Produce and Demand Management: Ending Stock - Research Paper Example

Problem Description

Supply and demand are among the factors that contemporary businesses have to ensure are taken care of to limit problems with customers and also sustain the profitability of the business models at hand. In order for businesses to achieve a reliable supply and demand correlativity, they must ensure that an equilibrium point is determined as well as what do with surplus produce. The purpose of the equilibrium is to balance between the number of supplies and the demand the market throws at any given business within a particular marketplace. Nonetheless, the number of businesses within a market are customers of the producing agents of the products and materials needed in that particular industry and market. As a result, the determination of equilibrium in the macroeconomic sector takes into account the production of the raw materials for supply to industries and vary with reference to the product at hand or the range of goods that can be made from the raw materials (Golecha, & Gan, 2016). In this regard, the United States Department of Agriculture (USDA) is responsible for the reporting of nationwide production, supply, & consumption of grains and has to ensure that economic balance exists between the supplies the demand at hand.

Through the determination of the ending stock, the USDA is able to establish how much grain can be sold after all the demand has been satisfied. Thus, with reference to market stability for grains, the USDA data on ending stock shows the equilibrium of the supply and demand and also the associated dangers of having too much or too small ending stock. In definition, the ending stock for grains is the amount of grain left over after all the demand has been satisfied. Some studies call the ending stock the ending inventory which also showcases the effect on prices and inflation of grain prices. Following the domestic and industrial use of corn, the ending stock for this products shows that various products such as ethanol, alcohol, and industrial food production can increase or decrease in prices. Nonetheless, it is identified that corn is a major raw material for various industrial and domestic products. In this regard, the production of corn has determined by the USDA follows a long history of production that meets and exceeds the requirements to satisfy demand and achieve the surplus in terms of ending stock. However, in the financial year 2015, the ending stock of corn as recorded by the USDA was a negative which at the same time is an effect associated with increasing prices in corn oil and a variety of the products related to corn production.

In this study, the production of corn to satisfy demand is considered a factor for economic balance with reference to demand and also the income per household. In order to ensure that inflation of grain prices does not increase to unmanageable levels, this study aims at understanding a statistical approach to determine whether there is a connection between supply and satisfaction of demand through the observation of ending stock. In the study, it is determined that a low ending stock signals a problem which may also influence the market for grains. However, taking corn into account, the prices hypothesised to increase include those of domestic products, industrial products such as ethanol, alcohol, and the failure of the grain market in general. In addition, this study also determines negative ending stock is associated with failing corn/grain market. Thus, as a result, the study will also suggest a specific counteraction for the government to ensure the equilibrium of supply and demand is achieved.

Among the suggestions include condition-based approached which include the increase of agricultural subsidies to farmers to increase their output, research and development to develop more innovative technologies for ensuring that farms cultivated produce sufficient yield to support the costs and economic benefits forecasted and desired, to increase importation of corn if local production is seen to fall below the equilibrium (any positive ending stock shows that an equilibrium is achieved regardless of whether the difference is large or small), to concentrate on the production of other raw materials if corn production does not meet the economic needs, and to lower the use of chemical fertilizers which have historically been associated with land degradation & low demand for serials produced through environmentally unfriendly methods.

With reference to the business aspect of the agricultural production and application of the ending stock concept, it is observed that commodities selling at a very high cost from the producers accumulate the effects and transfer the costs to the end customers. Customers unable to acquire basic needs associated with corn production will lead to low demand which in return will fail the economic portion supported by agriculture. Within the microeconomic sector, business enterprises that rely on agricultural products will have the production industries to deal with in terms of securing better and sustainable business deals to secure some profits. However, on the domestic use of products, low demand spiked by high prices is a major issue that this study aims to offer recommendations on how to avoid cumulative factors that have the end customer as the secondary cause.

Objectives

Three objectives are associated with this study. These objectives are associated with the determination of the agricultural sector's sustainability from 1973 to the year 2016. However, this determination is aimed at showcasing whether, with reference to growth in population, the agricultural sector has been able to adjust and produce enough products to sustain the agricultural economics.

