The News & What it Means – Laws of Supply and Demand Remain a Touchstone

By John DePutter & Dave Milne – October 15, 2019
The news:

A new report from the Guelph, ON-based Agri-Food Economic Systems is suggesting low prices may no longer cure low prices, as countries increasingly turn away from rules-based trade.

Syngenta Market News, October 8, 2019
What it means:

Regardless of what happens on trade, the old market axiom is not likely to change.

The basic laws of supply and demand dictate that when the supply of certain commodity is plentiful, the price is typically weak. The opposite is true when supplies become scarce. When we apply those laws to agriculture, the price signals generally tell farmers whether they should be increasing or decreasing the production of a certain crop.

Low prices encourage consumption too

But price signals also have another function. In the case of low prices, the market is trying to not only discourage production but also increase consumption. For example, if corn is low-priced, more of it may be fed to hogs or turned into ethanol, simply because the economics favour doing so. That has always happened – always will. If there is a way to profit from a relatively cheaply priced commodity you can always count on it happening.

To review, the report from Agri-Food Economic Systems contended that as normal trading partners and patterns are upset by various ongoing international trade wars, the price of some commodities may decline and fail to respond even when production is reduced. Obviously, farmers have seen the negative impact the U.S.-China trade battle has had on soybeans, so it’s clear the report is at least half right – prices have indeed fallen.

Soy price drop uncovers new world demand

The question now is whether prices will stay down. In the case of soybeans, U.S. exports to China fell by 53% or 546 million bu in 2018-19 compared to the previous year. But as exports fell and prices declined it should be noted that U.S. soybean exports to the rest of the world increased by 15% or 160 million bu. No, the sales to the rest of the world were not enough to completely offset the drop in China’s purchases but the uptick did prove that additional demand could be uncovered as prices softened.

Remember too, 2018-19 was only the first marketing year that China was not purchasing U.S. soybeans at its usual pace. Some encouraging signs in the regard to the trade war are now being seen, but we would speculate that if the battle continued, U.S. soybean exports to the rest of the world would gradually start to rise and replace a larger and larger share of the lost Chinese business.

Nobody is suggesting the turnaround would be quick. Sometimes it can take years for a low-priced market to find the right conditions to get pointed higher again. But history proves that it has happened, time and time again, and the laws of supply and demand dictate it will continue to happen.

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