Risk Uncertainty and the Agricultural Marketing System

While yield risk and its impact on the producer is the first and most recognized source of uncertainty, myriad related impacts affect economic conditions throughout the marketing chain and must be considered when estimating global supply and demand. Directly or indirectly, each economic agent at every level of the global agricultural marketing system is affected by one or several of the risk types. Price and income effects stemming from a particular set of meteorological conditions in a given crop cycle even influence cropping patterns in subsequent crop cycles, and these influences must be evaluated as global supply and demand estimates are made.

In order to highlight the scope of the potential impacts of meteorological events on global supply and demand, the following section summarizes a few of the implications of a hypothetical drought affecting the soybean crop in the western U.S. Corn Belt.

U.S. producers, tte most direct impact of a drought is on the producers in the affected area. Lower yield reduces production for each producer, potentially putting each producer's income at risk. If the drought is widespread, national production levels may be reduced, resulting both in higher prices and in an atypical seasonal pattern of prices. Higher prices and atypical seasonal price patterns affect producers' decisions about quantity and timing of sales to maximize income.

Producers beyond the region immediately affected by drought are also affected. Decisions these producers make ultimately affect soybean supply and demand, first in local markets, but ultimately in global markets. Because drought affects the level and seasonal pattern of prices, but not production levels for producers beyond the geographical reach of the drought, these producers have an opportunity to maximize income by taking advantage of higher prices caused by the drought. However, because the drought affects the seasonal price patterns, causing a sharp departure from normal, these producers must also consider the timing of sales to maximize income.

Elevators/storage enterprises, tte grain storage business can be affected by drought in different ways depending on the location of the storage. For storage facilities in the drought region, the main issue is whether there will be enough crop volume to efficiently utilize available storage. With too many facilities available for the limited regional supply of grain, decisions will have to be made regarding the best price to offer soybean producers as facilities compete for limited supplies. For storage facilities located in parts of the country not directly affected by the drought, the main issue becomes one of timing. While there is enough volume to utilize storage capacity efficiently, the impact of the drought is the level and pattern of cash and futures prices and how these impacts will affect the optimal timing of sales. A forecast of the price pattern over the remaining months of the marketing season is essential to make the best possible decisions about how long to store grain.

Transportation, tte grain transportation system, like the storage system, depends on volumes of grain to maximize income. For the rail system, one of the main issues is positioning of rail cars during the harvest season and in the months that follow. When drought strikes a region, demand for rail cars may diminish, and may increase in parts of the country not directly impacted. Increased demand in the non-affected producing areas may come from domestic soybean crushers and exporters as these enterprises attempt to meet business needs. Water transportation services are affected in the same manner as rail transportation. Barges and oceangoing vessels maybe less in demand due to reduced soybean supplies and increased prices that may reduce buyer demand. Profit and income is at increased risk for businesses that provide water transportation for grain.

Crushers. Soybean crushers account for almost 60 percent of the demand for soybeans in the U.S. market. Rising prices and diminishing volume available to meet crushing demand will affect profitability and income of crushers. As with other economic enterprises, crushers face increased competition for soybeans. Higher prices for soybean meal affect both soybean meal export demand and demand for soybean meal protein by livestock feeders. As soybean crush levels are reduced, soybean oil supply diminishes, vegetable oil prices increase, and demand for vegetable oil is affected both in the U.S. and abroad.

Livestock feeders. Higher soybean prices and reduced crush results in reduced soybean meal supplies and higher soybean meal prices. Since soybean meal is the main source of protein in livestock diets, higher soybean meal prices directly affect income levels of livestock production enterprises. Depending on the degree of impact on soybean supply and demand and on the price and supply of soybean meal, livestock producers may alter the mix of soybean meal and grain in rations, which may affect livestock production rates. At the extreme, livestock producers may liquidate some of their productive capacity (animal numbers), resulting in at first lower, then higher meat prices.

Foreign soybean producers. Global soybean supplies are distributed almost equally between the Northern and Southern Hemispheres, so a drought in the Northern Hemisphere likely leads to global supply adjustments 6 months later. South America accounts for more than 50 percent of exportable supplies of soybeans, soybean meal, and soybean oil. When global supplies are disrupted due to a drought in the U.S. Midwest, higher prices occur in global markets. Higher prices signal producers in South America to expand the area devoted to soybeans in the fall planting season subsequent to the drought. Higher production in South America leads to increased exports of soybeans and products from the Southern Hemisphere, and a shift in the demand for storage and transportation services from the region.

Other oilseed producers. In addition to affecting the global supply of soybeans, higher soybean prices affect producers' decisions regarding planting of substitute oilseed crops. Markets for rapeseed, sunflowerseed, and peanuts are all linked through protein and vegetable oil prices. All of these crops' primary products (protein meal and vegetable oil) substitute for one another, so higher prices for soybeans will lead to expanded area planted to other oilseeds, resulting in increased supplies and consumption, ttese economic reactions also help to offset the initial soybean price reaction stemming from the drought.

U.S. soybean producers. Completing the annual cycle, the impact of drought in one year in apart of the U.S. likely will result in increased area planted to soybeans and increased supplies in the subsequent marketing year.

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