 261 501 90%

Total 2080 2347 100%

A Shows the percent of increase in total calorie consumption due to each factor.

Source: Cutler, Gleaser, and Shapiro.




Figure 1.11. Discounting Example (discount rate = 10%)

Cost of Investment Present Value of Investment Benefit

The investment costs $150,000 today, but yields $70,000 in profits each year for the next three years.

Current Year $150,000 $0

Year 1 $0 (1+0.1)-1(70,000) = $63,636

Year 2 $0 (1+0.1)-2(70,000) = $57,851

Year 3 $0 (1+0.1)-3(70,000) = $52,592

Sum $150,000 $174,080

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle...

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Transcript of Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle...