You've learned a lot about running a farm.
Now you want to learn: How does a farm set prices to make money?
The food supply chain starts on the farm. A farm is in the business of selling commodities A standardized product, viewed by consumers as the same, such as corn or beef cattle. for food supply production—but how do food prices work?
How do food prices affect a farm's profitability A business’s profits are equal to the money it takes in—revenues—minus the money it spends—its costs. If you take in more than you spend, you make a profit. ?
A change is supply causes the supply curve to move. It's called a 'shift in the supply curve'. The graph shows an increase in supply.
Because the supply curve shifted, there’s a new equilibrium point. This new equilibrium point is much lower than it was before, which means the price has dropped significantly.
Equilibrium Point
Equilibrium Point
The laws of supply and demand apply to all items that we buy and sell—including your food.
Consider an ordinary hamburger, for example.
Click "Begin" and see if you can determine how each event will affect supply and demand for beef.
Begin
Supply and demand are just the beginning. To set food prices to make a profit, you need to learn about the supply chain.
Supply and Demand Along the Supply Chain
The farmer specializes in producing food products, not selling it to consumers.
Supply Chain for Corn
One of your farm’s products is corn.
To understand corn prices, you want to meet the people who make up the corn supply chain.
Slide the button to explore the supply chain.
The farmer is the initial producer of raw, unprocessed corn. He plants corn crops beginning in April and continuing into June. He begins harvesting in October and finishes in November. A farmer usually sells harvested corn to a grain elevator by the bushel.
The grain elevator buys large quantities of corn from farmers and combines and stores them together. The grain elevator system is much more efficient than storing corn in individual sacks. The grain elevator then distributes the corn, selling it to different processors.
Processors specialize in transforming the raw material—corn—into a finished product. Examples of corn-based products include canned corn, cornstarch, corn chips, cereal, and even fuel in the form of ethanol. The processor produces their product, packages it, and sells it at a profit to a wholesaler.
The wholesaler is a distributor who specializes in the business of getting the finished product to the markets where consumers demand them. Sometimes there are multiple levels to this part of the supply chain, especially when goods are sold across state and international borders.
The retailer, such as a neighborhood grocery store, is the final step in the supply chain. The retailer makes the finished product available to the consumer to purchase.
Speculators
A speculator An investor who is willing to accept risk in order to profit from future changes in prices. may never physically touch the corn but still influences prices.
Speculators buy or sell corn, typically through an organized futures exchange An organized exchange on which various market participants buy and sell standardized futures contracts. . They do this in hope of making a profit when prices change.
These exchanges help manage a farmer's risk Uncertainty about future outcomes. . Speculators profit by accepting that risk. This creates liquidity A high volume of activity in a market, usually resulting in increased efficiency and stabilized prices. , making the market efficient and stabilizing prices.
Supply Chain for Beef
The supply chain for ground beef ranges from farmer to retailer.
Each step in the chain has its own input and output costs. These add up to set the final price of the finished product.
How do prices move? Slide the button to move prices at each step, and see how the final price changes.
After accounting for all these costs, the retailer’s final price for ground beef at the store is per pound. With the consumer happily returning home with that ground beef, the supply chain is completed, and you’ve seen economics in action.
Now you’ve seen how a commodity price changes throughout the supply chain—from farm to table.
Why is each price in the supply chain set where it is? A big answer to this is risk.
Next you’ll learn about how risk affects business on the farm where you work and how to use that knowledge to increase the farm’s profits.
Final Cost
Ground Beef
's Price Breakdown
Input cost for 1lb. of ground beef =
Ground Beef
's Markup
's Output Price
Input Cost
$1.45
Farmer
Feedlot
Processor
Wholesaler
Retailer
Consumer
Finish
Explore the interactive infographic below to see what risk factors look like for corn crops.
A severe winter delays the planting season by several weeks. This reduces the amount you can produce and cuts into profits.
Last year’s grain production resulted in unusually high grain stocks left over in the market this year. This increase in supply means prices fall, and you’ll make less money.
An improving economy means increased hourly labor costs for your staff on the farm—cutting into your profits.
Increased grain produced abroad means more competition in the marketplace. Prices could fall and mean less money for you.
Fuel and energy prices have gone way up, making it more expensive to run all of your farm vehicles and equipment. This comes right out of your profits.
Risk factors always have an impact on the final price of food products like corn. Click on Make Prices Move to see how different risk factors can work together to influence the price of corn.
Prices Trend
You’ve seen a lot of the risks faced by farmers today. Next try deciding whether the risks and other factors below will increaseprices or decrease prices. Remember the basics of supply and demand and how they affect prices:
Use the buttons to choose how much you'll increase your production capacity of each food commodity. Remember, you can expand production only by a total of 10% this year. When you're finished, click "Finish Turn."
this year in sales.
Current Value of Cattle Production
production by 10% TOTAL
Current Value of Corn Production
Year Profit
Year 1 Prices
Cattle:
Corn:
Year Profit
Year 2 Prices
Cattle:
Corn:
Year Profit
Year 3 Prices
Cattle:
Corn:
Year Profit
Year 4 Prices
Cattle:
Corn:
Year Profit
Year 5 Prices
Cattle:
Corn:
Thanks for taking part in this interactive.
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