The first objective is to showcase that agricultural produce is a major supporting element of the economy since many products are used in the industrial sector for making both industrial products and end-consumer products. The merit of this objective is to show that, regardless of whether or not customers buy agricultural products, industries that use raw materials can also provide the market for the produce while at the same time reducing the overall consumption and demand as well. This effect is tested through the observation of trends from 1973 to 2016 in terms of the ending stock records.

On the other hand, objective two is to determine whether supply and demand have an equilibrium through the association of produce and consumption differences. The merit for this objective is to indicate that positive ending stock on corn is a signal for equilibrium while a very low ending stock is an advantage for producers & loss for consumers as it is the vice versa with a high ending stock on the short-term.

Lastly, objective three is to determine the best or most reliable course of action that should be taken into account given that ending stock is either too high or too low. The merit of the objective is to connect the business and economic use of agricultural supply with market demand and support of the GDP.

Data Collection and Description

For the study, data was extracted from the USDA database where records going back to 1929 were considered. However, the data from 1929 could not be used in this study since some products corn is used to produce were not legal at the time among them Alcohol production in 1929 which was affected by the prohibition era. The prohibition era ran from 1919 to 1933 when it was revoked, and production of alcohol was reinstated. In addition, ethanol production in the USA was industrialized and commercialized in 1988 which shows that the collected data could not be applied to a business model within the macroeconomic agricultural sector. Thus, the study took into account the last 44 years from 1973 where corn ethanol was used for the production of alcohol. However, since the study does not focus on the production of alcohol alone, the data is truncated from 1929 to include only 1973 onwards. In this case, the amount of time considered also takes into account four decades of economic revolution, industrial innovations, and technologies that have made various agricultural products major materials in the industrial sector. In addition, since the study takes corn only, more use of corn has been placed within the economic application, and therefore the produce is regarded as an economic input.

With reference to the use of corn and associated products for both commercial and domestic use, the USDA data collected is also truncated in terms of variables applicable for this study. The variables considered in this study include the timeline which is 44 years of production, the land use & associated harvested crop for every year. However, the variables which contribute to the demand and use of corn are considered to the independent variables with the dependent variable being the total supply of the crop. Among these variables, besides the harvested amount of corn, the actual yield, production, stocks, imports, total supply, food and & alcohol production, feed residual, combined domestic use, exports & imports, and total usage of the crop are all classified as independent variables with the dependent variable being the ending stock. The ending stock is a dependent variable in the study since it is the desired variable the study aimed to investigate in terms of sustaining the supply and demand equilibrium for the USDA tracking of corn production and market stability. In addition, the variable determines whether or not the supply and demand require amendment in terms of production or pricing. Following the study problem, it is observed that the dependent variable taking the entire variables constituting to the total production should be the total usage. However, when considering the difference between supply and the total usage, the dependent variable for the study becomes the difference which is ending stock.

By taking the independent variables from the collected data as well as the dependent variable for the study, more attention is paid on the balance of production and consumption which invalidates the description of the other variables in detail. Thus, taking a brief on these other variables classified as independent, actual yield is the realized stock from the agricultural activities that contribute to the actual yield, the production is the inputs considered for the acquisition of the yield, stocks are the leftovers added new yields after a financial year, total supply is the cumulative produce sold on the market, food & alcohol production is the industrial demand, feed residue is the economic benefit of using the wastes from corn, all domestic use include any use of processed and unprocessed corn products, exports include any corn sold outside the nation, and total usage takes into account all these factors including imported corn.

Although it is uneconomic to consider exports to other countries and imports at the same time, the study assumes that high yields trigger producers to sell their corn to foreign buyers while at the same time the government commissions importation of corn when the stocks fall below sustainable levels. Ending stock, on the other hand, does not consider land and harvested the crop as factors contributing to high or low margins. As a result, the use of land use and harvested crop is associated with the need for regression to check whether more land use and harvested crop have a positive or negative correlation with the equilibrium level for supply and demand. The rest of the independent variables constitute direct influence on consumption taking supply into account.

Statistical Methods for Quality Process

Graphics and Observations

The basic method of identifying variations in the data used in this study includes the plotting of graphics in MS Excel taking into account the consumption of the macroeconomic sector, agriculture. The graph below shows the food & alcohol use of corn within the industrial perspective for the development of economic use of the produce.

