supply and demand h why consider the topic? h why should you care about the demand curve for your...
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Supply and DemandSupply and DemandSupply and DemandSupply and Demand
Why consider the topic?Why consider the topic?
Why should you care about the Why should you care about the demand curve for your demand curve for your commodities?commodities?
P1P1
Q1Q1
Demand shiftersDemand shiftersDemand shiftersDemand shifters
Demand shiftersDemand shiftersDemand shiftersDemand shifters
IncomeIncomePopulation size, compositionPopulation size, compositionCompetitors supplies/pricesCompetitors supplies/pricesProcessing/retail marginsProcessing/retail marginsGovernment policiesGovernment policiesTastes and preferencesTastes and preferences
Demand ChangesDemand ChangesDemand ChangesDemand Changes
What changes in food consumption What changes in food consumption patterns have occurred in the last patterns have occurred in the last 10-20 years? Why?10-20 years? Why?
Summarize the key factors Summarize the key factors influencing the demand for a food influencing the demand for a food or agricultural product?or agricultural product?
Demand/consumption Demand/consumption changeschangesDemand/consumption Demand/consumption changeschanges
More vegetable fats and oils, More vegetable fats and oils,
sharply reduced animal fats, sharply reduced animal fats,
total fat declining in last decade to total fat declining in last decade to 33% of calories33% of calories
More pizza and pasta, cheeseMore pizza and pasta, cheeseLess beef and lamb, more poultryLess beef and lamb, more poultryMore fishMore fish
Demand/consumption Demand/consumption changeschangesDemand/consumption Demand/consumption changeschanges
More soft drinks (esp.non- caloric)More soft drinks (esp.non- caloric)Less fluid milk (esp. whole milk)Less fluid milk (esp. whole milk)More alcoholic beveragesMore alcoholic beveragesMore beer (22 gal., less distilled More beer (22 gal., less distilled
liquorliquorLess eggs Less eggs More sweeteners (esp. corn More sweeteners (esp. corn
sweeteners)sweeteners)
Demand/consumption Demand/consumption changeschangesDemand/consumption Demand/consumption changeschanges
More fresh fruits and vegetablesMore fresh fruits and vegetables Less cigarettesLess cigarettesOthers you have noticed??Others you have noticed??Overall, higher incidence of Overall, higher incidence of
overweight--exceeds 30% of USoverweight--exceeds 30% of US
Demand/consumption Demand/consumption changes-- Why??changes-- Why??Demand/consumption Demand/consumption changes-- Why??changes-- Why??
Higher incomesHigher incomesChanges in relative prices (chicken)Changes in relative prices (chicken)Age distribution, life styles Age distribution, life styles Home vs. away from home eatingHome vs. away from home eatingHealth and disease concernsHealth and disease concerns
Cholesterol, saturated fatCholesterol, saturated fat
Demand for Agricultural ProductsDemand for Agricultural ProductsDemand for Agricultural ProductsDemand for Agricultural Products
Explain the farm demand-retail demand Explain the farm demand-retail demand difference?difference?cost of processingcost of processinghandling costhandling costtransport costtransport costprofitprofitFarm demand derived from retail!Farm demand derived from retail!
Price elasticity of demandPrice elasticity of demandPrice elasticity of demandPrice elasticity of demand
PP
1%1%
X%X%
Price Elasticity of DemandPrice Elasticity of DemandPrice Elasticity of DemandPrice Elasticity of Demand
% Change in Q% Change in Q11
- - - - - - - - - - - = - - - - - - - - - - - = Usually between 0 and -1Usually between 0 and -1
% Change in P% Change in P11
Demand ElasticitiesDemand ElasticitiesDemand ElasticitiesDemand Elasticities
Economists usually only talk about Economists usually only talk about demand elasticities. For most food demand elasticities. For most food products, it is between 0 and -1 products, it is between 0 and -1 (inelastic demand).(inelastic demand).
