Farming: Supply and Demand
Today’s farmers are expected to produce higher yields and deliver a better quality of crops to markets than many of their predecessors, which makes agribusiness a challenging market. Supply and demand is still the law of the land when it comes to profitability and, ultimately, market success, but it works a little differently for farmers than it does in other industries. Read on to find out about the basics of agricultural supply and demand and how it affects modern farmers’ profits.
A General Definition of Supply and Demand
Before moving forward to discuss how this broad concept applies to agriculture, it’s worth taking a moment to offer a more general definition of supply and demand. In its most basic form, supply refers to the number of goods that producers have to offer on a market at any given price and time. Demand, on the other hand, refers to the number of goods that consumers are willing to buy on a market at a given price and time.
Factors That Influence Supply
It used to be easy to understand the factors that influenced farmers’ supply actions. When produce, meat, and dairy products were primarily produced for local consumers in the area, supply was determined by how many farms were operating and whether they had a good season.
These days, things are a bit different. Factors that can influence supply in modern agribusiness companies include:
- The prices of products
- How many firms are producing the products
- Advances such as all-inclusive farm management
- New technologies
- The prices of inputs
- The prices of alternative products that meet the same needs
- Weather events
Factors That Influence Demand
In competitive markets, prices are influenced just as much, if not more so by demand as they are by supply. Just like the idea of supply as it applies to agriculture has shifted, so has that of demand. In the modern world, the factors that can influence demand can include:
- Changing consumer preferences
- How many buyers are in the market
- Consumers’ income levels
- The price of related goods
- Consumers’ expectations of the future
- The Relationship Between Supply and Demand
As most farmers and agribusiness owners should expect, there is a direct relationship between supply and demand. Both of these concepts influence not just the ultimate price of goods as it applies to the end-consumers but also the decisions that farmers must make when they consider agricultural investment management and how best to protect their investments.
There are two things farmers need to know. The first is that it’s the relationship between supply and demand in a local market that determines the price of goods. If farmers set low prices, the demand for their products increases. If they set prices that are too high for local consumers to accept, the demand will decrease.
The second thing farmers need to realize is that market prices help to determine both supply and demand. When market prices for certain products are high, farmers tend to focus more on producing those goods. When the prices drop, they often switch to other crops. The key to maintaining profitability in this kind of market is to find an equilibrium.
In an uncontrolled market, only supply and demand dictate the price of goods and the flow of sales. As a result, this economic law goes a long way towards determining a farmer’s ability to turn a profit, and thus the success of his or her business. In many cases, farmers are offered federal grants to produce certain types of crops or even to leave fields fallow, though, the market is not completely uncontrolled.
Though the government plays a role in determining what crops Californian farmers will grow and which of them they will eschew, as do the growing concerns about increasingly turbulent weather patterns, the law of supply and demand still applies. The prices will continue to rise and fall until they reach market equilibrium.
One good example can be seen in nuts. If almonds, a water-heavy crop, do not produce well as a result of drought, the prices will go up since demand exceeds supply. Consumers might choose other nuts that are more affordable. In response to a potential decline in almond demand associated with this shift in consumer preferences, farmers would then have to lower their prices until demand begins to increase again. When the level of demand then reaches a balance with the supply, that represents market equilibrium.
Learn More Today
Interested in agribusiness investing and farm development, but not sure it’s worth getting a degree in economics to run a farm? Contact Ag Land Partners. We help Californian farmers of all sizes with everything from project and personnel management to permanent crop development and more. Give us a call at (209) 409-4935 today.