Thursday, January 2, 2014

Makin' Bacon in 2014 may be a little more expensive.These little piggies, unfortunately, are not going to make it to market...

Makin' Bacon is likely to cost a bit more this year. All is not well down on the farm.  Here is a short article about it. Read it and then "go to the graphs" below for a basic supply and demand lesson.

Pork market prices are expected to rise in 2014

The million-dollar question that many livestock producers want the answer to is: How market prices will fare in the future.Steve Meyer, the founder and president of Paragon Economics, said in a recent interview that producers can expect to see some changes in pork figures next quarter as a result of the porcine epidemic diarrhea virus, which hit first in June and July. 
Due to this, he noted, that there will be a reduction in slaughter numbers from where they would have been had the animals not been sick
The first and second quarters of the new year probably will be down between 2 percent and 4 percent in slaughter production, Meyer said. 
The good news for pork producers is that hog prices will be positive.
“Reduce supplies, prices go up,” Meyer said, adding that producers whose hogs were infected with PEDV most likely lost three to four weeks of production. 
Another thing that will help producers in the coming year is that the cost to produce a pig will be $35 lower per head. Meyer explained that this can be attributed to a good corn and soybean crop. 
“It was the fourth-largest soybean crop ever,” he said, adding that a bigger crop helps drive down the average cost of feed. 
Although Meyer doesn’t believe a lot of new individuals will start raising pork, he does believe that pork producers who have been waiting to expand, but hadn’t because they were waiting for better market prices, finally will expand their sow herds.
There are a many basic microeconomics concepts we can cull from these few paragraphs.  The one I want to focus on is how a short run disruption on the supply side, as described in the article, affects the market.

A couple of qualifications: (1) I just made up the prices and quantities you see in the graphs just to give reference points, (2) I make assumptions regarding the relative elasticities for both the Demand and Supply Curves in the Market for Pork products. The second one is certainly open to debate but for simplicity, go with it.

At the end of the article it is suggested that in response to the high(er) price additional producers may enter the market.  This means that over time the situation will reverse itself.  The Supply Curve will shift back towards the RIGHT, indicating that at the market price there will be an INCREASE in Quantity Supplied.  Quantity Supplied will be greater than Quantity Demanded (Surplus!!) and the price will decrease.  As the price decreases, the quantity demanded increases (Law of Demand).

The market will tend towards settling at the Long Run price and quantity...Until it doesn't.

Lunch time. For some reason I am craving a BLT.  :)
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