Very inelastic--eggs, milkVery inelastic--eggs, milk
Less inelastic--chickenLess inelastic--chicken
(If relatively close substitutes, (If relatively close substitutes, usually less inelastic.)usually less inelastic.)
ElasticitiesElasticitiesElasticitiesElasticities
Farm price elasticities are usually Farm price elasticities are usually the same as retail price elasticitythe same as retail price elasticity
(if a percentage markup is used) (if a percentage markup is used)
or more inelastic or more inelastic
(if a constant dollar markup is (if a constant dollar markup is used).used).
Price Cross - ElasticityPrice Cross - ElasticityPrice Cross - ElasticityPrice Cross - Elasticity
% Change in Q% Change in Q11
- - - - - - - - - - - = - - - - - - - - - - - = Usually positive if Usually positive if substitutes or substitutes or
competitors; competitors; negative if negative if
complements. complements.
% Change in P% Change in P22
Price flexibility of demandPrice flexibility of demandPrice flexibility of demandPrice flexibility of demand
PP
X%X%
1%1%
Price Flexibility of DemandPrice Flexibility of DemandPrice Flexibility of DemandPrice Flexibility of Demand
% Change in P% Change in P11
- - - - - - - - - - - = Between -1 and -10- - - - - - - - - - - = Between -1 and -10
% Change in Q% Change in Q11
If price elasticity is -.5, price If price elasticity is -.5, price flexibility is -2. (1/-.5)=-2flexibility is -2. (1/-.5)=-2
Using this in forecastingUsing this in forecastingUsing this in forecastingUsing this in forecasting
In price forecasting, you often have In price forecasting, you often have information regarding the likely information regarding the likely change in supply, and want to know change in supply, and want to know the likely price change resulting from the likely price change resulting from it--you need to use the price it--you need to use the price flexibility.flexibility.
e.g. A 10% change in Q (+) means a 20% e.g. A 10% change in Q (+) means a 20% change in price (-) if the price flexibility change in price (-) if the price flexibility is -2is -2
Approximate price flexibilities:Approximate price flexibilities:
HogsHogs -1.9-1.9
Fed CattleFed Cattle -1.6-1.6
CornCorn -2.0-2.0
SoybeansSoybeans -2.5-2.5
Price FlexibilityPrice FlexibilityPrice FlexibilityPrice Flexibility
% Change in P% Change in P22
- - - - - - - - - - - = Negative and big if - - - - - - - - - - - = Negative and big if % Change in Q% Change in Q11 good substitutes good substitutes
e.g. A 10% increase in beef quantity e.g. A 10% increase in beef quantity marketed might cause a 6% drop in marketed might cause a 6% drop in pork price if the cross-flexibility is -.6pork price if the cross-flexibility is -.6
Price Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - Flexibility
PP22
-.6%-.6%
1%1%
QQ11
Price Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - Flexibility
If you estimate Q change to be +5% If you estimate Q change to be +5% from last year, and other factors do from last year, and other factors do not change,not change,
% P change = % Q change * P flex% P change = % Q change * P flex
% P change = +5 * -1.9 = - 9.5 %% P change = +5 * -1.9 = - 9.5 %
If $50 last year, $50 - (.095 * 50) = $45.25If $50 last year, $50 - (.095 * 50) = $45.25
Price Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - Flexibility
If other factors change too, use the If other factors change too, use the same procedure and add up the same procedure and add up the percentage price changes to get the percentage price changes to get the net price change expected.net price change expected.
Price Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - FlexibilityPrice Cross - Flexibility
Income Elasticity of DemandIncome Elasticity of DemandIncome Elasticity of DemandIncome Elasticity of Demand
Engel’s Law: As income rises, a Engel’s Law: As income rises, a declining percentage is spent on declining percentage is spent on food.food.
Why?Why?At low incomes, virtually all income At low incomes, virtually all income
has to be spent on essentials like has to be spent on essentials like food and shelter.food and shelter.
