The Fundamental Elements of Marketing
Oct 07, 2011
Let me remind you of some basic elements about agriculture marketing that I’ve come to believe are bedrock assumptions when it comes to understanding long-term price patterns:
1. The best cure for high prices is high prices. When prices get too high, they destroy demand and stimulate production both domestically and internationally.
2. Short crops have long tails. This means we normally see a high price early on confirmation of a supply reduction, which leads to demand rationing and a subsequent increase in production during the next production year.
3. Bulls and bears always get fed, but hogs get slaughtered. If you don’t understand this, you might as well get out of the market.
4. The rule of unintended consequences. The market often reacts in an unexpected way that surprises us. Many times, it acts in a way that disappoints the maximum number of people. In this case, producers will be putting cash corn and soybeans in the bin with no carry in the hope of seeing sharply higher prices the following summer.
While these principles are well known, we seem to want more complex answers to the basic supply-and-demand equation. I believe commodities are produced in an economic structure that will not allow excessive profits to be realized for more than two marketing seasons. While this has been proven to be a little incorrect because of ethanol and the China growth function in the corn market, I believe it will eventually be vindicated.
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