Supply and Demand – Or Why Market Fundamentals Still Matter

How are agricultural prices determined in the marketplace?

I often hear that the prices that producers receive for agricultural commodities diverge from basic supply and demand relationships. Alleged culprits range from commodity index funds to pricing power in the supply chain.

It’s fair to say that market dynamics have changed over the last few years. But the bottom line is that supply and demand still matter.

Take the monthly World Agricultural Supply and Demand Estimates - WASDE - report of the USDA, which usually has a major impact in markets. It can reveal to buyers that supply is getting tighter than previously estimated. Higher prices are the result. Or, it can indicate to sellers that consumption is slowing down and lower prices are on the horizon. Short-term, these are insights for producers’ marketing plans.

Some highlights in the most recent WASDE report released on February 10 include:

  • Projections of stronger demand for corn in world markets. In a market in which corn supplies were rebuilt and the stock-to-use ratio is up compared to last year, strong foreign demand is essential to support price levels before the end of the marketing year. 
  • Tight soybean supplies in North America make weather conditions in South America critical to watch. Recent weather deterioration in Argentina implied a projected reduction in 2014 soybean production from last month’s estimate, while Brazil’s production was revised upward. The overall balance between supply and demand is expected to keep a lid on a further price rally.
  • U.S. imports of Canadian wheat are projected to increase 10 million bushels because of the grain transportation bottleneck in the Canadian Prairies.  Overall good demand outlook for wheat is supporting current advances in wheat prices.

Another set of USDA projections to be released on February 13th will focus on the long-term outlook for agricultural commodities, revealing projections over the next ten years. These long-term forecasts are useful to build scenarios and evaluate business plans.    

Check back with us in the near future. We’ll have more on the USDA long-term projections and how to use their projections to make informed decisions around expansion plans, equipment purchases, rent vs. buy decisions, etc.

- J.P. Gervais, Chief Agricultural Economist