Commodity Marketing Activity Chapter 2 Supply and Demand

Commodity Marketing Activity Chapter #2

Supply and Demand Supply: quantity of a commodity the producers are willing to provide at a given price n If prices are low, producer can keep their product n Law of Supply: relationship between supply and price n

Law of Supply

n Supply Grain Supply: carryover stocks, current production, expected production – weather – yields – amount in storage – government programs – exports & imports n Livestock Supply: current production only – weather – feed and feeder costs – exports & imports

Changes in Supply

Demand Quantity of a commodity that the buyers are willing to purchase at a given price n Law of Demand: relationship between demand price n Prices are high, buyers buy less n

Law of Demand

Change in Demand

Factors Affecting Demand Consumer Tastes n Income n Population Size n Price of Substitution Goods n Consumers will substitute other meats if beef is too high n

Market Price When quantity supplied equals quantity demanded = market price (equilibrium price) n When Supply line crosses Demand line n

Market Price

Shift in Supply Affects Market Price

Factors Affecting Market Price n Supply factors – – production costs government programs exports & imports price n Demand factors – – consumer tastes income population price of substitution goods – market price influences consumption

Factors Affecting Market Price n n n How will the market price be affected if: Supply increases, Demand is the same? Supply decreases, Demand is the same? Supply stays the same, Demand increases? Supply stays the same, Demand decreases?

Carryover Projected corn usage = 7 billion bu n Carryover stocks = 7 billion bu. n All production would be carryover n Prices will fall n Projected corn usage = 7 billion bu. n Carryover stocks = 2 billion bu. n Projected useage = 9 billion bu. n No corn left, prices rise drastically n

Carryover Compare carryover to prices of previous years n Carryover = 2 bill. Bu. & Production = 8 bill. Bu. , then carryover = 25% n Look at years where carryover was 20 -30%, this will give you a good idea what to expect prices to be n These numbers released regularly from the U. S. Dept. of Agriculture n Table Page 16 n

Important Fundamentals for Corn Acreage and yields n Moisture & temp in July & Aug n Livestock on Feed n Exports n U. S. dollar exchange rate n – weak U. S. dollar = foreigners can buy more

Important Fundamentals for Wheat Growing conditions n Winter n – Snow cover in winter Spring wheat n Exports n

Important Fundamentals for Soybeans Soybean Meal (animal & people food) n Oil (edible oil products & industry) n Crush Margin = cost of soybeans to value of resulting oil and meal n

World Crop Supply Produced by the U. S. in 1989 Corn 41% Wheat 10% Soybeans 49% n U. S. Crop Production Exported to Foreign Countries in 1989 Corn 28% Wheat 62% Soybeans 30% n

Livestock Fundamentals No carryover stocks n Cattle on Feed Report (p. 18) n Consumption patterns n High Feed Prices = Producers lower herd size (slaughter females) = Increases supply n – long run will decrease supply As Livestock prices rise, producers increase herd size which increases supply which lowers prices n This cycle repeats (9 -16 years) (12 yr. Avg. ) n

Livestock Fundamentals n Seasonal Pattern – cattle supply for slaughter is lower in spring, raises in late summer and fall Hog prices follow a 4 yr cycle (p. 19) n Hog demand related to price of beef n – high beef prices = increased pork consumption