Income Elasticity of Income Elasticity of DemandDemandIncome Elasticity of Income Elasticity of DemandDemand
At high incomes, At high incomes,
Do not need more food, but may Do not need more food, but may upgrade food somewhat (steak vs upgrade food somewhat (steak vs hamburger), more eating out and hamburger), more eating out and processed food.processed food.
Discretionary purchases--house, car--Discretionary purchases--house, car--
go first in recession.go first in recession.
Income Elasticity of DemandIncome Elasticity of DemandIncome Elasticity of DemandIncome Elasticity of Demand
Income elasticity of demand for Income elasticity of demand for most food products is positive and most food products is positive and less than 1. less than 1.
Inferior goods (possibly dry beans, Inferior goods (possibly dry beans, unprocessed potatoes) would have unprocessed potatoes) would have a negative income elasticity of a negative income elasticity of demand.demand.
In forecasting, usually expect increases In forecasting, usually expect increases in income to result in increased demand in income to result in increased demand for most “normal” goods.for most “normal” goods.
Thus, the income effect on Thus, the income effect on priceprice or or quantity quantity purchasedpurchased will usually be positive, but often will usually be positive, but often not significantly different from zero in high not significantly different from zero in high income countries like the U.S. (+2% income income countries like the U.S. (+2% income implies +.4% price change)implies +.4% price change)
Income Elasticity of DemandIncome Elasticity of DemandIncome Elasticity of DemandIncome Elasticity of Demand
Forecasting ExerciseForecasting ExerciseForecasting ExerciseForecasting Exercise
Assume that:Assume that: flexibilityflexibility
cattle Qcattle Q +4%+4% -1.5-1.5
hog Qhog Q +2%+2% -.3 -.3
incomeincome +3% +3% +.3+.3
poultry Qpoultry Q +5%+5% -.2 -.2
Forecasting exerciseForecasting exerciseForecasting exerciseForecasting exercise
The percentages are changes from The percentages are changes from last year when prices for fed cattle last year when prices for fed cattle were $104 per cwt. in the beef. were $104 per cwt. in the beef.
What price would you expect for the What price would you expect for the same time this year?same time this year?
Forecasting ExerciseForecasting ExerciseForecasting ExerciseForecasting Exercise
Assume that:Assume that: flexibility flexibility %chngP%chngP
cattle Qcattle Q +4%+4% -1.5-1.5 -6 -6
hog Qhog Q +2%+2% -.3 -.3 -.6-.6
incomeincome +3% +3% +.3+.3 +.9 +.9
poultry Qpoultry Q +5%+5% -.2 -.2 -1-1
104x(1-.067)=97104x(1-.067)=97 -6.7% -6.7%
Forecasting exerciseForecasting exerciseForecasting exerciseForecasting exercise
Assume that:Assume that: flexibilityflexibility
cattle Qcattle Q - 4%- 4% -.4 -.4
hog Qhog Q - 2%- 2% -1.9 -1.9
incomeincome +1% +1% +.3 +.3
poultry Qpoultry Q +5%+5% -.2 -.2
Forecast change from $48 hogs last Forecast change from $48 hogs last year. year.
Forecasting exerciseForecasting exerciseForecasting exerciseForecasting exercise
Assume that:Assume that: flexibilityflexibility P impactP impact
cattle Qcattle Q - 4%- 4% -.4 -.4 1.6%1.6%
hog Qhog Q - 2% -1.9- 2% -1.9 3.83.8
incomeincome +1% +1% +.3+.3 .3 .3
poultry Qpoultry Q +5%+5% -.2 -.2 -1.0-1.0
$48 x 1.047 = 50.256 $48 x 1.047 = 50.256 4.7% 4.7%
SupplySupplySupplySupply
What are the key factors affecting What are the key factors affecting market supply?market supply?
Relative profitsRelative profitsRecent, expected input and output Recent, expected input and output
pricespricesTechnology and management Technology and management
changeschanges
SupplySupplySupplySupply
WeatherWeather
--most dramatic effect-crops--most dramatic effect-cropsPrevious production levelsPrevious production levels
Expertise, specialized equipment, Expertise, specialized equipment, habithabit
As the expected commodity prices As the expected commodity prices increase, farmers will shift more of increase, farmers will shift more of their productive resources into their productive resources into producing that commodity.producing that commodity.
