English Dutch

How supply and demand drives production and marketing decisions

Posted on Aug 2nd, 2022 by Mariah Degelder

How supply and demand drives production and marketing decisions

Supply and demand dynamics are ever-present and changing, but you can use them to achieve higher profits.

The foundation of earning profit through supply and demand is to make the right decisions about what to grow and when to sell it.

Kyle Burak, an FCC Senior Economist, says farmers usually choose what to grow based mainly on crop rotation and crop prices. For example, if prices are high for a crop grown last year, it may be tempting to replant that same crop in the same field to cash in. However, for soil health, repeating last year’s planting should be avoided.

When it comes to selling, Burak says farmers usually make the decision on when to sell and for how much based on the need to raise money to pay off loans and pre-buy seed and inputs.

However, there are other considerations to keep in mind to make a more encompassing decision.

1. Think locally, nationally and globally
Farmers set themselves up for success when they make informed production and marketing decisions that are broad, far-reaching and at a high level. From considering local, national and global crop supplies, to judging the impact of world issues, all play a role in agricultural production and sales.

For example, consider growing conditions in other parts of the country and the world. A wet spring at home may delay your seeding plans and reduce the crop yield, but ideal spring conditions in another province or on the other side of the globe may produce a bumper crop.

That means the days of finalizing a crop plan in November and using it to seed in May don’t exist anymore for top producers, says Evan Shout, CFO of Hebert Grain Ventures, a 27,000-acre grain and oilseed farm in southeast Saskatchewan. Instead, farmers need to think long-term and consider what’s happening on a global and national scale and what impact they could see as a result.

“We’re looking at the supply/demand impacts for both inputs and (crop) pricing and volatility, pretty much 12- to 36-months out,” Shout says. “And we’re doing that because the trends haven’t changed, but volatility has.”

2. Prices are global
The factors behind the price you receive for what you produce go far beyond your crop field, paddock or barn.

“We’re on a global market,” Burak says. Using canola as an example, he adds, “Canada is a canola producing powerhouse and strongly influences the global price. However, there are many international factors that impact the market.”

If canola production in Australia is down, there could be an opportunity for Canada to fill any world supply gaps. However, a strong soybean output in the United States and South America could also help fill the gap in animal feed. At the same time, palm oil supplies in Southeast Asia could take up the canola oil shortage left by a poor Australian crop. All contribute to shaping the value of canola grown in Canada in any given year.

3. Weather can significantly alter market supplies
Record-breaking drought can cause pasture, hay and feed shortages and even reduce water availability. A local shortfall in any of those areas could lead farmers to reduce the size of their livestock herd and sell more for meat processing. In turn, local farmers and those in other parts of the country could see a slump in prices.

4. Politics and world issues play a role
Political factors such as Indonesia’s 2022 palm oil export ban can also affect available supply. So too can geopolitical tensions.

Ukraine and Russia were major exporters of wheat, canola and other crops, but sanctions and logistics issues in 2022 forced buyers of their commodities to seek alternative sellers.

The conflict also contributed to a fertilizer supply crunch, sending input prices soaring.

Shout says gone are the days of keeping as little fertilizer on hand as possible — called just-in-time inventory — since global issues can halt the supply chain. He points out one single ship getting stuck in the Suez Canal in 2021 was enough to cause supply chain backlogs.

“You no longer can run a just-in-time inventory. You must be prepared for swings like this because the volatility – it’s not going anywhere,” Shout says. “The planning around finance and working capital and logistics, it’s almost a full business line included into farming now.”

5. Bullish supply factors don’t guarantee high prices
Strong supply doesn’t guarantee high prices for farmers. Somebody must buy that production, and farmers in Canada are highly reliant on exports.

It’s challenging to forecast what importing countries will do, and sudden changes in buying behaviour can occur.

For instance, an outbreak of African swine flu in China’s hog herd in 2018 sent Canadian pork exports to that country soaring.

The Ukraine-Russia conflict also created demand opportunities for Canada.

Conversely, trade restrictions and barriers from China and India caused Canada’s canola and pulse sectors to take a hit.

How do farmers market in an uncertain environment and in a way that doesn’t force selling into dips or miss rallies?

“The plan’s not to be perfect, the plan is to sell into a profit,” Shout says.

A must-have is a cash flow and working capital in place. Then you’re not forced to sell and can wait for a more desirable price.

“It goes back to having the finances in place to be able to execute a marketing plan, not based on having to sell, but based on when you want to sell,” Shout says.

Obviously, no one can know when prices will peak. Although chances are they're lowest at harvest, when supplies hit the pipeline as farmers need cashflow to pay the bills.

Grains and oilseeds farmers who can hold on are much more likely to receive better prices for their crops moving into the summer than they would have off the combine.

“If you looked at a 10-year trend, it’s not very often that during harvest or during fall or January/February, when all the lines of credit are due, that those are the top places for basis or for futures,” Shout says.

What farmers can do
Beyond bide your time you can:

Maple syrup supply and demand
In some sectors, supply and demand forces are out of the hands of the free market. That’s the case for the maple syrup industry in Quebec, which accounts for approximately 72% of world production.

As of 2004, Quebec maple syrup producers must hold quota, which applies to all production except containers of five litres or less that are sold directly to consumers. That means they are allotted a specific amount of maple syrup to produce. The objective of the quota system is to support producers’ prices.

The Québec Maple Syrup Producers, which represents 13,300 producers, regulates production and marketing. It also established the Global Strategic Maple Syrup Reserve in 2000.

QMSP explains that the reserve maple syrup ensures constant supplies to customers and “stabilizes product prices, eliminating the swings typically caused by shortage or surplus.”

That means if poor spring weather means a reduced maple syrup harvest by Quebec producers, the price to consumers won’t skyrocket, as the supply will be topped up by the reserve supply.

When excellent spring weather conditions mean a bumper crop of syrup, those who produce over the quota must send their surplus barrels to the reserve. They are paid when the product is sold.

The reserve is in Laurierville, Que. At a 267,000 square foot-site and can store 55 million pounds of maple syrup, the QMSP says.

The organization has plans to expand its storage facilities. It says sales and exports will go up by almost 20% in the early 2020s, so they are looking ahead to increased product demand to ensure prices stay stable.

Article by: Richard Kamchen

Photo by Tom Fisk

For More Information: https://www.fcc-fac.ca/en/knowledge/supply-demand-production-marketing.html How supply and demand drives production and marketing decisions https://www.fcc-fac.ca/en.html, August 2022.