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Demand-Driven Markets and the Importance of Demand Rationing

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  • Prehn, S.
  • Glauben, T.
  • Loy, J.-P.

Abstract

Whenever supply falls short or actual consumption rates exceed projected consumption rates grain markets call for demand rationing. In recent years, in particular high demand made demand rationing more than once necessary. Here, we develop a theory of how demand rationing functions. Theory implies that agricultural futures markets not only fulfill a hedging and information function but also a market coordination function. Speculators always have a rational economic incentive to bring demand down to fit with supply conditions. Empirical evidence for the US corn market emphasizes the importance of demand rationing for the functioning of grain markets.
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Suggested Citation

  • Prehn, S. & Glauben, T. & Loy, J.-P., 2016. "Demand-Driven Markets and the Importance of Demand Rationing," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 51, March.
    • Handle: RePEc:ags:gewipr:261854
    DOI: 10.22004/ag.econ.261854
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    1. Jeremy Ferwerda & Jens Hainmueller & Chad Hazlett, 2013. "KRLS: Stata module to perform Kernel–Based Regularized Least Squares," Statistical Software Components S457704, Boston College Department of Economics, revised 06 Mar 2015.
    2. Brian D. Wright, 2011. "The Economics of Grain Price Volatility," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 32-58.
    3. Good , Darrel & Irwin, Scott, 2011. "Corn Prices, Basis, and Spreads," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 1, October.
    4. Hainmueller, Jens & Hazlett, Chad, 2014. "Kernel Regularized Least Squares: Reducing Misspecification Bias with a Flexible and Interpretable Machine Learning Approach," Political Analysis, Cambridge University Press, vol. 22(2), pages 143-168, April.
    5. Good, Darrel, 2012. "Corn Prices in Three Parts," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 2, May.
    6. Good, Darrel, 2012. "Has the 2011 Corn Crop Been Rationed?," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 2, April.
    7. Good, Darrel & Irwin, Scott, 2012. "Corn Basis Revisited," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 2, January.
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    Demand and Price Analysis;

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