Question

It has been a tough year in the poultry business with supply outpacing demand while poultry feed prices rising substantially. However, producers are hoping that changes in the market will occur once the Muslim fasting month sets in and the Hari Raya celebration comes by.

The seasonal upswing in chicken consumption, along with the anticipated leap in spot-market poultry prices, could bring some relief to producers whose profit margins have been slashed by surging chicken feed costs.

Rising chicken feed price have mainly been caused by the diversion of corn, an important ingredient in chicken feed formulation to ethanol production as car fuel have raised the cost of producing live chicken by as much as 65 percent over the last two years. Three factors make poultry market analyst more optimistic:

1. Companies are cutting production,
2. Weekly egg-set numbers are declining [egg sets are fertile eggs placed in incubators for producing chicks],
3. Prices are responding positively to the decreasing supply.

The production decline was a response to the rise in feed prices. Profit margins at producers will not improve unless spot market prices increase fast enough to cover cost of feed for the chicken flocks. Production cutbacks and seasonal demand have helped fuel a 20 percent increase in boneless, skinless breast meat prices RM7 per kg. Prices are expected to reach at least RM9.00 per kg by the festive season this year.

1. Use demand and supply analysis to explain the changes in chicken prices
2. Describe what has happened in the corn market and how it has influenced the chicken market.

Describe what are the non-price factors and which and how does it influence the chicken market in the above case.

Answer 1

a. As stated in the case study , the diagram on the left labelled I(roman number shows a rise in the market supply of chicken as compared to its market demand), the rightward shift in supply of chicken from S to S1 which outstrips the shift in the demand for chicken from D to D1, this causes a fall in price from P to P1. The market supply of chicken has risen from Q to Q1. The market equilibrium shifting form E to E1. This rise in supply has however not been matched by a rise in demand , with producers hoping that with the onset of religious festivals the demand for chicken is expected to rise . The falling price level accompanied by higher input costs in the form of higher prices of chicken feed, have reduced profits for the chicken sellers.

The producers are facing a short run loss which they hope will be wiped out by rising prices, falling supply and especially a fall in the market supply of chicken due to firms reducing the overall supply. This leads to contraction of output, leading to a rise in prices and a higher profit margin for the chicken producers. This has been depicted by the diagram II ( on the right side) where the market supply curve has shifted to the left from S to S2 showing a decrease in the supply of chicken due to lesser supply by firms, higher feed prices and lower egg production, the effect of these factors is that the market price has risen from P to P2, the equilibrium shifting from E to E2 and quantity shifting from Q to Q2. The market demand is shown by a contraction in demand due to higher prices.

b.

The market for feed has been affected as corn an important input of chicken feed has been diverted to be used as a bio fuel for cars, this has caused the price of feed to rise to an considerable extent—with rising costs of maintaining chicken not matched by rising demand for chicken in the market. Corn is an important source of food for chicken, a fall in its supply also meant in a fall in the nutritional diet of chicken and hence its ability to produce more eggs is also adversely affected.

The market for chicken has been affected by external diseconomies of scale that occur due to rise in costs of production due to factors that are external to the firm and the industry as a whole. The diversion of corn from chicken feed production to be used as car fuel and hence the rise in the chicken feed prices has been affected causing the costs of chicken to rise. The gap between the rise in market demand expected due to social and cultural factors and the existing supply of chicken exceeding the demand led to a fall in the prices of chicken, since chicken being perishable, its elasticity of supply is low and hence the producers have to reduce their prices if the chicken is not being sold at the market prices, since they cannot be stored for long .