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 prices are low, producer can keep their product n Law of Supply: relationship between supply and price

Law of Supply

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

Law of Demand

Change in Demand

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

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

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

Carryover n 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

Carryover n 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

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

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

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

World Crop Supply n World Crop Supply Produced by the U.S. in 1989 Corn41% Wheat10% Soybeans49% n U.S. Crop Production Exported to Foreign Countries in 1989 Corn28% Wheat62% Soybeans30%

Livestock Fundamentals n 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 –long run will decrease supply n As Livestock prices rise, producers increase herd size which increases supply which lowers prices n This cycle repeats (9-16 years) (12 yr. Avg.)

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