Supply and Demand - PowerPoint PPT Presentation

Loading...

PPT – Supply and Demand PowerPoint presentation | free to download - id: 775d9a-ZGYwY



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Supply and Demand

Description:

Title: Fundemental price forcasting Author: Ed Damman / Donna Moore Last modified by: Pam Mundt Created Date: 9/24/1998 4:10:52 PM Document presentation format – PowerPoint PPT presentation

Number of Views:43
Avg rating:3.0/5.0
Slides: 78
Provided by: EdDam3
Learn more at: http://econ.iastate.edu
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Supply and Demand


1
Supply and Demand
  • Why consider the topic?
  • Why should you care about the demand curve for
    your commodities?

2
Demand shifters
  • P1
  • Q1

3
Demand shifters
  • Income
  • Population size, composition
  • Competitors supplies/prices
  • Processing/retail margins
  • Government policies
  • Tastes and preferences

4
Demand Changes
  • What changes in food consumption patterns have
    occurred in the last 10-20 years? Why?
  • Summarize the key factors influencing the demand
    for a food or agricultural product?

5
Demand/consumption changes
  • More vegetable fats and oils,
  • sharply reduced animal fats,
  • total fat declining in last decade to 33 of
    calories
  • More pizza and pasta, cheese
  • Less beef and lamb, more poultry
  • More fish

6
Demand/consumption changes
  • More soft drinks (esp.non- caloric)
  • Less fluid milk (esp. whole milk)
  • More alcoholic beverages
  • More beer (22 gal., less distilled liquor
  • Less eggs
  • More sweeteners (esp. corn sweeteners)

7
Demand/consumption changes
  • More fresh fruits and vegetables
  • Less cigarettes
  • Others you have noticed??
  • Overall, higher incidence of overweight--exceeds
    30 of US

8
Demand/consumption changes-- Why??
  • Higher incomes
  • Changes in relative prices (chicken)
  • Age distribution, life styles
  • Home vs. away from home eating
  • Health and disease concerns
  • Cholesterol, saturated fat

9
Demand for Agricultural Products
  • Explain the farm demand-retail demand difference?
  • cost of processing
  • handling cost
  • transport cost
  • profit
  • Farm demand derived from retail!

10
Price elasticity of demand
  • P
  • 1
  • X
  • Q

11
Price Elasticity of Demand
  • Change in Q1
  • - - - - - - - - - - - Usually between 0 and -1
  • Change in P1

12
Demand Elasticities
  • Economists usually only talk about demand
    elasticities. For most food products, it is
    between 0 and -1 (inelastic demand).
  • Very inelastic--eggs, milk
  • Less inelastic--chicken
  • (If relatively close substitutes, usually less
    inelastic.)

13
Elasticities
  • Farm price elasticities are usually the same as
    retail price elasticity
  • (if a percentage markup is used)
  • or more inelastic
  • (if a constant dollar markup is used).

14
Price Cross - Elasticity
  • Change in Q1
  • - - - - - - - - - - - Usually positive if
    substitutes or competitors
    negative if complements.

Change in P2
15
Price flexibility of demand
  • P
  • X
  • 1
  • Q

16
Price Flexibility of Demand
  • Change in P1
  • - - - - - - - - - - - Between -1 and -10
  • Change in Q1
  • If price elasticity is -.5, price flexibility is
    -2. (1/-.5)-2

17
Using this in forecasting
  • In price forecasting, you often have information
    regarding the likely change in supply, and want
    to know the likely price change resulting from
    it--you need to use the price flexibility.
  • e.g. A 10 change in Q () means a 20 change in
    price (-) if the price flexibility is -2

18
Price Flexibility
  • Approximate price flexibilities
  • Hogs -1.9
  • Fed Cattle -1.6
  • Corn -2.0
  • Soybeans -2.5

19
Price Cross - Flexibility
  • Change in P2
  • - - - - - - - - - - - Negative and big if
    Change in Q1 good substitutes
  • e.g. A 10 increase in beef quantity marketed
    might cause a 6 drop in pork price if the
    cross-flexibility is -.6

20
Price Cross - Flexibility
  • P2
  • -.6
  • 1
  • Q1

21
Price Cross - Flexibility
  • If you estimate Q change to be 5 from last
    year, and other factors do not change,
  • P change Q change P flex
  • P change 5 -1.9 - 9.5
  • If 50 last year, 50 - (.095 50) 45.25

22
Price Cross - Flexibility
  • If other factors change too, use the same
    procedure and add up the percentage price
    changes to get the net price change expected.

23
Income Elasticity of Demand
  • Engels Law As income rises, a declining
    percentage is spent on food.
  • Why?
  • At low incomes, virtually all income has to be
    spent on essentials like food and shelter.

24
Income Elasticity of Demand
  • At high incomes,
  • Do not need more food, but may upgrade food
    somewhat (steak vs hamburger), more eating out
    and processed food.
  • Discretionary purchases--house, car--
  • go first in recession.