Graph 3: Demand for Corn

As shown above, the graph represents a non-modeling approach which identifies the variable of consumption of corn products or end products. From 1973 towards 2007, there has been a slow growth of using corn to process food and manufacture alcohol within the industrial sector. However, a similar trend is observed for feed and residual usage which, as food & alcohol processing and manufacturing went up, the feed & residual usage decreased. Nonetheless, domestic use of corn shows the highest level of consumption as compared to the other variables. These observations indicate that demand for corn is highest for domestic and industrial use than it is for feed and residual usage. These observations showcase the sector’s trends which contribute to the merits of production of corn.

Graph 2: Production of Corn

The graph above indicates that a variation in the acreage of planted and harvested corn as a significant difference. This difference is associated with failure of crop as well as produce affected by crop diseases among other factors such as poor farming strategies. The graph indicates that a steady difference has been observed from 1973 to 2015 despite the increase in agricultural use of land. In addition, the graph indicates that there was a sharp drop in corn farming between 1983 and 1985 with similar observations noted between 1993 and 1997. From 2007, the acres planted and harvested increased but significant fluctuations are seen towards 2015.

Graph 3: Ending Stock and Demand Curves

Based on the purpose of the study, the ending stock as indicated in the above table is affected by fluctuations associated with the other variables such as total supply. However, although this trend is consistent, this observation offers signals that from 2014 a sharp drop was associated with ending stock although total supply was the highest recorded within the 44 years of observation. The observation method in this case, as well as the graph above, indicate that demand exceeded supply between 2013 onwards with a small improvement in 2015. As the study evaluates whether the government should take proactive preventive measure, there is evidence that statistical modeling is essential to evaluate whether this phenomenon is significant.

Summary Statistics

In order to test the significance of the difference between supply and demand as well as the possible outcomes, it is observed that a negative ending stock is a bad sign that the corn market may fail if no action is taken. Thus, by using the MS Excel data applied in Minitab, statistical analysis software, the summary statistics were produced before applying regression and correlation analyses for testing associations and covariance. Note that all data is in millions depending on the variables such as millions of acres and tons of corn produce.

Table 1: Summary Statistics

As observed in the table above, the means of planted and harvested acres make the highest values of 80724.57 and 72386.09 respectively. However, in terms of consumption variables, imports, and actual yields have the least values in an increasing order of 15.20 and 123.84 respectively. On the other hand, it is observed that exports make a significant portion which exceeds stocks as they record 1818.59 and 1639.99 respectively. Total supply clocks at 10834.55 million tons while total usage is 9164.889 million tons. The ending stock is 1463.026. The standard deviations, on the other hand, indicate by how much the data can fluctuate from the mean indicating that acreage has the highest of 7648.737 for planted and 7799.803 million acres harvested. Another significant standard deviation is ending stock's which is 1204.476 million tons.

Output 1: Minitab Regression Analysis

Regression Analysis

The R-Squared value for the regression model aimed to associate independent variables with ending stock is 0.8442 which indicates a high variation of the data variables. The value shows that the ending stock is 84.42% varied from the other variables which as strong positive variation. Taking the 44 observations, it is observed, using a confidence interval of 95% or 0.05 significance level, which stock with a p-value of 0.016, food & alcohol with 0.043, feed & residue with 0.045, all domestic use 0.043, and total usage with 0.001 are all significantly correlated to ending stock. Thus, a positive change in these variables, has a significant change in ending stock.

Output 2: Correlation Analysis

Correlation Analysis

The correlation analysis associated Ending stock with the rest of the variables. However, it is observed that all the variables except stocks and exports are negatively correlated with ending stock. Specific observations show that planted acres, harvested acres, food & alcohol, all domestic use and total usage have a strong negative correlation with ending stocks of -0.2733, -0.2445, -0.4324, -0.3763, and -0.3693 respectively. On the other hand, the actual yield, production, total supply, and feed & residual use have a weak negative correlation with -0.0821, -0.1753, -0.0867, and -0.0469 respectively. Positive but non-significant correlation of ending stocks and stocks is observed with stocks with a value 0.4885 which is larger than the 0.05 alpha value.

