Download Lecture 2 - United Nations University Fisheries Training Programme

An Introduction to Fish Prices
Prepared for the
United Nations University Fisheries Training Program
Reykjavik, Iceland
Gunnar Knapp
Professor of Economics
Institute of Social and Economic Research
Anchorage, Alaska USA
[email protected]
January 2013
Prices are critically important to the fish business.
• How much money a fisherman makes depends just as much—or
more—on the price he gets paid as on the amount of fish he catches
or grows.
• You can’t tell how well fishermen or fish farmers are doing just from
how many fish they are catching or growing.
• Fishery and aquaculture managers and regulators can’t think of
prices and markets as industry’s concern and not their concern.
– How fisheries, fish farming, and the seafood industry are
regulated may have important implications for prices throughout
the value chain.
Fish products reach consumers through supply chains
• Supply chains may include many different stages or functions, such
as processing, transportation, warehousing, distribution to retail
outlets, and retailing.
• Different functions may be undertaken by different companies or
multiple functions may be performed within a single company.
• Products may be bought and sold multiple times as they move
through the supply chain, by different companies which perform
different functions.
• Each time a product is bought and sold, the price typically increases
Fish go up
the supply
chain
from
fishermen
to
consumers
Money
goes down
the supply
chain from
consumers
to
fishermen
Some general characteristics of fish prices:
• Fish prices can and do fluctuate widely over time
• Prices are higher at each new level of the value chain
• Prices at different levels of the value chain tend to move in the same
direction.
• Fishermen typically receive only a small share of the retail price paid
by the consumer
• Similar products tend to command similar prices in the same place
at the same time
• Prices for similar products may differ widely between
– Different places
– Different types of stores
– Different purchase volumes
• .
Fish prices can and do fluctuate widely over time
Prices are higher at each new level of the value chain
Prices at different levels of the value chain tend to move in the same direction.
Fishermen typically receive only a small share
of the retail price paid by the consumer
What explains these general characteristics of fish prices?
What explains the price of any particular fish or fish product?
Fish prices are complicated.
• Economics can explain a lot but not everything about fish prices.
• It’s a lot easier to explain what happened to prices in the past than
predict what will happen in the future.
• I would be a lot richer if I could predict what is going to happen to
fish prices next month or next year.
Fish prices are hard to define and measure
• Every sales transaction has its own price.
• At any given time, prices for the same product may vary for different
buyers and sellers, for different places, for different sales volumes
and for other sales condition.
• For any given product, prices may change over time—from year to
year, month to month, day to day, or even hour to hour
• The price a particular buyer paid or seller received for a particular
sale may vary widely from the “average” price for the product or
species or period of time.
• Most buyers and sellers are reluctant to share price information, or
they may have an incentive to overstate or understate the prices
they received or paid.
• Be careful when you use price data: think about how the data were
collected and whether they are really representative of the prices
you are interested in.
A price tag is not a price.
• A price tag is a price offer.
• It isn’t the real price unless someone actually pays that price.
• Just because I say the price of my fish is $50/lb doesn’t mean I can
sell it for $50/lb.
• Don’t assume that prices you see in a store or hear about are
necessarily representative of overall market conditions.
Your own experience can teach you a lot about fish markets and prices.
• You probably
– shop around for the best deals.
– try to buy low and sell high.
– bargain if you think you can buy for a lower price or sell for a higher
price.
• You don’t necessarily
– tell people the price you could afford to pay or sell for
– tell people price you actually paid or sold for
– Think or care about how the price affects the person you’re buying
from or selling to
• How much you pay or sell for probably depends on:
– how urgently you need the product or the money.
– whether you (or the person you’re selling to or buying from) has cash
or needs credit.
– how well you know or trust the person you’re doing business with.
– what else you’re buying and selling as part of the deal.
All the money in the fish supply chain
comes from consumers
• The ultimate constraint on prices for
everyone in the supply chain is what
consumers are willing to pay.
• Collectively, the participants in the
supply chain can’t earn more than
consumers are willing to pay for the final
product.
