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
A nation’s food and fiber system consists of four sectors that provide
food 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
US Corn Market
Annual Supply and Use of Corn

Local
Locallabor Food
labor Fooduse
use Food
Foodmanufacturers
manufacturers
market
market
Feed
Feeduse
use Feedlot
Feedlotoperations
operations
John
JohnDeere,
Deere, US
US
Pioneer
PioneerSeed corn Fuel
Seed corn Fueluse
use Ethanol
Ethanolproducers
producers
Monsanto
Monsanto farmers
farmers
Exports
Exports Foreign
Foreigncountries
countries
Local
Local
banker Storage
Storage Elevators
Elevatorsand
andbins
bins
banker

Page 90
Growth in Demand for US Corn
1995/96 1996/97 2005/06 2006/07 2007/08*
Domestic use for feed (Mil bu) 4,682 5,277 6,155 5,750 5,750
Percent of total use 55.1% 60.2% 54.6% 50.6% 45.30
Domestic use for food (mil bu) 1,176 1,240 1,358 1,355 1,370
Percent of total use 13.8% 14.2% 12.1% 11.9% 10.8%
Domestic use for seed (mil bu) 20 21 20 20 21
Percent of total use 0.2% 0.2% 0.2% 0.2% 0.2%
Domestic use for fuel (mil bu) 396 429 1,603 2,150 3,200
Percent of total use 4.7% 4.9% 14.2% 18.9% 26.8%
Exports (mil bu) 2,228 1,797 2,134 2,100 2350
Percent of total use 26.2% 20.5% 18.9% 18.5% 16.9%
Ending stock (mil bu) 347 883 1,967 1,304 1,997
Stock-to-use ratio 0.04 0.10 0.17 0.10 0.12
Season average price ($/bu) $3.24 $2.71 $2.00 $3.20 $3.20

* USDA latest projection for 2007.

Page 90
Page 90
Historical perspective on
crude oil prices
$80
$70
Nominal dollars per barrel

$60
PDVSA
PDVSAstrike
strike
$50 Iraq
Iraqwar
war
Iran/Iraq Asian
Asiangrowth
$40 Iran/IraqWar
War growth
$30
Iranian
IranianRevolution
Revolution
$20
$10
$0
1960
1962
1964
1966
1968

1972
1974
1976

1980
1982
1984
1986
1988
1990
1992
1994

1998
2000
2002
2004
2006
1970

1978

1996
Source: U.S. Department of Energy
Merging Demand and Supply
Factors
Factorsthat
thatchange
change
Price D*
D S demand:
demand:

 Other
Otherprices
prices

 Consumer
Consumerincome
income
PE* 
 Tastes
Tastesand
andpreferences
preferences
PE 
 Real
Realwealth
wealtheffect
effect

 Global
Globalevents
events

QE QE* Quantity
Merging Demand and Supply
S*
Price Factors
Factorsthat
thatchange
change
D S supply:
supply:
 Input
Inputcosts
costs
 Technology
Technology
PE*
 Government
Governmentpolicy
policy
PE
 Price
Priceexpectations
expectations
 Weather
Weather& &disease
disease
 Global
Globalevents
events

QE* QE Quantity
 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
Any Questions?
Understanding Macro Forces
M
A
Local
Locallabor Food
labor Fooduse
use Food
Foodmanufacturers
manufacturers C
market
market R
Feed
Feeduse
use Feedlot
Feedlotoperations
operations O
John
JohnDeere,
Deere, US
US
Pioneer
PioneerSeed corn Fuel E
Seed corn Fueluse
use Ethanol
Ethanolproducers
producers
Monsanto
Monsanto farmers
farmers C
Exports Foreign O
Exports Foreigncountries
countries
N
Local
Local
Storage Elevators
O
banker
banker Storage Elevatorsand
andbins
bins M
Y

Page 90
 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
Let’s Look at the
Macro Economy