25
Income Elasticity of Demand
  • Income elasticity of demand for most food
    products is positive and less than 1.
  • Inferior goods (possibly dry beans, unprocessed
    potatoes) would have a negative income elasticity
    of demand.

26
Income Elasticity of Demand
  • In forecasting, usually expect increases in
    income to result in increased demand for most
    normal goods.
  • Thus, the income effect on price or quantity
    purchased will usually be positive, but often not
    significantly different from zero in high income
    countries like the U.S. (2 income implies .4
    price change)

27
Forecasting Exercise
  • Assume that flexibility
  • cattle Q 4 -1.5
  • hog Q 2 -.3
  • income 3 .3
  • poultry Q 5 -.2

28
Forecasting exercise
  • The percentages are changes from last year when
    prices for fed cattle were 104 per cwt. in the
    beef.
  • What price would you expect for the same time
    this year?

29
Forecasting Exercise
  • Assume that flexibility chngP
  • cattle Q 4 -1.5 -6
  • hog Q 2 -.3 -.6
  • income 3 .3 .9
  • poultry Q 5 -.2 -1
  • 104x(1-.067)97 -6.7

30
Forecasting exercise
  • Assume that flexibility
  • cattle Q - 4 -.4
  • hog Q - 2 -1.9
  • income 1 .3
  • poultry Q 5 -.2
  • Forecast change from 48 hogs last year.

31
Forecasting exercise
  • Assume that flexibility P impact
  • cattle Q - 4 -.4 1.6
  • hog Q - 2 -1.9 3.8
  • income 1 .3 .3
  • poultry Q 5 -.2 -1.0
  • 48 x 1.047 50.256 4.7

32
Supply
  • What are the key factors affecting market supply?
  • Relative profits
  • Recent, expected input and output prices
  • Technology and management changes

33
Supply
  • Weather
  • --most dramatic effect-crops
  • Previous production levels
  • Expertise, specialized equipment, habit

34
Supply response
  • As the expected commodity prices increase,
    farmers will shift more of their productive
    resources into producing that commodity.

35
Supply Analysis
  • Potential supply is limited by the biological
    nature of agricultural production, and the time
    it takes to respond to incentives.
  • Short run, inventories in storage or in feedlot
    are the primary supply factors expected to
    influence price.
  • Longer run-change acres, sows, cows

36
Supply Response / Supply Shifters
  • Behavioral lags
  • How long before you believe relative price
    changes are likely to persist?
  • New technology, such as higher yielding crops,
    new growth promotants, global positioning
    systems, etc.

37
Supply Response / Supply Shifters
  • Government restrictions on technology or acreage
  • Restricted chemical use, free range chicken
  • Government tax and farm program incentives for
    some enterprises, acreage restrictions in some
    farm programs

38
Supply Analysis
  • In a few days or a week
  • grain supplies in storage could rapidly be
    marketed if a favorable price change occurred,
    but limited to the old crop size plus carryover
    from prior year

39
Supply Analysis
  • In a few days or a week
  • livestock at or near normal market weight could
    be sold, but limits on acceptable product
    characteristics would limit possible supply
    increases (borrow from tomorrow to market today).

40
Supply Analysis
  • In a few months
  • In grains, little change possible unless a new
    crop becomes available, and that crop size cant
    be affected much by producers.

41
Supply Analysis
  • In a few months
  • In livestock, producers could feed more head,
    feed to heavier weights, or sell breeding stock,
    but basic number of head available is already
    determined.

42
Supply Analysis
  • Next year
  • In grains, producers could change acreage and
    fertilization, etc. to change size of next crop.

43
Supply Analysis
  • Next year
  • In livestock, could breed more hogs, turkeys,
    egg producing chickens, and keep more dairy
    heifers in the herd, and increase market
    suppliers in a year, but breeding more cows would
    not change beef suppliers in a year.

44
The Cobweb Theorem
  • Quantity supplied now is the response to earlier
    price and profit signals.

45
The Cobweb Theorem
  • Farmers tend to react as if the prices they
    observe today are the best indicator of the
    prices they will experience next year, and often
    fail to consider the effect which their and their
    neighbors production changes will have on prices
    then.

46
The Cobweb Theorem
  • In agricultural commodity markets, this results
    in a pattern of high prices now causing higher
    production and lower prices later, followed by
    lower production and higher prices,and so on.

47
Cyclical production
  • Slow reactions or overreactions to prices
    recently lead to production changes later
  • Cattle cycle--9-10 years
  • Hog cycle--3-4 years
  • Broiler cycle--less than a year

48
Fundamental forecasting
  • Based on supply/demand factors
  • Seasonal patterns
  • Balance sheet methods--grains
  • Price flexibility methods
  • Price forecast equations
  • Analagous years

49
Fundamental forecasting
  • Seasonal price patterns
  • Futures--often different patterns
  • Cash prices-- often strong seasonal
  • Indirect effects on related commodities via input
    or output price chages

50
Fundamental forecasting
  • Attempt to forecast likely direction and amount
    of price change
  • Probabilities are much higher for success in
    direction than amount
  • When little information is known yet, accuracy is
    not high

51
Analagous years
  • Find a similar supply - demand setting and see
    how prices behaved then
  • Primarily used for unusual situations--short crop
    years, embargos, shocks with few precedents

52
Seasonal patterns
  • Which commodities have strong seasonal production
    patterns?
  • Which food products have strong seasonal demand
    variations?

