Marsh, John M.

English

Research Papers in Economics

B R I E F I N G 
Briefing No. 71                     February 2005 
Demand and Supply Factors in the Feed Grain Market:  
Effects on Corn Producers 
 
John M. Marsh 
Agricultural Marketing Policy Center 
Linfield Hall 
P.O. Box 172800 
Montana State University 
Bozeman, MT 59717-2920 
Tel: (406) 994-3511 
Fax: (406) 994-4838 
email: ampc@montana.edu 
website: www.ampc.montana.edu 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Objective  
 
Analysis 
 
for Informed 
 
Decision Making 
 
 
 
 
Contact: 
 
John M. Marsh 
(406) 994-5621 
jmarsh@montana.edu 
 
Introduction: 
 
Corn is the major grain produced in 
the U.S. wheat and feed grains 
sectors. In 2003, U.S. corn 
production equaled 10.114 billion 
bushels, or about 76 percent of 
domestic wheat and feed grain 
production.  Corn is also the leading 
cash crop, constituting about 71 
percent of the $34.7 billion 
production value of wheat and feed 
grains in 2003.  About 56 percent of 
corn production was used for 
feeding in the cattle, hog, lamb, and 
poultry sectors (USDA Agricultural 
Statistics 2004). Wheat for feed use 
was about 10 percent of wheat 
production in 2003. The other feed 
grains of oats, barley, and sorghum 
had about 45 percent (on average) 
of their production allocated to feed 
use in 2003. 
 
In terms of 2003 disappearance, 
about 56 percent of corn was 
allocated to feed purposes, 24 
percent was allocated to food, seed, 
and industrial (syrups, ethanol) use, 
and the remaining 20 percent was 
sold into the export market.  The 
five largest U.S. export customers 
for corn in 2003 were Japan, 
Mexico, Taiwan, Canada, and 
Egypt, accounting for about 75 
percent of total U.S. exports. 
 
 
Corn’s economic role as the largest 
cash grain crop is apparent, but its 
role in the secondary markets of 
livestock production is also crucial.  
Demand and supply factors that 
determine corn prices impact 
livestock and poultry feeding costs 
and prices and production in the 
livestock-meat and poultry 
industries. Moreover, corn’s 
marketing and agribusiness effects 
are not trivial, generating 
employment and income through 
storage, transportation, processing, 
and product distribution and 
retailing. 
 
In this briefing the economic 
factors underlying corn demand 
and supply and their effects on corn 
prices, production, and production 
revenues are analyzed. An 
econometric model is used to 
estimate price, production, and 
revenue effects due to changes in 
production technology, fertilizer 
costs, price supports through 
marketing assistance loans, corn 
exports, and competition from 
sorghum and soybeans. This 
information is important to corn 
growers because of their vested  
interest in United States 
Department of Agriculture (USDA) 
farm commodity programs, 
international trade policies, 
domestic energy costs, and public 
and private research such as grain  crop production (Smith and 
Glauber).  USDA acreage data 
show that planted corn acreage 
increased, on average, from 
74.14 million acres in the 1988 
to 1995 period prior to the FAIR 
Act to an average of 78.65 
million acres in the 1996 to 2003 
period.  
 
Demand and Supply Effects 
 
Issues pertinent to feed grain 
producers often relate to policy. 
One consistent component of 
federal commodity policy (first 
legislated in the 1930s) has been 
price supports in the form of 
nonrecourse loans.  These loans 
permit participating crop 
producers with loan quality 
production to establish a 
minimum or floor price equal to 
the loan rate, thereby reducing 
marketing risk (Knutson, Penn, 
and Boehm). The corn loan rate, 
subject to economic and political 
influences, increased from a 
1970-1972 average of $1.05/bu 
to a 2001-2003 average of $1.95/
bu, or 85.7 percent. However, in 
real or inflation-adjusted terms 
(1982-84constant dollars), the 
corn loan rate declined from 
$2.60/bu to $1.08/bu, or by 58.5 
percent during this period. 
  
U.S. grain trade policies are 
critical to domestic prices 
received by producers since 
grain imports and exports affect 
total supplies and disappearance.  
For several decades, the United 
States expanded its corn exports 
due to liberalized trade and 
increases in livestock production 
in importing countries.  Corn 
exports increased from an 
average of 0.86 billion bushels in 
1970-1972 to an average of 1.77 
billion bushels in 2001-2003, or 
a 106.2 percent increase.  
However, bulk corn exports 
peaked at 2.42 billion bushels in  
levels expected to have a negative 
effect on price; (3) corn exports, 
with increases in exports expected 
to have a positive effect on price; 
(4) sorghum price, with increases 
in sorghum prices relative to prior 
levels expected to have a positive 
effect on corn price (sorghum is a 
demand substitute in feed rations); 
and (5) livestock prices of beef and 
pork.  The last factor indicates 
increases in demand prices for 
cattle and hogs by livestock 
finishers (hence, more animal units 
fed) leads to an increase in demand 
and price of feed corn. 
 
