How Price Benchmarks Shape Markets
By Kellen Betts in Manifold
This summer, one of the country’s largest egg producers was charged with price gouging, inflating the price of their eggs to “unconscionably excessive” levels during the peak months of the pandemic. According to the New York Attorney General, the Ohio- and Pennsylvania-based producer Hillandale Farms (allegedly) charged up to four times more per carton in March and April, netting the company $4 million. 
Price gouging laws are designed to prevent abuse during periods of significant disruption. The New York statute cited in the case against Hillandale Farms states: “During any abnormal disruption of the market for consumer goods . . . vital and necessary for the health, safety and welfare of consumers, no party within the chain of distribution of such consumer goods . . . shall sell or offer to sell any such goods . . . for an amount which represents an unconscionably excessive price….” 
Critics argue these price controls extend shortages, and an unfettered market would more efficiently allocate scarce resources. If demand increases for bottled water following an earthquake that disrupts municipal water systems, for example, then some sellers might increase the price of bottled water to profit from their supply. These higher prices could then encourage some sellers to rush new supplies to the market. This argument, however, rests on the classic supply-and-demand model which is most effective for perfectly competitive markets where there is no price manipulation, the costs of trading are low, and everyone has full information about the price (and quality) of goods offered for sale.
In a market disrupted by an earthquake, even the most enterprising seller can’t bring supplies to market if roads and other infrastructure is not operational. More importantly, an unfettered market where sellers can raise prices to profit from increased demand allocates resources to those who can pay—which might mean physical cash on-hand in an earthquake—rather than those in the greatest need during an emergency.
In the case against Hillandale Farms, the New York Attorney General (NYAG) argues the company raised prices to profit from an increase in demand driven by the coronavirus pandemic rather than recouping increased costs. In defense, Hillandale argues that they charge market-based prices. Like many producers in the egg industry, they base their prices on an index published by a price reporting agency (PRA). 
PRAs are private companies who report news and analysis of company activities and price trends in commodity markets. Their price assessments serve as an independent reference for strategy, procurement, and a wide range of financial products that play a crucial role in commodity markets and the broader economy. An oil refinery, for example, may use prices from a PRA for specific grades of crude to determine what feedstock they will buy, and prices for its refined products to determine which markets to sell in. “Without their work,” argues Owain Johnson in The Price Reporters, “many important markets would experience a reduction in transparency that would have knock-on effects on confidence, activity levels and, ultimately, on the cost of everyday goods and services.” 
PRA price assessments are used as the basis of trade deals, simplifying negotiations to benchmark premiums rather than volatile commodity prices. Many commodities like grains, metals, and crude oil are traded on exchanges with transparent, near real-time pricing information. PRAs report on market prices and trading levels for these exchange-traded commodities. The assessments by different PRAs often deviate significantly on specific trading days but are remarkably consistent over longer periods of time for some commodities. The major price indexes for crude oil, for example, can differ by less than $0.01 per barrel.  PRAs also provide assessments and information on commodities that are not traded in sufficient quantity or frequency to be listed on exchanges.
Given the central role price benchmarks serve in commodity markets, there is increasing scrutiny by regulators worried about the manipulation of commodity markets affecting wholesale—and ultimately consumer—prices. There are few cases of a PRA deliberately publishing a false or misleading price, but their assessments have been subject to manipulation by market participations. 
In some markets, PRA price assessments have become entrenched in the contractual fabric of the industry. In the oil industry, long-term contracts and short- and long-term derivative instruments are based on Platts’ price benchmarks. This has created the condition where adopting a different price benchmark would have both contractual risk and risk when hedging physical contract prices in the derivative markets.
The methodology PRAs use can influence the way an industry trades as well. Platts uses transaction data from a specific window of time to compile its price quotations, and traders will time their trades based on this window if they want their transaction included—or not included—in Platts’ assessment. 
In an active market, there are conflicting price signals. Sellers will try to assess higher prices, buyers lower prices, and speculative traders will flip between the two based on where their position lies. PRAs use a variety of methodologies to provide a fair and independent assessment of where the market values a given product. Some use information collected from market participants and trading screens. Others use a more mechanical approach based on data submitted by a panel of traders. Most use a combination of analysis and judgement.
In the egg industry, Hillandale Farms and other producers use an index published by Urner Barry, a PRA specializing in agricultural commodities. Urner Barry uses a hierarchy of market information to form their price assessments including bona fide trades, offers and bids, trading activity of feedstock and related items, and assessments by market participants like Hillandale Farms. 
In effect, Hillandale Farms bases their prices on an index that uses their own assessment of the market. According to the New York Attorney General (NYAG), Hillandale claims its customers have agreed to this pricing practice but “to the extent that any such agreements with its customers purport to allow Hillandale to charge unconscionably excessive prices for eggs during an abnormal market disruption, such provisions are illegal, in violation of public policy, and unenforceable under New York law.” 
 New York Attorney General. (2020, September 5). Attorney General James Sues One of the Nation’s Largest Egg Producers for Price Gouging During the Coronavirus Pandemic.
 New York versus Hillandale Farms. New York versus Hillandale Farms, Supreme Court of the State of New York (August 10, 2020).
 Johnson, O. (2018). The Price Reporters. New York: Routledge.
 International Organization of Securities Commissions IOSCO. (2011). Oil Price Reporting Agencies Report by IEA, IEF, OPEC and IOSCO to G20 Finance Ministers, October 2011.
 Urner Barry. (2020). Price Reporting Methodology.
What We're Reading
How Giant Ships Are Built by Christopher Payne and Niraj Chokshi in The New York Times
Before the U.S. Can Have Clean Power, It Needs More Power Lines by Brian Eckhouse in Bloomberg Green
China is the world’s factory, more than ever in The Economist
The Self-Driving Car Is a Red Herring: Ghost roads of robot workhorses will power cities through the shocks of the 21st century, by Anthony Townsend in Nautilus
Computer Scientists Break Traveling Salesperson Record by Erica Klarreich in Quanta
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By the Numbers
The average number of eggs American’s consume in a year, which is down from 389 eggs per year in 1950. (USDA Food Safety and Inspection Service)
Kellen Betts is Editor of Supply Chain Weekly. He also writes the newsletter Manifold, exploring the intersection of supply chain, sustainability, and technology. Contact him at firstname.lastname@example.org. Follow him on LinkedIn and @KellenBetts.