Supply responseSupply responseSupply responseSupply response
Supply AnalysisSupply AnalysisSupply AnalysisSupply Analysis
Potential supply is limited by the Potential supply is limited by the biological nature of agricultural biological nature of agricultural production, and the time it takes to production, and the time it takes to respond to incentives. respond to incentives.
Short run, inventories in storage or in Short run, inventories in storage or in feedlot are the primary supply factors feedlot are the primary supply factors expected to influence price.expected to influence price.
Longer run-change acres, sows, cowsLonger run-change acres, sows, cows
Behavioral lags:Behavioral lags: How long before you believe How long before you believe
relative price changes are likely to relative price changes are likely to persist?persist?
New technology, such as higher New technology, such as higher yielding crops, new growth yielding crops, new growth promotants, global positioning promotants, global positioning systems, etc.systems, etc.
Supply Response / Supply ShiftersSupply Response / Supply ShiftersSupply Response / Supply ShiftersSupply Response / Supply Shifters
Government restrictions on Government restrictions on technology or acreagetechnology or acreageRestricted chemical use, “free Restricted chemical use, “free
range” chickenrange” chickenGovernment tax and farm program Government tax and farm program
incentives for some enterprises, incentives for some enterprises, acreage restrictions in some farm acreage restrictions in some farm programsprograms
Supply Response / Supply ShiftersSupply Response / Supply ShiftersSupply Response / Supply ShiftersSupply Response / Supply Shifters
In a few days or a week:In a few days or a week:
grain supplies in storage grain supplies in storage could rapidly be marketed if could rapidly be marketed if a favorable price change a favorable price change occurred, but limited to the occurred, but limited to the old crop size plus carryover old crop size plus carryover from prior yearfrom prior year
Supply AnalysisSupply AnalysisSupply AnalysisSupply Analysis
In a few days or a week:In a few days or a week:
livestock at or near normal livestock at or near normal market weight could be sold, market weight could be sold, but limits on acceptable but limits on acceptable product characteristics product characteristics would limit possible supply would limit possible supply increases (borrow from increases (borrow from tomorrow to market today).tomorrow to market today).
Supply AnalysisSupply AnalysisSupply AnalysisSupply Analysis
In a few monthsIn a few months
In grains, little change In grains, little change possible unless a new crop possible unless a new crop becomes available, and that becomes available, and that crop size can’t be affected crop size can’t be affected much by producers.much by producers.
Supply AnalysisSupply AnalysisSupply AnalysisSupply Analysis
In a few monthsIn a few months
In livestock, producers could In livestock, producers could feed more head, feed to feed more head, feed to heavier weights, or sell heavier weights, or sell breeding stock, but basic breeding stock, but basic number of head available is number of head available is already determined. already determined.
Supply AnalysisSupply AnalysisSupply AnalysisSupply Analysis
Next year:Next year:
In grains, producers could In grains, producers could change acreage and change acreage and fertilization, etc. to change fertilization, etc. to change size of next crop.size of next crop.
Supply AnalysisSupply AnalysisSupply AnalysisSupply Analysis
Supply AnalysisSupply AnalysisSupply AnalysisSupply Analysis
Next year:Next year:
In livestock, could breed more In livestock, could breed more hogs, turkeys, egg producing hogs, turkeys, egg producing chickens, and keep more dairy chickens, and keep more dairy heifers in the herd, and heifers in the herd, and increase market suppliers in a increase market suppliers in a year, but breeding more cows year, but breeding more cows would not change beef would not change beef suppliers in a year.suppliers in a year.
The Cobweb TheoremThe Cobweb TheoremThe Cobweb TheoremThe Cobweb Theorem
Quantity supplied now is the Quantity supplied now is the response to earlier price and profit response to earlier price and profit signals.signals.
