Transcript Macroeconomic Fundamentals

Market Equilibrium
Fundamentals
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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 labor
market
John Deere,
Pioneer Seed
Monsanto
Local
banker
US
corn
farmers
Food use
Food manufacturers
Feed use
Feedlot operations
Fuel use
Ethanol producers
Exports
Foreign countries
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
$70
$60
PDVSA strike
Iraq war
Asian growth
$50
Iran/Iraq War
$40
$30
Iranian Revolution
$20
Source: U.S. Department of Energy
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
$0
1962
$10
1960
Nominal dollars per barrel
$80
Merging Demand and Supply
Price
Factors that change
S demand:
 Other prices
 Consumer income
 Tastes and preferences
 Real wealth effect
 Global events
D*
D
PE*
PE
QE QE*
Quantity
Merging Demand and Supply
S*
Price
D
S
PE*
PE
QE*QE
Factors that change
supply:
 Input costs
 Technology
 Government policy
 Price expectations
 Weather & disease
 Global events
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
Local labor
market
John Deere,
Pioneer Seed
Monsanto
Local
banker
US
corn
farmers
Food use
Food manufacturers
Feed use
Feedlot operations
Fuel use
Ethanol producers
Exports
Foreign countries
Storage
Elevators and bins
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M
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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
Let’s Look at the
Macro Economy