Market Equilibrium Fundamentals

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Market Equilibrium Fundamentals

• Internal and external forces influencing the
  demand for a particular commodity
• Internal and external forces influencing supply
• Market equilibrium
• Example of US corn market

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A nations 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.

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The ultimate consumers of food and fiber products
include households, businesses, governments and
overseas buyers.
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Lets Focus on the US Corn Market
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Annual Supply and Use of Corn
Local labor market
Food use
Food manufacturers
Feed use
Feedlot operations
John Deere, Pioneer Seed Monsanto
US corn farmers
Fuel use
Ethanol producers
Exports
Foreign countries
Local banker
Storage
Elevators and bins
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Growth in Demand for US Corn
1995/96 1996/97 2005/06 2006/07 2007/08
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 3.20
USDA latest projection for 2007.
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Historical perspective on crude oil prices
PDVSA strike Iraq war Asian growth
Iran/Iraq War
Iranian Revolution
Source U.S. Department of Energy
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Merging Demand and Supply

• Factors that change
• demand
• Other prices
• Consumer income
• Tastes and preferences
• Real wealth effect
• Global events

D
Price
D
S
PE
PE
Quantity
QE
QE
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Merging Demand and Supply
S

• Factors that change
• supply
• Input costs
• Technology
• Government policy
• Price expectations
• Weather disease
• Global events

Price
D
S
PE
PE
Quantity
QE
QE
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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

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Any Questions?
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Understanding Macro Forces
M A C R O E C O N O M Y
Local labor market
Food use
Food manufacturers
Feed use
Feedlot operations
John Deere, Pioneer Seed Monsanto
US corn farmers
Fuel use
Ethanol producers
Exports
Foreign countries
Local banker
Storage
Elevators and bins
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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

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Lets Look at the Macro Economy