Prices and margins
• What matters for fishermen is the price they receive
• What matters for consumers in the price they pay
• What matters for everyone else in the supply chain is the margin
they earn:
Margin = Price received – Price paid
Everyone in the supply chain depends on everyone else
• Everyone needs:
– Fishermen to catch the fish
– Processors to process the fish
– Wholesalers to distribute the fish
– Stores and restaurants to sell the fish
• No level of the supply chain can stay in business by putting other
parts of the supply chain they depend on out of business.
The constraints on fish prices are
different in the long run than in the short run
• In the long run:
– Businesses have to cover their costs--or they go out of business
– Prices have to be at levels at which businesses at every level of
the supply chain can cover their costs
• In the short run:
– Businesses don’t necessarily have to cover their costs
– Prices don’t necessarily have to be at levels at which businesses
at every level can cover their costs
For a supply chain to last over time,
over the long term, at every level of the supply chain . . .
• Margins must be:
– high enough to cover costs
– low enough for businesses at
other levels to cover costs
• The price can’t be:
– lower than cumulative costs
below that level
– higher than the price consumers
are willing to pay minus
cumulative costs above that
level.
Price consumers are
willing to pay
Total costs of businesses
at higher levels
Potential price range
Total costs of businesses
at lower levels
If buyers or sellers face limited competition,
they may have market power.
• If there is only one or a few sellers, they may be able to sell for
higher prices than if they had competitors
• If there is only one or a few buyers, they may be able to buy for
lower prices than if they had competitors
• Who has market power affects who earns profits in the value chain.
• The margins at each level of the supply chain depend in part on how
much competition and market power there is at each level.
Competition and bargaining power drive where in the potential price
range actual prices fall—and who in the supply chain earns profits
• At any level of the value
chain:
– The less competition,
the greater the higher
the price and margin is
likely to be
– The more competition,
the lower the price and
margin is likely to be
Price consumers are
willing to pay
Total costs of businesses
at higher levels
Potential price range
Total costs of businesses
at lower levels
Competition plays a key role in pricing.
•
•
•
At any level of the value chain:
– the more competition there is among sellers, the lower the price
tends to be—because buyers prefer to buy from the sellers offering
the lowest price.
– the more competition there is among buyers, the higher the price
tends to be, because sellers prefer to sell to the buyers offering the
highest price.
Competition explains why prices tend to be similar—and to move
together—for similar products at a given time and place.
– Buyers don’t want to pay higher prices than competing sellers are
offering.
– Sellers don’t want to accept lower prices than competing buyers are
offering.
Competition can make the fish business a tough business to be in.
– If your competitors are willing to raise the prices they are paying, or
cut the prices they are selling for, you may have no choice but to
raise or cut your prices too.
Anything that affects what a buyer is willing to pay or a seller is willing
to sell for can affect prices.
• How much the buyer and seller trust each other
• How much they depend on each other for other types of business
(such as buying and selling other kinds of fish at other seasons)
• How easy or convenient it is for them to do business with each other
• How much each of them needs money
• What kind of financing and payment arrangements they are able to
provide each other.
The higher the price, the less consumers will buy
The lower the price, the more consumers will buy
To sell more, the consumer price must be lower
To sell less, the consumer price can be higher
• The more fish the supply chain tries to sell, the less everyone in the
value chain the make collectively.
• The less fish the supply chain tries to sell, the more everyone can
make collectively
In the short-term, not everyone in the supply chain necessarily has to
make money all the time.
• Prices can and do fluctuate widely in the short run.
• Some of the time, companies have to buy or sell for prices at which
they lose money—sometimes a lot of money
Supply and demand analysis
• Supply and demand analysis provides a very powerful and useful
way to explain how different factors may affect prices in a market
• Supply and demand analysis is taught in almost every introductory
economics course
• Supply and demand is more subtle and complicated than many
people realize
• Many people who think they understand supply and demand don’t
really understand it!
A supply and demand graph
Price
(P)
Supply curve (S)
Equilibrium
price (P*)
Demand curve (D)
Equilibrium
quantity
(Q*)
Quantity supplied (Q)
Quantity demanded (Q)
The supply curve (S) shows how much sellers would be willing to
supply for any given price.
Price
(P)
Supply curve
(S)
P2
P1
Quantity supplied (Q)
Q1
Q2
The demand curve (D) shows how much buyers “demand” or would be
willing to buy for any given price.