The Cobweb TheoremThe Cobweb TheoremThe Cobweb TheoremThe Cobweb Theorem
Farmers tend to react as if the Farmers tend to react as if the prices they observe today are the prices they observe today are the best indicator of the prices they will best indicator of the prices they will experience next year, and often fail experience next year, and often fail to consider the effect which their to consider the effect which their and their neighbor’s production and their neighbor’s production changes will have on prices then.changes will have on prices then.
The Cobweb TheoremThe Cobweb TheoremThe Cobweb TheoremThe Cobweb Theorem
In agricultural commodity markets, In agricultural commodity markets, this results in a pattern of high this results in a pattern of high prices now causing higher prices now causing higher production and lower prices later, production and lower prices later, followed by lower production and followed by lower production and higher prices,and so on.higher prices,and so on.
Cyclical productionCyclical productionCyclical productionCyclical production
Slow reactions or overreactions to Slow reactions or overreactions to prices recently lead to production prices recently lead to production changes laterchanges later
Cattle cycle--9-10 yearsCattle cycle--9-10 yearsHog cycle--3-4 yearsHog cycle--3-4 yearsBroiler cycle--less than a yearBroiler cycle--less than a year
Fundamental forecastingFundamental forecastingFundamental forecastingFundamental forecasting
Based on supply/demand factorsBased on supply/demand factorsSeasonal patternsSeasonal patternsBalance sheet methods--grainsBalance sheet methods--grainsPrice flexibility methodsPrice flexibility methodsPrice forecast equationsPrice forecast equationsAnalagous yearsAnalagous years
Fundamental forecastingFundamental forecastingFundamental forecastingFundamental forecasting
Seasonal price patternsSeasonal price patterns
Futures--often different patternsFutures--often different patterns
Cash prices-- often strong Cash prices-- often strong seasonalseasonal
Indirect effects on related commodities Indirect effects on related commodities via input or output price chagesvia input or output price chages
Fundamental forecastingFundamental forecastingFundamental forecastingFundamental forecasting
Attempt to forecast likely direction Attempt to forecast likely direction and amount of price changeand amount of price change
Probabilities are much higher for Probabilities are much higher for success in direction than amountsuccess in direction than amount
When little information is known When little information is known yet, accuracy is not highyet, accuracy is not high
Analagous yearsAnalagous yearsAnalagous yearsAnalagous years
Find a similar supply - demand Find a similar supply - demand setting and see how prices behaved setting and see how prices behaved thenthen
Primarily used for unusual Primarily used for unusual situations--short crop years, situations--short crop years, embargos, shocks with few embargos, shocks with few precedentsprecedents
Seasonal patternsSeasonal patternsSeasonal patternsSeasonal patterns
Which commodities have strong Which commodities have strong seasonal production patterns?seasonal production patterns?
Which food products have strong Which food products have strong seasonal demand variations?seasonal demand variations?
Seasonal Price PatternsSeasonal Price PatternsSeasonal Price PatternsSeasonal Price Patterns
What causes them?What causes them?
Seasonal consumptionSeasonal consumption
eating habitseating habits
cooking practicescooking practices
HolidaysHolidays
Seasonal Price PatternsSeasonal Price PatternsSeasonal Price PatternsSeasonal Price Patterns
What causes them?What causes them?
WeatherWeather
Seasonal productionSeasonal production
batch production -- cropsbatch production -- crops
risk or cost differences -- risk or cost differences -- livestocklivestock
Seasonal patternsSeasonal patternsSeasonal patternsSeasonal patterns
Either or both can cause seasonal Either or both can cause seasonal patterns in cash prices which you patterns in cash prices which you can use to advantagecan use to advantageStoring grainStoring grainTiming feeder cattle or pig Timing feeder cattle or pig
purchasespurchasesTiming cash salesTiming cash sales
Forecast equationsForecast equationsForecast equationsForecast equations
P = f(Prod, Beg Inv, Q comp, Inc, P = f(Prod, Beg Inv, Q comp, Inc,
Export Q, Livestock Q, etc.)Export Q, Livestock Q, etc.)
