Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 23

A Word about Forecasting Supply and Demand in Meats

INTRODUCTION

Forecasts using the pipeline approach provide an estimate of slaughter and production, but they may be inaccurate if investors fail to understand and take into account important forces that impact supply. One of the first things investors need to understand is the type of force causing changes in supply. Is change in supply simply due to price fluctuations, or is an external force causing a shift in the entire supply curve?

Theoretically, a supply curve is an upward-sloping line expressing the relationship between the price of a commodity and the quantity supplied. As price increases (decreases), the quantity supplied increases (decreases)—that is, moves either up or down along the existing supply curve. This type of supply change is generally short term and is due solely to changes in the price of a commodity.

Other supply changes are the result of forces that are external to—that is, independent of—the relationship between price and supply. They do not trigger movement up and down the supply curve. Rather, they cause a shift in the supply curve itself. Factors that elicit this type of supply change include changes in the price of inputs, changes in the price of substitutes, changes in the price of joint products, changes in technology, and institutional factors. If the influence of any of these factors is positive, they will cause the supply curve to shift to the right; and if it is negative, the supply ...