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Old fashioned economics

Agriculture.com Staff 01/18/2008 @ 11:45am

The market has to deal with old fashioned economics as it wrestles with tight supply and demand situations in many of the basic commodities. What price point will cause end users to finally say "enough is enough" and reduce usage?

Some have made comparisons to wheat prices to try to determine how high corn or soybean prices could go. This is a dangerous exercise. The first thing that sticks out is that wheat becomes an everyday staple product (bread) that is consumed around the world.

Many governments have programs in place to purchase wheat and they are not price sensitive when it comes to keeping their citizens happy. There are governments that bake subsidized bread and distribute it. There are other government subsidy programs in the world to keep bread on store shelves at affordable prices.

In supply and demand terms, demand for wheat is the most inelastic of the three major commodities the US produces (corn, wheat, soybeans). Changes in price do not easily affect consumption, so it is hard for higher prices to reduce demand for wheat.

Historically, corn has a more elastic supply/demand relationship. For example, corn for feed use (the largest usage category) is influenced by livestock profitability. Sustained unprofitability can cause liquidation and reductions in feed use. Reductions in soybean meal would also occur. The difficult thing about livestock liquidation is that it is a long lasting phenomenon.

Corn also has a new element in the supply/demand equation-ethanol. In the past few years since ethanol has become a more important part of corn use, there has not been a rationing situation. So it is really not known how this larger ethanol industry will respond to price and how elastic or inelastic ethanol demand will be. How long will it take before the classic economic choke point is reached-when variable costs are no longer covered by variable revenue?

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.

The market has to deal with old fashioned economics as it wrestles with tight supply and demand situations in many of the basic commodities. What price point will cause end users to finally say "enough is enough" and reduce usage?

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