Consider this scenario: It has been a tough year in the poultry business, with supply outpacing demand and feed-grain prices rising substantially

Consider this scenario: It has been a tough year in the poultry business, with supply outpacing demand and feed-grain prices rising substantially. But producers are hoping all that changes when the summer cook-out season starts. The seasonal upswing in chicken consumption, along with the anticipated jump in spot-market poultry prices, could bring some relief to producers whose profit margins have been slashed by surging corn and soybean-meal costs. Rising feed-grain prices, accelerated by the diversion of corn to make ethanol, have pushed up the cost of producing a live chicken by as much as 65 percent over the past two years.

Three factors make analysts more optimistic: Companies are cutting production, weekly egg-set numbers are declining (egg sets are fertile eggs placed in incubators), and prices are responding positively to the decreasing supply. The production slowdown is a response to the surge in feed-grain prices last fall. Profit margins at producers will not improve unless spot-market prices for chicken move up fast enough to cover costs paid for corn and soybean meal to feed chicken flocks.

Production cutbacks and seasonal demand have helped fuel a 20-cent increase in boneless, skinless breast-meat prices to $1.46 a pound. Prices are expected to reach at least $1.80 by summer 2008.

a. Use demand and supply analysis to illustrate the changes in chicken prices described in the above article.

b. Describe what happened in the corn and soybean markets and how that has influenced the chicken market.