Market Equilibrium Fundamentals

Market Equilibrium Market Equilibrium Fundamentals Fundamentals

Internal and external forces influencing Internal and external forces influencing the demand for a particular commoditythe demand for a particular commodity

Internal and external forces influencing Internal and external forces influencing supplysupply

Market equilibriumMarket equilibrium Example of US corn marketExample of US corn market

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

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

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

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

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

Let’s Focus on the Let’s Focus on the US Corn MarketUS Corn Market

John Deere,Pioneer Seed

Monsanto

UScorn

farmers

Food use

Feed use

Fuel use

Exports

Storage

Food manufacturers

Feedlot operations

Ethanol producers

Foreign countries

Elevators and bins

Local labormarket

Local banker

Annual Supply and Use of CornAnnual Supply and Use of Corn

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Growth in Demand for US CornGrowth in Demand for US Corn1995/96 1996/97 2005/06 2006/07 2007/08*

Domestic use for feed (Mil bu)Percent of total use

4,68255.1%

5,27760.2%

6,15554.6%

5,75050.6%

5,75045.30

Domestic use for food (mil bu)Percent of total use

1,17613.8%

1,24014.2%

1,35812.1%

1,35511.9%

1,37010.8%

Domestic use for seed (mil bu)Percent of total use

200.2%

210.2%

200.2%

200.2%

210.2%

Domestic use for fuel (mil bu)Percent of total use

3964.7%

4294.9%

1,60314.2%

2,15018.9%

3,20026.8%

Exports (mil bu)Percent of total use

2,22826.2%

1,79720.5%

2,13418.9%

2,10018.5%

235016.9%

Ending stock (mil bu)Stock-to-use ratio

3470.04

8830.10

1,9670.17

1,3040.10

1,9970.12

Season average price ($/bu) $3.24 $2.71 $2.00 $3.20 $3.20

* USDA latest projection for 2007.

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$0$10$20$30$40

$50$60$70$80

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Nom

inal

dol

lars

per

bar

rel

Historical perspective on Historical perspective on crude oil pricescrude oil prices

Source: U.S. Department of Energy

PDVSA strikeIraq war

Asian growthIran/Iraq War

Iranian Revolution

Merging Demand and SupplyMerging Demand and SupplyPrice

Quantity

D S

PE

QE

Factors that changedemand: Other prices Consumer income Tastes and preferences Real wealth effect Global events

D*

QE*

PE*

Price

Quantity

D S

PE

QE

Factors that changesupply: Input costs Technology Government policy Price expectations Weather & disease Global events

QE*

PE*

S*

Merging Demand and SupplyMerging Demand and Supply

External ForcesExternal 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

Any Questions?Any Questions?

John Deere,Pioneer Seed

Monsanto

UScorn

farmers

Food use

Feed use

Fuel use

Exports

Storage

Food manufacturers

Feedlot operations

Ethanol producers

Foreign countries

Elevators and bins

Local labormarket

Local banker

Understanding Macro ForcesUnderstanding Macro Forces

Page 90

MMAACCRROO

EECCOONNOOMMYY

Macroeconomic “Big 5”Macroeconomic “Big 5”1. The rate of growth in

economy (consumer income)

2. Interest rates3. Inflation rates4. Unemployment rate5. Exchange rates and

global demand

Let’s Look at the Let’s Look at the Macro EconomyMacro Economy