Commodity Marketing Activity Chapter #2. Supply and Demand n Supply: quantity of a commodity the producers are willing to provide at a given price n If.

Commodity Marketing ActivityCommodity Marketing Activity

Chapter #2Chapter #2

Supply and DemandSupply and Demand

Supply: quantity of a commodity the Supply: quantity of a commodity the producers are willing to provide at a given producers are willing to provide at a given priceprice

If prices are low, producer can keep their If prices are low, producer can keep their productproduct

Law of Supply: relationship between supply Law of Supply: relationship between supply and priceand price

Law of SupplyLaw of Supply

0

20

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60

80

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Quantity

Supply

SupplySupply Grain Supply: carryover stocks, current production, Grain Supply: carryover stocks, current production,

expected productionexpected production– weatherweather– yieldsyields– amount in storageamount in storage– government programsgovernment programs– exports & importsexports & imports

Livestock Supply: current production onlyLivestock Supply: current production only– weatherweather– feed and feeder costsfeed and feeder costs– exports & importsexports & imports

Changes in SupplyChanges in Supply

Quantity

Price

DemandDemand

Quantity of a commodity that the buyers are Quantity of a commodity that the buyers are willing to purchase at a given pricewilling to purchase at a given price

Law of Demand: relationship between Law of Demand: relationship between demand and pricedemand and price

Prices are high, buyers buy lessPrices are high, buyers buy less

Law of DemandLaw of Demand

Quantity

Price

Change in DemandChange in Demand

Quantity

Price

Factors Affecting DemandFactors Affecting Demand

Consumer TastesConsumer Tastes IncomeIncome Population SizePopulation Size Price of Substitution GoodsPrice of Substitution Goods Consumers will substitute other meats if Consumers will substitute other meats if

beef is too highbeef is too high

Market PriceMarket Price

When quantity supplied equals quantity When quantity supplied equals quantity demanded = market price (equilibrium demanded = market price (equilibrium price)price)

When Supply line crosses Demand lineWhen Supply line crosses Demand line

Market PriceMarket Price

Quantity

Price

SupplyDemand

Equilibrium Price

Shift in Supply Affects Market PriceShift in Supply Affects Market Price

Quantity

Price

SupplyDemand

Equilibrium Price

Factors Affecting Market PriceFactors Affecting Market Price

Supply factorsSupply factors– production costsproduction costs

– government programsgovernment programs

– exports & importsexports & imports

– priceprice

Demand factorsDemand factors– consumer tastesconsumer tastes

– incomeincome

– populationpopulation

– price of substitution price of substitution goodsgoods

– market price influences market price influences consumptionconsumption

Factors Affecting Market PriceFactors Affecting Market Price

How will the market price How will the market price be affected if:be affected if:

Supply increases, Demand Supply increases, Demand is the same?is the same?

Supply decreases, Demand Supply decreases, Demand is the same?is the same?

Supply stays the same, Supply stays the same, Demand increases?Demand increases?

Supply stays the same, Supply stays the same, Demand decreases?Demand decreases?

Quantity

Price

SupplyDemand

Equilibrium Price

CarryoverCarryover

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

Carryover Carryover

Compare carryover to prices of previous yearsCompare carryover to prices of previous years Carryover = 2 bill. Bu. & Production = 8 bill. Carryover = 2 bill. Bu. & Production = 8 bill.

Bu., then carryover = 25%Bu., then carryover = 25% Look at years where carryover was 20-30%, Look at years where carryover was 20-30%,

this will give you a good idea what to expect this will give you a good idea what to expect prices to beprices to be

These numbers released regularly from the U.S. These numbers released regularly from the U.S. Dept. of AgricultureDept. of Agriculture

Table Page 16Table Page 16

Important Fundamentals for CornImportant Fundamentals for Corn

Acreage and yieldsAcreage and yields Moisture & temp in July & AugMoisture & temp in July & Aug Livestock on FeedLivestock on Feed ExportsExports U.S. dollar exchange rateU.S. dollar exchange rate

– weak U.S. dollar = foreigners can buy moreweak U.S. dollar = foreigners can buy more

Important Fundamentals for WheatImportant Fundamentals for Wheat

Growing conditionsGrowing conditions Winter Winter

– Snow cover in winterSnow cover in winter Spring wheatSpring wheat ExportsExports

Important Fundamentals for SoybeansImportant Fundamentals for Soybeans

Soybean Meal (animal & people food)Soybean Meal (animal & people food) Oil (edible oil products & industry)Oil (edible oil products & industry) Crush Margin = cost of soybeans to value Crush Margin = cost of soybeans to value

of resulting oil and mealof resulting oil and meal

World Crop SupplyWorld Crop Supply

World Crop Supply World Crop Supply Produced by the U.S. Produced by the U.S. in 1989in 1989

CornCorn 41%41%

WheatWheat 10%10%

SoybeansSoybeans 49%49%

U.S. Crop Production U.S. Crop Production Exported to Foreign Exported to Foreign Countries in 1989Countries in 1989

CornCorn 28%28%

WheatWheat 62%62%

SoybeansSoybeans 30%30%

Livestock FundamentalsLivestock Fundamentals

No carryover stocksNo carryover stocks Cattle on Feed Report (p. 18)Cattle on Feed Report (p. 18) Consumption patternsConsumption patterns High Feed Prices = Producers lower herd size High Feed Prices = Producers lower herd size

(slaughter females) = Increases supply(slaughter females) = Increases supply– long run will decrease supplylong run will decrease supply

As Livestock prices rise, producers increase herd As Livestock prices rise, producers increase herd size which increases supply which lowers pricessize which increases supply which lowers prices

This cycle repeats (9-16 years) (12 yr. Avg.)This cycle repeats (9-16 years) (12 yr. Avg.)

Livestock FundamentalsLivestock Fundamentals

Seasonal PatternSeasonal Pattern– cattle supply for slaughter is lower in spring, cattle supply for slaughter is lower in spring,

raises in late summer and fallraises in late summer and fall Hog prices follow a 4 yr cycle (p. 19)Hog prices follow a 4 yr cycle (p. 19) Hog demand related to price of beefHog demand related to price of beef

– high beef prices = increased pork consumptionhigh beef prices = increased pork consumption