IBC2000-5 Marketing

Sustaining Prosperity
A Case Study in Supply and Demand - The Good, The Bad, The Disastrous

Paul Jonjak
Blue Mountain Bison
PO Box 1460
Lyons  CO   USA   80540

The following article was originally presented at the International Bison Conference in Edmonton, Alberta in August 2000.  The conference covered a wide array of bison topics including production, marketing, genetics, history and much more.  This article has been reprinted with the permission of the IBC2000 Chairman.

There is only one way for most of us to survive in the Bison business and that is for our bison to make a profit for us.   We've got to be able to sell our production.  We have to get a profitable price. 

Supply and demand is the key.  Extensive statistical analysis has been performed on the price of agricultural commodities from corn to apples to beef.  This analysis confirms that the balance between supply and demand is the single most important factor in determining the market price of commodities.  But, you don't need statistical analysis to confirm what you already know--short supply means good prices and surplus means low prices.

I have often used Ocean Spray Cranberries as an example of a company, which has driven demand as a way of improving prices.  The results have been dramatic as seen in Fig. 1.  From 1965 to 1998, the price of cranberries went from 15 cents a pound to 60 cents a pound.  How did this happen?  Ocean Spray's market for cranberries grew from 1 million barrels to 3.7 million barrels.

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Fig. 1.  Supply, demand and price of Ocean Spray cranberries between 1965 – 1998.

But, in 1999 the price crashed back to 10 cents a pound (Fig. 2).  Why?  The easy answer is that a surplus of cranberries developed.  What caused the surplus?  Demand was growing very slowly and supply was growing very rapidly.  Suddenly there was 20% more supply than demand.  Producers panicked. Each was afraid their crop would be in the 20% that would not get sold.  They started a price war that drove the price down.  Why would a producer sell cranberries for 10 cents that cost 40 cents to produce?   Because they were afraid they couldn’t sell them at all and they decided 10 cents was better than nothing at all.

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Fig. 2. Supply, demand and price of Ocean Spray cranberries between 1965 – 2000.

What can we learn from this example?  How did supply and demand get out of balance?  The sad fact is that supply and demand got out of balance because Ocean Spray drove them out of balance.  Consumers were willing to pay a good price for cranberry products and Ocean Spray was in a position to decide how much of the consumer's dollar to spend on growing demand and how much would be left over to be paid to the producer.

Producers wanted more money.  When Ocean Spray created a shortage of cranberries by growing demand faster than supply, the market value of cranberries went up because competing buyers had to pay more.  When Ocean Spray was paying 50 cents, some competitors were paying as much as 80 cents.  Producers threatened to leave Ocean Spray for the extra money, so Ocean Spray gave them more—look at the sudden jump from 50 cents to 60 cents just before the disaster hit.  And, when Ocean Spray paid the producer more, it meant less was left to spend on growing demand, so demand stopped growing.

Pay the producer more, and they will grow more.  This increases the supply.  Spend less on marketing and demand will stop growing.  Suddenly, there is a surplus supply and the market price crashes.  Those same producers who demanded 60 cents in 1998 are getting 10 cents today. 

You and I can learn from their experience.  You and I can realize the producer can't take too much of the consumer's dollar.  We have to be putting more of the consumer's dollar back into marketing if we are to grow supply faster than demand.  The Bison business is learning its lesson.  Producers of the North American Bison Cooperative are putting 7% of their meat payments back into marketing.  Other marketers are also putting more money back into marketing to grow demand

But, this is not the end of the story.  I entitled this presentation, “The good, the bad, and the disastrous.”  I’ve told you about the good—how growing demand faster than supply can lead to prosperity.  I’ve told you the bad—about how letting supply get ahead of demand can put downward pressure on price.

Now is the time to talk about the disastrous.  Why is it that a 20% surplus leads to an 80% drop in price?  That doesn’t make sense.  A 20% surplus should mean a 20% drop in price, not an 80% drop in price.  Time for another chart (see Table 1).

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