Price
(P)
P2
Demand curve (D)
P1
Q2
Q1
Quantity demanded
(Q)
Where the demand and supply curves cross shows what economists
call the equilibrium price (P*) and the equilibrium quantity (Q*) in the
graph). At the equilibrium price, the quantity supplied equals the
quantity demanded. In competitive markets, price and quantity tend to
move towards the equilibrium price and quantity.
Price
(P)
Supply curve (S)
Equilibrium
price (P*)
Demand curve (D)
Equilibrium
quantity
(Q*)
Quantity supplied (Q)
Quantity demanded (Q)
Competition between buyers or sellers is what drives prices towards
the equilibrium price.
Price
(P)
At prices above P*, the
quantity supplied is more
than the quantity
demanded.
S
PH
P*
PL
D
At prices below P*, the
quantity supplied is less
than the quantity
demanded.
Quantity
(Q)
Changes in factors other than price can cause the supply or demand
curves to shift in or out
Bad weather might cause the supply curve for fish to shift inwards.
Price
(P)
S’
S
P2
P1
Quantity supplied (Q)
Q1’
Q1
Q2’
Q2
A safety scare might cause the demand curve for fish to shift inwards.
Price
(P)
P2
P1
D’
Q2’
Q2
Q1’
Q1
D
Quantity demanded
(Q)
When the supply or demand curve shifts the equilibrium price and
quantity shift. We can predict the how different factors affect prices
and quantities by how they shift the supply and demand curves.
Bad weather might cause the price of fish to rise and the quantity of
fish sold to fall.
Price
(P)
S2
S1
P*2
P*1
D
Q*2
Q*1
Quantity
(Q)
A food scare might cause the price of fish to fall
and the quantity of fish sold to fall.
Price
(P)
S
P*1
P*2
D2
Q*2
Q*1
D1
Quantity
(Q)
To think of how something may affect quantity and price, think about
how it would shift the supply or demand curve
Examples of factors
which shift the
supply or demand
curves
Increase in fish
abundance
Increase in cost of
fuel
Marketing
campaign
Fish safety scare
Effect on
equilibrium
quantity
Effect on
equilibrium
price
Supply curves shifts out
(sellers are willing to sell
more at any given price)
Increase
Decrease
Supply curve shifts in
(sellers are willing to sell less
at any given price)
Decrease
Increase
Demand curve shifts out
(buyers are willing to buy
more at any given price)
Increase
Increase
Demand curve shifts in
(buyers are willing to buy less
at any given price)
Decrease
Decrease
How the supply or demand
curve shifts
What happens to prices at any given time reflects the combined effects
of many different factors which may be shifting the demand and supply
curves in different ways.
• You can’t predict how prices will change from the effects of any one
factor: you have to look at the combined effects of all the factors
together.
• If your fishery has a big catch, by itself this would tend increase
supply and lower your price.
• But if you have an effective marketing campaign which increases
demand, that could offset the effect of the bigger catch—causing
your price to rise.
• So many different factors can affect prices at the same time that it
can be very difficult to explain why prices change in a particular way.
Changes in supply and demand occur differing time scales and affect
prices on differing time scales
• Supply tends to vary more from year to year
– Year to year changes in price are usually driven by changes in
supply
• Demand changes more gradually over time
– Consumer tastes change only gradually over time
– Incomes tend to change only gradually over time
– Demand may change a lot over time and affect prices a lot over
time
Fishermen’s prices tend to change relatively more than prices at higher
levels in the value chain
• Competition causes prices to tend to rise and fall by relatively similar
absolute amounts at different stages of the supply chain.
• The same absolute price changes are greater relative price changes
at lower levels of the value chain
Value chain level
Price last
year
Price this
year
Absolute
change
Relative or
% change
Price the consumer pays the
store
$4
$3
-$1
-25%
Price the store pays the
processor
$3
$2
-$1
-33%
Price the processor pays the
fisherman
$2
$1
-$1
-50%
What can fishermen do to get better prices?
• Gain market power
– Increase competition among buyers
– Reduce competition among themselves
• Increase demand
– By selling to more markets
– By increasing quality
• Reduce costs at other levels in the value chain (so that there is more
money left to be shared with fishermen)
• Reduce catches
Getting better prices for fishermen is not easy!