February 2011 Articles

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The Important of Price Discovery

The Importance of Price Discovery Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter
Recent events in the livestock markets have turned attention back to the issues of price determination, price discovery, and what factors affect the observed market price. Price determination is the observance of the market price which is influenced by supply and demand factors at the aggregate level. Price discovery is not the same as price determination although the concepts are related. Price discovery is the observance of individual transactions which is reflected in the average market price which is observed through price determination. Supply and demand factors are involved in price discovery, but other factors such as the amount and quality of information, number of buyers/sellers and their competitiveness are also involved in the process of price discovery. The thinness of cash markets, especially when discussing fed cattle markets, affects price discovery and price determination. This is not as great of concern with feeder cattle in Louisiana due to the volume of cattle sold at public auction. However, prices reported in Louisiana originate at public auctions and are needed for future price determination and price discovery. These prices are collected by independent observers (USDA Agricultural Marketing Service in partnership with the Louisiana Department of Agriculture and Forestry) which increase the transparency, reliability, and quality of information available in the marketplace. Prices for Louisiana feeder and cull cattle are not covered under federal mandatory price reporting laws, but are quoted in many popular press outlets which reduces the uncertainty in the local cattle markets. In areas where price reporting does not exist, pricing information from other states becomes more important. However, those prices reflect information about supply and demand factors which are not completely reflective of the market where pricing information is absent. Relationships that once held between markets are subject to change and once held assumptions may not be valid. In addition to pricing information that is provided by pricing discovery and price determination, several questions are answered by pricing information. These include the value of replacement heifers and if the market price will lead to a profitable investment and does it make sense to retain ownership of cattle to a heavier weight. This information is dependent upon price discovery and price determination being available to producers in the local cash cattle markets.