1. Market Equilibrium Fundamentals Internal and external forces influencing the demand for a particular commodity Internal and external forces influencing the demand for a particular commodity Internal and external forces influencing supply Internal and external forces influencing supply Market equilibrium Market equilibrium Example of US corn market Example of US corn market

2. A nation’s food and fiber system consists of four sectors that provide food and fiber products to their ultimate consumer.

3. The farm input supply sector supplies variable and fixed inputs to farmers and have market power to establish the price.

4. Crop and livestock farmers sell their production into the food and fiber processing sector which also has power to influence price.

5. Processed food and fiber products move through wholesale and retail marketing channels.

6. The ultimate consumers of food and fiber products include households, businesses, governments and overseas buyers.

7. Let’s Focus on the US Corn Market

8. John Deere, Pioneer Seed Monsanto John Deere, Pioneer Seed Monsanto US corn farmers US corn farmers Food use Feed use Fuel use Exports Storage Food manufacturers Feedlot operations Ethanol producers Foreign countries Elevators and bins Local labor market Local labor market Local banker Local banker Annual Supply and Use of Corn Page 90

9. Growth in Demand for US Corn 1995/961996/972005/062006/072007/08* Domestic use for feed (Mil bu) Percent of total use 4,682 55.1% 5,277 60.2% 6,155 54.6% 5,750 50.6% 5,750 45.30 Domestic use for food (mil bu) Percent of total use 1,176 13.8% 1,240 14.2% 1,358 12.1% 1,355 11.9% 1,370 10.8% Domestic use for seed (mil bu) Percent of total use 20 0.2% 21 0.2% 20 0.2% 20 0.2% 21 0.2% Domestic use for fuel (mil bu) Percent of total use 396 4.7% 429 4.9% 1,603 14.2% 2,150 18.9% 3,200 26.8% Exports (mil bu) Percent of total use 2,228 26.2% 1,797 20.5% 2,134 18.9% 2,100 18.5% 2350 16.9% Ending stock (mil bu) Stock-to-use ratio 347 0.04 883 0.10 1,967 0.17 1,304 0.10 1,997 0.12 Season average price ($/bu)$3.24$2.71$2.00$3.20 * USDA latest projection for 2007.

10. Page 90

12. Historical perspective on crude oil prices Source: U.S. Department of Energy PDVSA strike Iraq war Asian growth PDVSA strike Iraq war Asian growth Iran/Iraq War Iranian Revolution

13. Merging Demand and Supply Price Quantity D S PEPE QEQE Factors that change demand: Other prices Consumer income Tastes and preferences Real wealth effect Global events Factors that change demand: Other prices Consumer income Tastes and preferences Real wealth effect Global events D* Q E* P E*

14. Price Quantity D S PEPE QEQE Factors that change supply: Input costs Technology Government policy Price expectations Weather & disease Global events Factors that change supply: Input costs Technology Government policy Price expectations Weather & disease Global events Q E* P E* S* Merging Demand and Supply

15. External Forces Farmers must form expectations about future price trends when investing Many forces are beyond their control Understanding these market forces requires knowledge of the domestic and global economies

16. Any Questions?

17. John Deere, Pioneer Seed Monsanto John Deere, Pioneer Seed Monsanto US corn farmers US corn farmers Food use Feed use Fuel use Exports Storage Food manufacturers Feedlot operations Ethanol producers Foreign countries Elevators and bins Local labor market Local labor market Local banker Local banker Understanding Macro Forces Page 90 MACROECONOMY

18. Macroeconomic “Big 5” 1.The rate of growth in economy (consumer income) 2.Interest rates 3.Inflation rates 4.Unemployment rate 5.Exchange rates and global demand

19. Let’s Look at the Macro Economy