Estimate price impacts of historical Estimate price impacts of historical variations in key factors, then plug variations in key factors, then plug in todays best estimates to in todays best estimates to calculate likely pricecalculate likely price
Balance sheet aproachBalance sheet aproachBalance sheet aproachBalance sheet aproach
Beg. inventoryBeg. inventory
+ production+ production
+ + importsimports
Tot. SupplyTot. Supply
Tot. supply - tot. Tot. supply - tot. use = carryoveruse = carryover
Feed useFeed use
ExportsExports
SeedSeed
IndustrialIndustrial
Tot. UseTot. Use
Use price flex to Use price flex to get priceget price
Grain Price ForecastingGrain Price ForecastingGrain Price ForecastingGrain Price Forecasting
Forecast likely changes in use Forecast likely changes in use without price changeswithout price changes
Then, calculate % change in Then, calculate % change in carryovercarryover
Multiply by price flexibility to get Multiply by price flexibility to get price percentage changeprice percentage change
Prob.Prob.
%%
YieldsYields
Probability Distribution of ForecastsProbability Distribution of ForecastsProbability Distribution of ForecastsProbability Distribution of Forecasts
Probability Distribution of ForecastsProbability Distribution of ForecastsProbability Distribution of ForecastsProbability Distribution of Forecasts
Needed for marketing strategy choiceNeeded for marketing strategy choiceLong tail on left of yield distribution Long tail on left of yield distribution
curvecurveLong tail on right of price distribution Long tail on right of price distribution
curvecurveDistribution curve is compressed as Distribution curve is compressed as
growing season advancesgrowing season advances
Grain Price ForecastingGrain Price ForecastingGrain Price ForecastingGrain Price Forecasting
Critical factors:Critical factors:Beginning inventoryBeginning inventoryProductionProduction
Acres, YieldsAcres, YieldsUseUse
ExportsExports
Feed UseFeed Use
Grain Price ForecastingGrain Price ForecastingGrain Price ForecastingGrain Price Forecasting
Expected change in ending Expected change in ending inventory vs. last year inventory vs. last year
Carryover/use ratio is biggest Carryover/use ratio is biggest influence on priceinfluence on price
Need ~ 3 weeks inventory at end of Need ~ 3 weeks inventory at end of mktg. yearmktg. year
Grain Price ForecastingGrain Price ForecastingGrain Price ForecastingGrain Price Forecasting
Forecast the crop mktg. year price, Forecast the crop mktg. year price, then use seasonal patterns for then use seasonal patterns for short/long crop years for shorter short/long crop years for shorter term prices.term prices.
Price flexibilities:Price flexibilities:-2.5 Soybeans-2.5 Soybeans-2.0 Corn-2.0 Corn
Forecasting exerciseForecasting exerciseForecasting exerciseForecasting exercise
Crop condition reports in July Crop condition reports in July suggest that soybean crop may be suggest that soybean crop may be 5% smaller than most recent 5% smaller than most recent forecast. If your last price forecast forecast. If your last price forecast was 6.80/bushel for the marketing was 6.80/bushel for the marketing year, how would you forecast:year, how would you forecast:
(a) the next year’s average price(a) the next year’s average price
(b) the price at harvest time.(b) the price at harvest time.
Assignment 7Assignment 7Assignment 7Assignment 7
Use the DTN Farmdayta screen in Use the DTN Farmdayta screen in 174 or 468 Heady174 or 468 Heady
Describe two most useful types of Describe two most useful types of information for an agribusiness you information for an agribusiness you select. Is this service worth the select. Is this service worth the cost?cost?
Forecasts of Monthly Crop PriceForecasts of Monthly Crop PriceForecasts of Monthly Crop PriceForecasts of Monthly Crop Price
First concentrate on season First concentrate on season average price, U.S.average price, U.S.
