Procurement Price Change Outcomes for Producer & Processor along Supply Chain

Abstract

The article focuses on the issue of changes in prices received and paid to an agricultural producer and agri-food processor as a source of changes in the profitability of production. The same purchase price for the first is the price received, for the second price paid. The same movement of the price, i.e. its decrease or increase, is also a source of changes in the profitability of production for both entities. However, its mechanism is different. The description of this mechanism for the agricultural producer and food processor is the subject of the remark in this article. Profitability is, as it is known, the basis of the objective function of both entities. Their own analytical reasoning which captures the essence of this mechanism has been derived. Production profitability ratios for both entities are the basis of the approach. These profitability ratios are determined by the production efficiency indexes and the relations of price received and paid. Understanding of the concept is helpful for explaining the sources of price risk for an agricultural producer and agri-food processor. In addition to derivation of analytical formulas describing the mechanism of changes in profitability, which is the main goal adopted in the article, this was subjected to initial empirical illustration, to confirm the correctness of reasoning, in particular to confirm the relationship between indicators adopted in the paper. An empirical analysis of price risk was not the goal.