Analysis of Transaction Between Famers and Agents in Agricultural Market

Analysis of Transaction between Famers and Agents in Agricultural Market

Yuan-yuan Yu1, Li-wei Bao2

1School of Management, Zhejiang University, Hangzhou, P. R. China

2School of Business, Zhejiang University City College, Hangzhou, P. R. China

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Abstract- The transaction between farmers and agents is in the upstream of the agricultural supply chain. In the current economic environment, farmers have limited understanding of agricultural market trend, while agents can control marketing information correctly and roundly. Given the supply-demand relationship, trading between farmers and agents exists in many cases. This paper takes the price of wholesale market in producing area for reference, and analyses the trade in the fields between farmers and agents. It is concluded that information asymmetries benefit the agents in the aspect of transaction price.

Keywords- agent, agricultural market, farmer, transaction analysis

Ⅰ. INTRODUCTION

Agricultural products are different from industrial products, for example, different agricultural products have different planting area, growth cycle, picking time, storage condition and packaging requirements[1]. Those properties yield different circulation channels and transaction styles.

The transaction between farmers and agents is in the upstream of the agricultural supply chain[2]. The fact that transaction subjects who are mainly farmers are scattered over the nation, and information asymmetries, various transaction locations, time, environment and mentality give rise to the different results including whether closing a deal and the final price, which means different “transaction scene” leading to different trading results. Urbanization is speeding up throughout China, while many rural areas still cannot put an end to backwardness. A substantial portion of farmers work on the farm all day long and they are ignorant of what is happening outside. Contrary to those farmers, agents are sensitive to the changes of agricultural markets, especially the fluctuation of trading price. Asymmetric informationmakes the trading results different[3-5]. Many researchers employ game theory [6-7] to analyze the transaction in agricultural market [8-15]. In the immediately following sections we shall apply static game model with incomplete information to analyze the trading results in the fields between farmers and agents who are players in this game theory.

Ⅱ. HYPOTHESES

In general terms, we idealize the transaction by assuming that there are two players, a farmer and an agent. For convenience we introduce the substitution F and A respectively to stand for farmer and agent. One of the fundamental assumptions in the study of economy has been that players are highly rational, that each can accurately compare his desires for various things. The equilibrium point is the determination of the final transaction price, or, rather, a determination of how much it should be worth to each of them to engage in this deal. Moreover, we hold the view that if they cannot make a deal or F produces any remaining products, F will take the price of wholesale market in producing area for reference and sell the products in the wholesale market. In this situation, the profit of A is zero.

Ⅲ. VARIABLES

In the trade between F and A, the most important is to determine the transaction price and costs. We intended to illustrate the meanings of the variables we defined.

P1: the final transaction price after bargaining between F and A.

P2: purchasing price in wholesale market or A’s selling price.

C1: per unit production costs including land costs, labor costs, intermediate inputs (seeds, chemical, fertilizer or pesticide) and so on.

C2: per unit logistics costs including loading and unloading costs, packaging and processing costs, storage costs and so on.

C: the fixed costs from field to wholesale market which will be paid by transporter.

Q1: the amount of agricultural products F planted.

Q2: the amount of agricultural products A will purchase.

R1: revenue of F.

R2: revenue of A.

Ⅳ. ANALYSIS

In order to explain the real situation we abstract from the “transaction scene” to form a mathematical model. There are four cases which we will illustrate in proper sequence.

A. Symmetric information and supply over demand, that is Q1>Q2

We have assumed that if the two players cannot make a deal or F produces any remaining products, F will take the price of wholesale market in producing area for reference and sell the products in the wholesale market. We write R1=Q2(P1-C1)+(Q1-Q2)(P2-C1-C2)-C to represent the revenue of F when F and A make a deal. However, R1=Q1(P2-C1-C2)-C represents the revenue of F when a deal doesn’t be reached. A’s corresponding revenue is R2=Q2(P2-P1-C2)-C and R2=0.

It is obvious that F prefers to make a deal with A if Q2(P1-C1)+(Q1-Q2)(P2-C1-C2)-C≥Q1(P2-C1-C2)-Cis satisfied. Therefore, we have P1≥P2-C2.

Similarly, for A, the requirement to deal with F is Q2(P2-P1-C2)-C≥0. Then we know that P1≤P2-C2-C/Q2.

When the information is symmetric and supply exceeds demand, F knows that A will decide the price according to P1≤P2-C2-C/Q2. As a corollary we may conclude that A must think that F will decide whether to close a deal with him according to P1≥P2-C2. F hopes the price is no less than P2-C2, and A regards P2-C2-C/Q2 as a ceiling price. It is clear that P2-C2>P2-C2-C/Q2, provided C>0, so that they cannot reach an agreement.

B. Symmetric information and demand over supply, that is Q1<Q2

In this case, F will sell all the agricultural products to A once they strike a bargain.

The revenue of F is R1=Q1(P1-C1) when the deal is done, and R1=Q1(P2-C1-C2)-C while not done. We think that F is likely to deal with A if Q1(P1-C1)≥Q1(P2-C1-C2)-C, which means P1≥P2-C2-C/Q1. The condition for A is the same as situation A. F knows what A is considering and A knows what F is thinking about, so the equilibrium point exists when P1=P2-C2-C/Q1. Both sides’ revenue are R1=Q1(P2-C2-C1-C/Q1) and R2=0 respectively.