U.S. average typically above IA by U.S. average typically above IA by relative constant amountrelative constant amount
Season average price adjusted to Season average price adjusted to monthly via historical monthly monthly via historical monthly patternpattern -two distinct patterns: -two distinct patterns:
normal & short cropnormal & short crop
Grain Price ForecastingGrain Price ForecastingGrain Price ForecastingGrain Price Forecasting
Market information sources:Market information sources:Reports on weather, soil moisture, Reports on weather, soil moisture,
crop condition, acreage, production, crop condition, acreage, production, inventories, exports, livestock inventories, exports, livestock numbers, crops and use elsewhere numbers, crops and use elsewhere
Government policies re acreage set Government policies re acreage set aside, CRP, trade, target or loan aside, CRP, trade, target or loan prices, etc. less important now.prices, etc. less important now.
Feeder livestock pricesFeeder livestock pricesFeeder livestock pricesFeeder livestock prices
Why are prices so volatile?Why are prices so volatile?
Are there unusual factors which Are there unusual factors which influence their prices?influence their prices?
Fed cattle price changeFed cattle price changeFed cattle price changeFed cattle price change
$10/cwt. live weight up = $110/hd.$10/cwt. live weight up = $110/hd.
$110/hd more for feeder steer $110/hd more for feeder steer
$110 / 6 cwt. = $18.33 per cwt. for $110 / 6 cwt. = $18.33 per cwt. for feeder animal; almost twice the feeder animal; almost twice the impact per cwt.impact per cwt.
Market hog price changeMarket hog price changeMarket hog price changeMarket hog price change
$5/cwt. price change =$5/cwt. price change =
$12.50 per head$12.50 per head
Willing to pay $12.50 more per head Willing to pay $12.50 more per head for feeder pigs?for feeder pigs?
If input price , what is the effect on If input price , what is the effect on feeder cattle or pig price?feeder cattle or pig price?
ExampleExample
Corn Price Feeder Cattle Corn Price Feeder Cattle PricePrice
Corn Price Feeder Pig PriceCorn Price Feeder Pig Price
Input price impactsInput price impactsInput price impactsInput price impacts
Corn price changeCorn price changeCorn price changeCorn price change
Corn price up $1/bushel.Corn price up $1/bushel.Effect on fed cattle price now?Effect on fed cattle price now?
Little, weight effect only?Little, weight effect only?Effect on fed cattle later?Effect on fed cattle later?
Fewer on feed, weight effect.Fewer on feed, weight effect.
Corn price changeCorn price changeCorn price changeCorn price change
Feeder cattle effectFeeder cattle effectFeedlot operators reduce bids to Feedlot operators reduce bids to
maintain profits near earlier levelsmaintain profits near earlier levels
60 bushels of corn=$60/head60 bushels of corn=$60/head
$60 / 6cwt.= $10/cwt. price drop$60 / 6cwt.= $10/cwt. price drop
Technology changeTechnology changeTechnology changeTechnology change
Determine profit change per head or Determine profit change per head or cwt. of final product caused by cwt. of final product caused by technology changes in industrytechnology changes in industry
.5 lbs. feed less / lb. gain = .5 lbs. feed less / lb. gain =
$.07 x .5 lbs. x 180 lbs. gain = $.07 x .5 lbs. x 180 lbs. gain =
$6.30 less cost passed on to $6.30 less cost passed on to
feeder pig suppliers as higher pricefeeder pig suppliers as higher price
Forecast ChangesForecast ChangesForecast ChangesForecast Changes
Would those forecast changes Would those forecast changes necessarily be accurate?necessarily be accurate?
Presumes that feedlot Presumes that feedlot operators look at current operators look at current price changes and expect price changes and expect similar changes in prices similar changes in prices later.later.
Forecast ChangesForecast ChangesForecast ChangesForecast Changes
And presumes that the And presumes that the competitive process will competitive process will bring the related markets bring the related markets back to previous profit back to previous profit levels.levels.
EndEndEndEnd