Managing Marketing and Pricing Risks in Evolving Agricultural Markets

While local livestock auctions and grain elevators remain important locations of exchange, agricultural producers in many sectors increasingly rely on negotiated contracts. As both sellers in commodity and product markets and buyers in input markets, U.S. agricultural producers negotiate a surprisingly diverse set of complex contracts, stipulating price, quantities and qualities delivered, and other terms of sale. See the Glossary of Economic Terms provided in a box with this article, for further explanation. Examples include forward contract sales of feeder cattle, malt barley production contracts with brewers, feedstock corn contracted to ethanol plants, and fertilizer purchases prior to crop planting. Fresh produce marketing contracts and poultry and pork production contracts often specify a price and quantity delivered as well as details of the production process. While increased contracting offers the chance to forwardprice products and perhaps reduce price volatility, privately negotiating sales may create risks for producers that affect profitability. These risks may include potential costs asso ciated with unsold inventory and related bargaining disadvantages, limited opportunities to match with trading partners, negotiating with a more experienced buyer, and renegotiating incomplete contracts. Such marketing issues that could result in a price negotiation disadvantage for producers receive relatively little attention in agricultural policy and lack relevant funding for risk management education. Contracting and the Evolution of U.S. Agricultural Markets