The economic variables 
hypothesized to determine corn 
supply (or production) are: (1) the 
market price of corn, which for an 
increase would have a positive 
effect on production; (2) the corn 
nonrecourse loan rate, for which an 
increase would have a positive 
effect on production; (3) fertilizer 
price, of which its increase would 
have a negative effect on 
production; (4) technology such as 
increased yields, that would have a 
positive effect on production; and 
(5) the price of soybeans for which 
an increase would have a negative 
effect on corn production. Corn 
and soybeans are production 
substitutes in the corn-soybean 
producing areas.   An increase in 
soybean price relative to the corn 
price would shift acreage away 
from corn to soybeans. 
  
Another factor hypothesized to 
have influenced corn production 
are the commodity provisions of 
the Federal Agricultural 
Improvement and Reform Act 
(FAIR) Act of 1996.  This 
legislation eliminated the annual 
acreage conservation reserve and 
fully decoupled current commodity 
production from acreage bases.  
Thus, any corn production effect of 
the FAIR Act likely involves the 
full decoupling of base for current 
genetics and farming practices.  
These domestic and trade policies 
play a major role in influencing grain 
market prices and returns to 
producers. 
 
Corn Model 
 
Several economic variables expected 
to determine the demand, supply, and 
price of corn are specified in the 
econometric model.  Statistical 
estimation of model demand and 
supply coefficients serves two 
purposes in the analysis of the corn 
market. One is estimation of the 
demand and supply elasticities, 
which measure the effects in 
percentage terms of changes in 
economic variables on corn price and 
production (acreage times yield).  For 
example, if the USDA were to 
project carryover (stocks) of corn to 
increase by 10 percent, an expected 
percentage change in corn price can 
be predicted.  Another purpose of 
these elasticities is to estimate 
changes in corn prices and 
production based on historical 
changes in commodity (or other) 
national policies.  For example, 
nonrecourse corn loan rates set by the 
USDA for the past thirty years (under 
various configuration of the 
commodity policy) have varied from 
$1.05/bu to $2.65/bu (current 
dollars).  These loan rate variations 
likely affected producer returns 
through production, marketing, and 
price changes.  Estimating and 
interpreting such impacts can be a 
guide to price support policies in 
future commodity program 
legislation. 
 
The data period used for the 
econometric model was 1970-2003.  
Variables expected to determine corn 
demand (or price) along with their 
economic effects are: (1) corn 
production, with increases in 
production expected to have a 
negative effect on price; (2) corn 
stocks, with increases over prior sector by $4.92 billion, or 24.6 
percent of average corn revenue 
in the 1970-2003 period.  
Following close to the effect of 
livestock prices was the negative 
impact of declining real sorghum 
and soybean prices.  These prices 
declined by an average of 64.6 
percent, over the period, and 
resulted in decreasing corn-
sector revenue by $3.66 billion, 
or 18.3 percent of annual average 
corn revenue during the 1970-
2003 period. 
  
Corn loan rate and the price of 
fertilizer had opposite effects on 
revenues in the corn sector.  The 
58.5 percent decrease in the real 
loan rate reduced corn revenue 
by $1.79 billion, while the 29.1 
percent decrease in real fertilizer 
price increased corn revenue by 
$1.72 billion. The key reasons 
for the revenue changes were the 
1.06 billion bushel reduction in 
corn production from the loan 
rate and the 1.39 billion bushel 
increase in corn production from 
the fertilizer price.  In each case, 
the production changes more 
than offset corn price changes in 
the opposite direction (Table 1).   
  
Model results indicated the 
effects of the FAIR Act 
increased corn production by 
about 12 percent from 1996 to 
2003, largely due to the 
decoupling of crop production 
from crop base.  But, the 
variable’s economic effect was 
not statistically significant and 
the effect was not included 
(Table 1). 
 
Conclusions 
 
Results from the econometric 
model indicate that corn loan 
rates established through 
domestic commodity policy, 
international trade, and energy 
costs significantly affect corn  
Beef prices declined during this 
period because of decreasing retail 
beef demand and increasing beef 
and competing (pork and poultry) 
meat supplies. Pork prices declined 
because of increasing pork and 
competing (beef and poultry) meat 
supplies, but pork demand 
remained relatively constant 
(Marsh 2003). Increases in pork 
supplies are primarily attributed to 
reduced unit production costs from 
the relatively recent, but rapid  
vertical integration in the hog-pork 
industry. 
 
Comparative Impacts 
 
Changes in real corn price, quantity 
produced, and real total revenue 
attributable to long-term changes in 
the economic variables during the 
1970-1972 to 2001-2003 period are 
presented (Table 1).  The effects of 
declines in real sorghum and 
soybean prices, which decreased by 
66.5 percent and 62.8 percent, 
respectively are presented.  
Estimated changes in total revenue 
for corn are based on deviations 
from average total revenue of corn 
production, which was $20.01 
billion for the 1970-2003 period. 
  