Results

From the statistical analysis, it is observed that the ending stock has a negative correlation and significant association with the other variables. However, there are no significant associations between ending stock and stock within the model. Based on the objectives of the study, the results of the statistical analysis indicate that ending stock for the corn production has been stead and positive since 1973 towards 2007 when a drop was observed. According to the association between ending stock and prices of commodities, the corn market has been experiencing increased production from total supply while at the same time experiencing diminishing ending stock at the same time. This indicates that the production of corn for both industrial and domestic use has been increasing at a rather slower pace as compared to demand. As a result, although equilibrium of supply and demand have been attained for the larger portion of the observation period, demand has continued to grow such that from 2013 and 2015, it exceeded supply. As a result, the production of corn and the entire strategies applied in the agricultural sector need reestablishing to identify issues related to the phenomenon (Etienne, et al. 2015; p. 65-87).

From the observed results, four recommendations are offered to limit the failure of the agricultural output and market for corn. Firstly, in order to match the supply with the demand and avoid inflation of food commodities associated with corn, there is the need for increased land for cultivating corn. The increase of land increases the output of corn, and as observed from the graphical presentation, this approach would not lower the difference between planting acreage and the harvested acres. Thus, to limit the difference between total land use and total productive land, it is also recommended that modern techniques of production be put in place to limit the wasted crop. Among the modern techniques available in 2016 include technology for developing drought-resistant seeds through genetic modification (Hess, et al. 2015; p.14). In addition, fertilizers and pesticides used on the crops require a more advanced approach to research and development to ensure they do not affect the soil composition and the overall production of the land (Golecha, & Gan, 2016; pp. 34-44). Recommendation number three is associated with the use of the corn in the production of energy. Ethanol from corn has been regarded as a renewable source of energy which observations have rendered the practice unproductive in economic perspectives.

As a result, as identified that food processing and alcohol production has gone up while residue and feed have gone down from 2007, the use of corn has shifted industrial use where much of the produce is used to make products that have a little economic use. For instance, the use of ethanol as a fuel is one way of industrially using corn while the production of alcohol is another but closed associated with domestic use (Good, 2015; p. 15-17). The cumulative bushels of corn needed to produce these products are much higher than in the production of other consumer products. As corn finds increasing industrial application, it is observed that more corn is required to satisfy industrial demand while domestic use rises with increasing population. These tradeoffs are responsible for the negative ending stock witnessed from 2013 to current financial year 2016 in the balance of trade for corn demand and supply (Lamers, et al. 2015; 618-624). Lastly, the government which reports the agricultural produce through USDA database, should budget for incentives for farmers such that more land is used to grow corn and less corn is exported since there is a negative association between farmers exporting their firm producing and the government importing supplementary corn after local deposits fall below the equilibrium of supply and demand (Lagi, et al. 2015; pp. E6119-E6128).

Conclusion

The USDA tracking and reporting of the macroeconomic sector of agricultural input to the economy on grain production indicates that corn has been on the decline in terms of ending stock. Using the ending stock concept, this measure indicates the difference between production and demand. When demand is high, and supply does not reflect the change, ending stock decreases with the effect of inflating prices. Taking the production of corn as it relates to industrial and domestic use, this study has statistically identified that ending stock is affected by increasing demand and short supply of the commodity. Although land use and harvested land are on the increase in 2016, there is a drop in surplus corn for the ending stock. Based on the economic and business association of corn production and GDP, failure of the corn market is inevitable if the government which oversees the macroeconomic sectors does not intervene. In order to intervene appropriately, the government is required to implement strategies such as research and development to innovate technologies which will increase crop survival and reduce soil degradation. In addition, there is the need for the shift from industrial production of ethanol from corn since the demand for this production continues to affect the optimal supply-demand equilibrium of corn. While variables such as land may be fixed, the usage of land can be increased through incentivized production to farmers and increasing exportation restrictions such that foreign trade does not push the government into importing supplementary corn for the current industrial and domestic use. The ending stock must be lifted from the observed negative values to positive values to ensure that prices associated with low supply do not disrupt the corn market nor the overall production of grain in the US.