Managerial economics: Wheat market in the United States - Essay Example

? Managerial economics: Wheat market in the United s Introduction The market place is affected by a number of factors that play varying roles indetermining the performances of the variables taking part in the market. The most basic factors that affect the equilibrium in the free open market are the demand for a commodity and the supply of the commodity. A complex assortment of factors affects the demand and supply of commodities in the market; they can be classified as the micro level factors and the macro level factors. Micro factors are those factors that directly influence the firm level decision making regarding the production levels and the choice of pricing and also the individual demand. In other words the micro level factors are involved in the project or organizational level. These factors are almost always related to the product attributes, the taste and preferences of the buyers and their demographic characteristics at the individual level. Macro factors on the other hand are related to the factors that influence the supply of the commodity and its market demand at the broader economic level (Iman, 2002). These factors can be classified into three separate categories; features of the product, demographic factors of the international market and the economic factors involving the countries involved in trade. These factors are derived from the international market for the commodity, the size of the country that is trading the commodity in the international market, level of development of the country (GDP and per capita income), interest rate, the exchange rate and the technological advancement of the industry considered for the study. Factors affecting demand and supply Product attributes are generally associated to the physical characteristics of the product (such as colour, size and texture) and product packaging. Demographic factors can be broken down further into smaller variables, such as, population size, level of employment in the economy, per capita income of the households, education level of the general mass and also the average household size in the country (Iman, 2002). Economic factors are also subdivided into the following element; credit facilities in the economy in which the good is produced as well in the economy in which the good is consumed. In case of a product that is traded within the national boundary, the credit facilities within the nation are considered. Besides the disposable income of the population, level of government regulation in the economy, interest rate, mortgage rate and capital gains are important elements in the economic factor. Interest rate prevailing in the market has a negative relationship with the production of the commodity and therefore the supply of the commodity. If the rate of interest is high, investment decisions become less attractive to the entrepreneurs and therefore production is hindered. On the demand side, interest rate also affects the credit facility in the economy. If the rate of interest is high, demand for the commodity falls. Commodity price and quantity of demand and supply While all the factors mentioned above cast a combined effect on the demand and supply of the commodity, the effect would be varied depending upon the geography, social and demographic situation of the market. Also, the influences differ according to the set of factors that are combined together to affect the market. Price is the most important factor influencing demand and given a particular combination of these factors, for any normal good, demand for a commodity is a negative function of its price. However, price of the commodity shares a positive relation with supply of the commodity. If price of a commodity rises, demand for the commodity falls. Individual demand is affected by several factors such as, price of a commodity, price of related goods such as, substitutes and complementary goods, consumer’s income, consumer’s wealth, taste and preferences of consumer and consumer expectation. Market demand of a commodity is affected by population, government policy, season and climate and income distribution (Marshall, 1959). According to the law of demand, cetaris paribus (other things remaining constant) demand for a commodity rises with a fall in its price and vice versa. It is an inverse relationship between price and quantity demanded of a particular commodity. The demand function can be represented as: Dx= f(Px), where Dx represent demand for good x and Px represents price of good x. Graphically, this function can be represented as follows: (Source: Author’s creation) Since the demand for a commodity is linear and is inversely related to its price, this relationship is represented by a line having a negative slope. The supply of a commodity is directly proportional to the price of the commodity. Therefore the relationship is represented by a positively sloped supply curve. (Source: Author’s creation) This relationship shows that if price of a commodity is high, producers would produce and supply more quantity of the commodity. According to the law of the market, if the commodity is supplied at a high quantity, supply exceeds demand for the commodity and price falls. This phenomenon is evident in the current wheat market in the US and in the whole world. (Source: Author’s creation) When price of the commodity is high, supply rises. If there is excess supply (supply is greater than demand) of the commodity price begins to fall (other factors remaining unchanged) in order to reach the equilibrium point in the market. Wheat market in the United States Wheat farmers in the United States produce the largest share of the total wheat production of the world and also the widest range of wheat is produced in the country. The U.S. Wheat Associates is the organization looking after the export market in the US and take necessary steps to develop the country’s export market. This organization looks after the level of supply of wheat in the wheat importing countries and the level of demand for the commodity in that market, in more than 100 countries on behalf of all the classes of wheat producers of the USA (US wheat, 2009). Price of wheat affecting demand and supply There is continual uncertainty about the prospects of wheat harvest in a number of major wheat producers in the world. Yet at the global level wheat availability is expected to be ample all throughout the current year. Forecasts for the fiscal year 2013 - 2014 indicate that there would be an approximate increment of 7 percent in the total output of field crops (International grains council, 2013). Research report shows that internationally prices of different varieties of wheat have softened since April 2013. Since supply of the varieties is expected to increase over the next fiscal year, prices are expected to remain at a low level. Forecast by the International grains council reveals that although supply of wheat would be ample, there total production of wheat would fall by a small amount in the 2013/2014 fiscal year. This would be an outcome of higher amount of production of other agricultural crops and higher trade in crops such as maize (HGCA, n.d.). The USA has recovered from a draught that took place in the last quarter of 2012 and it implies that wheat production would increase in the current year. The effect is most significantly felt on the two major crops of the country, wheat and soya bean. Due to the draught, harvest of wheat would be reduced in 2013, but the actual output would be high enough to boost up the total global output by 6.1 percent (Wilson and Dreibus, 2013). Due to the bear market of wheat and other food crops, global food prices have declined by 9.5 percent from the price level that prevailed in February 2011 (Wilson and Dreibus, 2013). Since wheat is a large exporter of wheat, exports of wheat by the US affects the international price hugely. Since supply is high, and prices are low, demand for the crop would be high at the international level (Jain and Khanna, 2011). Therefore with rising demand the gap between demand and supply starts to decline and price of wheat starts rising. Eventually the level of demand and supply tends to be equalized and equilibrium is attained in the market. Fall in the dollar value affects the export of wheat positively to Mexico, Japan, the Philippines, and Nigeria (USDA, 2013). As the dollar depreciates the commodity becomes cheaper for the importing country. There for they import more of the commodity and export for the US rises. Conclusion The wheat market in the United States is a major industry and contributes an important part in the country’s gross domestic product. Since it is a big producer and exporter of the crop, international market is affected by the amount of wheat supply by the US to the international market. Forecasts of wheat production show that average wheat production would rise, and prices of the crop would be low at the global level. The most important factor that determines wheat prices in the United States’ is the export demand for wheat. While domestic demand for food crops, such as, wheat is substantially high, in quantity, it has not been able to bring much variability in the wheat prices. Exports demand for wheat on the other hand has affected its prices to a large extent (Brien and Olson, 2012). References Brien, D. and Olson, F., 2012. The Price Responsiveness of U.S. Wheat Export Demand by Class. Available at: [Accessed 15 June 2013]. HGCA, n.d. USDA reduce global wheat and maize production but stocks still set to grow year on year. Available at: [Accessed 15 June 2013]. Iman, A. H. M., 2002. An Introduction to Property Marketing. Kuala Lumpur: Penerbit. International grains council, 2013. Grain Market Report. Available at: [Accessed 15 June 2013]. Jain, T. R. and Khanna, O.P., 2011. Microeconomics. New Delhi: FK Publications. Marshall, A., 1959. Principles of Economics: An Introduction. Oxford: Osprey Publishing. U.S. Wheat Associates, 2009. The Wheat you want from producers you can depend on. Available at: [Accessed 15 June 2013]. USDA, 2013. U.S. Wheat Trade. Available at: [Accessed 15 June 2013]. Read More