53
Seasonal Price Patterns
  • What causes them?
  • Seasonal consumption
  • eating habits
  • cooking practices
  • Holidays

54
Seasonal Price Patterns
  • What causes them?
  • Weather
  • Seasonal production
  • batch production -- crops
  • risk or cost differences -- livestock

55
Seasonal patterns
  • Either or both can cause seasonal patterns in
    cash prices which you can use to advantage
  • Storing grain
  • Timing feeder cattle or pig purchases
  • Timing cash sales

56
Forecast equations
  • P f(Prod, Beg Inv, Q comp, Inc,
  • Export Q, Livestock Q, etc.)
  • Estimate price impacts of historical variations
    in key factors, then plug in todays best
    estimates to calculate likely price

57
Balance sheet aproach
  • Beg. inventory
  • production
  • imports
  • Tot. Supply
  • Tot. supply - tot. use carryover
  • Feed use
  • Exports
  • Seed
  • Industrial
  • Tot. Use
  • Use price flex to get price

58
Grain Price Forecasting
  • Forecast likely changes in use without price
    changes
  • Then, calculate change in carryover
  • Multiply by price flexibility to get price
    percentage change

59
Probability Distribution of Forecasts
  • Prob.
  • Yields

60
Probability Distribution of Forecasts
  • Needed for marketing strategy choice
  • Long tail on left of yield distribution curve
  • Long tail on right of price distribution curve
  • Distribution curve is compressed as growing
    season advances

61
Grain Price Forecasting
  • Critical factors
  • Beginning inventory
  • Production
  • Acres, Yields
  • Use
  • Exports
  • Feed Use

62
Grain Price Forecasting
  • Expected change in ending inventory vs. last year
  • Carryover/use ratio is biggest influence on price
  • Need 3 weeks inventory at end of mktg. year

63
Grain Price Forecasting
  • Forecast the crop mktg. year price, then use
    seasonal patterns for short/long crop years for
    shorter term prices.
  • Price flexibilities
  • -2.5 Soybeans
  • -2.0 Corn

64
Forecasting exercise
  • Crop condition reports in July suggest that
    soybean crop may be 5 smaller than most recent
    forecast. If your last price forecast was
    6.80/bushel for the marketing year, how would you
    forecast
  • (a) the next years average price
  • (b) the price at harvest time.

65
Assignment 7
  • Use the DTN Farmdayta screen in 174 or 468 Heady
  • Describe two most useful types of information for
    an agribusiness you select. Is this service
    worth the cost?

66
Forecasts of Monthly Crop Price
  • First concentrate on season average price, U.S.
  • U.S. average typically above IA by relative
    constant amount
  • Season average price adjusted to monthly via
    historical monthly pattern -two distinct
    patterns normal short crop

67
Grain Price Forecasting
  • Market information sources
  • Reports on weather, soil moisture, crop
    condition, acreage, production, inventories,
    exports, livestock numbers, crops and use
    elsewhere
  • Government policies re acreage set aside, CRP,
    trade, target or loan prices, etc. less important
    now.

68
Feeder livestock prices
  • Why are prices so volatile?
  • Are there unusual factors which influence their
    prices?

69
Fed cattle price change
  • 10/cwt. live weight up 110/hd.
  • 110/hd more for feeder steer
  • 110 / 6 cwt. 18.33 per cwt. for feeder
    animal almost twice the impact per cwt.

70
Market hog price change
  • 5/cwt. price change
  • 12.50 per head
  • Willing to pay 12.50 more per head for feeder
    pigs?

71
Input price impacts
  • If input price , what is the effect on feeder
    cattle or pig price?
  • Example
  • Corn Price Feeder Cattle Price
  • Corn Price Feeder Pig Price

72
Corn price change
  • Corn price up 1/bushel.
  • Effect on fed cattle price now?
  • Little, weight effect only?
  • Effect on fed cattle later?
  • Fewer on feed, weight effect.

73
Corn price change
  • Feeder cattle effect
  • Feedlot operators reduce bids to maintain profits
    near earlier levels
  • 60 bushels of corn60/head
  • 60 / 6cwt. 10/cwt. price drop

74
Technology change
  • Determine profit change per head or cwt. of final
    product caused by technology changes in industry
  • .5 lbs. feed less / lb. gain
  • .07 x .5 lbs. x 180 lbs. gain
  • 6.30 less cost passed on to
  • feeder pig suppliers as higher price

75
Forecast Changes
  • Would those forecast changes necessarily be
    accurate?
  • Presumes that feedlot operators look at current
    price changes and expect similar changes in
    prices later.

76
Forecast Changes
  • And presumes that the competitive process will
    bring the related markets back to previous profit
    levels.

77
End
About PowerShow.com