The largest impact on the corn 
sector occurred from its foreign 
trade component (Table 1).  The 
106.2 percent increase in corn 
exports amounted to an increase of 
$9.84 billion, or 49.2 percent of 
average total revenue. The second 
largest impact occurred from 
technology changes, which added 
$6.16 billion to the sector, or 30.8 
percent of average total revenue. 
  
Livestock prices had the third 
largest impact on revenues in the 
corn sector.  But the change in 
livestock prices had a negative 
effect on corn growers.  The 
average decline of 54.3 percent in 
real beef and pork slaughter prices 
decreased revenue in the corn 
1979.  Since then, an increasing 
portion of U.S. corn exports have 
consisted of processed products. 
 
U.S. imports, domestic exploration, 
and consumption of energy are basic 
demand and supply factors that 
determine energy prices. For grain 
producers, fuel and fertilizer costs 
are important components of 
variable costs of operation. Costs of 
anhydrous ammonia (used in 
fertilizer production) are highly 
correlated with natural gas prices, 
and gas prices have substantially 
increased since the mid 1990s 
because of declining inventories and 
increasing energy consumption. 
Fertilizer prices increased from 
$37.33/ton in 1970-1972 to $118.33/
ton in  2001-2003, or about 217 
percent. However, real fertilizer 
prices decreased from $92.48/ton to 
$67.55/ton, or 29.1 percent during 
this period. 
  
Technology changes involving corn 
genetics (new hybrids), machinery 
capital, and new farming practices 
have contributed to increased U.S. 
corn production. Trends in crop 
yields normally reflect technology 
changes. Yield growth was 
substantial for corn, i.e., from 1970-
1972 to 2001-2003 yield per 
harvested acre increased from 85.9 
bushels to 136.6 bushel, or a 59.0 
percent increase. Technology 
adoption that reduces unit costs of 
production may also increase 
planted acres. 
  
The corn sector also depends upon 
the economic well being of the 
livestock industry.  For example, if 
cattle and hog livestock prices 
increase due to an increase in retail 
meat demand, then the additional 
animal units fed would increase the 
demand and price of feed corn.  But 
from 1970-1972 to 2001-2003 real 
beef slaughter price decreased by 
48.6 percent and real pork slaughter 
price decreased by 60.1 percent. The programs of the MSU Extension Service are available to all people regardless of race, color, national origin, 
gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status.  Issued in  
furtherance of cooperative extension work in agriculture and home economics, acts of May 8 and June 30, 1914, in  
cooperation with the U.S. Department of Agriculture, Dr. Douglas Steele, Vice Provost and Director, Extension  
Service, Montana State University, Bozeman, MT 59717. 
Smith, V. H., and J. W. Glauber.  
“The Effects of the 1996 
Farm Bill on Feed and 
Food Grains.”  Policy 
Issues Paper No. 3, 
Montana State University 
Trade Research Center, 
September 1997. 
 
U.S. Department of Agriculture, 
National Agricultural 
Statistic Service. 
“Agricultural Statistics.” 
United States Government 
Printing Office, 
Washington, DC. 2004. 
prices, and livestock prices, the 
corn sector managed a net revenue 
gain of $7.35 billion relative to its 
average real revenue of $20.01 
billion for the 1970-2003 period.  
The positive contributors were 
expanded exports, lower real 
energy costs, and technological 
advancement. 
 
References 
 
Knutson, R. D., J. B. Penn, and W. 
T. Boehm. “Agricultural and 
Food Policy.” Second 
Edition. Prentice Hall: New 
Jersey, 1990. 
 
Marsh, J. M. “Impacts of Declining 
U.S. Retail Beef Demand on 
Farm-Level Beef Prices and 
Production.” Amer. J. Agr. 
Econ. 85(November 
2003):902-913. 
 
producer returns. Corn’s 
competitive relationship with other 
grain substitutes in demand and 
production and the effects of 
technology are also critical.  Of 
nearly equal importance is the 
economic health of the livestock 
industry, a substantial component of 
the demand for feed grains. 
Livestock prices accounted for 
about 18 percent of the corn revenue 
changes caused by the six variables 
found to have statistically 
significant impacts on corn sector 
revenues (Table 1). 
 
The variables analyzed in this 
briefing are not all inclusive, i.e., 
other factors such as feed wheat, 
barley, and ethanol use may also 
influence producer revenues in the 
corn sector.  But for the variables 
considered, in spite of corn income 
reductions from declines in the real 
loan rate, sorghum and soybean 
Table 1. Effects of Changes in Economic Factors on the Corn Sector, 1970-2003 
 
Note:  The percentage reduction (64.6%) in the “Grain Prices” column is the average percentage reduction in real 
sorghum and soybean prices. The percentage reduction (54.3%) in the “Livestock Prices” column is the average  
percentage reduction in real slaughter beef and pork prices. 

Demand and Supply Factors in the Feed Grain Market: Effects on Corn Producers

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