In reality, the equilibrium is non-existent. There are three reasons to explain it. One reason is that R2=0 is not A’s expectation who definitely is a profitable individual, and it is not enough to meet the basic physiological needs. The second lies in that symmetric information is hard to realize in reality. The last is that the model is very simple and the analysis of a more realistic model should be an interesting affair.

C. Asymmetric information and supply over demand, that is Q1>Q2

Urbanization is speeding up throughout China, while many farmers in rural areas still cannot rid themselves of backwardness. A substantial portion of farmers work on the farm all day long and they are unaware of what is happening outside. Or construction of public infrastructure is poor in rural areas so that it’s costly for farmers to access information. Contrary to those farmers, agents are sensitive to the changes of agricultural markets, especially the fluctuation of trading price.

Let P2H and P2L be high price and low price in the wholesale market. F has no idea the real price and A knows it exactly. However, F knows the probability for high price is μ, and 1-μ stands for probability of low price, provided P2H>P2L. We may also regard the real price as private information for A.

It is quite clear for F that supply exceeds demand at present. Nevertheless, F agrees a deal on the basis of prospective payoff. So the prospective payoff is R1=Q2(P1-C1)+(Q1-Q2)((μP2H+(1-μ)P2L)-C1-C2)-C, and R1=Q1((μP2H+(1-μ)P2L)-C1-C2)-C is the payoff of a failing trade.

Transaction price shall conform to the following condition if F is glad to deal with A: Q2(P1-C1)+(Q1-Q2)((μP2H+(1-μ)P2L)-C1-C2)-C≥Q1((μP2H+(1-μ)P2L)-C1-C2)-C. We obtain P1≥μP2H+(1-μ)P2L-C2. For A, when the real price is high, A expects P1≤P2H-C2-C/Q2, and when price is low, A expects P1≤P2L-C2-C/Q2.

When the purchasing price is high, μP2H+(1-μ)P2L-C2≤P2H-C2-C/Q2 is required if the two players are willing to reach agreement. So we have μ≤1-C⁄((Q2(P2H-P2L))). The final trading price is between μP2H+(1-μ)P2L-C2 and P2H-C2-C/Q2. The exact figure is heavily depending on bargaining power of F and A. The maximum expectation disparity is (P2H-C2-C/Q2)-(μP2H+(1-μ)P2L-C2)=(1-μ)(P2H-P2L)-C/Q2, which implies that it’s easier to bargain when the difference between P2H and P2L is small. Or we may conclude that smaller the difference, smaller fluctuations, easier to close a deal.

In contrast, when the purchasing price is low, μP2H+(1-μ)P2L-C2≤P2L-C2-C/Q2 can never be true, for μ(P2H-P2L)≤-C/Q2 is false (we cannot ignore the fact of P2H>P2L and μ>0).

D. Asymmetric information and demand over supply, that is Q1<Q2

F still doesn’t know the real price but the probability. The final trading price is determined by anticipation. We use R1=Q1(P1-C1) to express F’s revenue when it’s done, while R1=Q1((μP2H+(1-μ)P2L)-C1-C2)-C to express revenue when it’s not. So Q1(P1-C1)≥Q1((μP2H+(1-μ)P2L)-C1-C2)-C or P1≥μP2H+(1-μ)P2L-C2-C/Q1 is desirable. Just like situation C, P1≤P2H-C2-C/Q2 and P2L-C2-C/Q2 must be satisfied.

If price is high, μP2H+(1-μ)P2L-C2-C/Q1≤P2H-C2-C/Q1 can hold water for P2H>P2L is obvious. Since A knows F doesn’t know the environment of market, A offers μP2H+(1-μ)P2L-C2-C/Q1 on his own terms. Although F has no idea of market quotation, F knows the probability of high and low. F may respond to A’s offer as μP2H+(1-μ)P2L-C2-C/Q1 in the bargaining in terms of A’s anticipation. In the end, equilibrium maintained when transaction price reaches μP2H+(1-μ)P2L-C2-C/Q1. At this point, we write Q1(μP2H+(1-μ)P2L-C2-C/Q1-C1) to represent F’s revenue and Q1(1-μ)(P2H-P2L)>0 to refer to A’s. We now show that asymmetric information is in favor of A from analysis above.

If the price is low, the situation is more or less like situation C. That is, μP2H+(1-μ)P2L-C2-C/Q2≤P2L-C2-C/Q2 does not hold.

Ⅴ. CONCLUSIONS

We employ game theory to analyze the transaction between famers and agents. The model is simple even though we make attempt to come closer to reality. However, we still come to some conclusions. When information is asymmetric, demand exceeds supply and real price is high, both sides can make a deal at price μP2H+(1-μ)P2L-C2-C/Q1. While the deal can be secured once asymmetric information, supply exceeding demand and high price are satisfied at the same time. The ultimate trading price may not be determined until after tough bargaining.

In order to make the transaction smooth in the agricultural markets, government should standardize market order, promote fair competition, and set up corresponding operation rules with expectation of reducing wide price fluctuation. In the end, agricultural markets can offer higher transparency and reduce transaction cost.

ACKNOWLEDGMENT

This material is based upon work funded by Zhejiang Provincial Natural Science Foundation of China under Grant No.Y6110555 and the Humane Social Science Fund Project No.10YJA790004 of Education Ministry of China.

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This material is based upon work funded by Zhejiang Provincial Natural Science Foundation of China under Grant No.Y6110555 and the Humane Social Science Fund Project No.10YJA790004 of Education Ministry of China.