Economic lesson

Today’s lesson is in supply and demand via inspiration from Tam.

Food is an interesting commodity is that it is very inelastic. If the price of gasoline goes down people will be more likely to increase their discretionary driving such as vacations. If the price of food goes down people, at least in the U.S., do not start eating more. The reverse is also true. If the price goes up people don’t cut down their eating. They will eat different foods and they will cut down on going to restaurants but they are still going to eat about the same amount of food. This means that if there were to be a small change in the supply you would expect a large change in the price.

As some people might have noticed there has been some very hot weather with an absence of rainfall in the mid-west this summer. The crops grown in the area are suffering as a result of the weather and the yields are forecast to be lower than usual. This means the price of crops over 1000 miles away in the Pacific Northwest should show dramatic increases as the crop damage in the Midwest becomes irreversible.

The result via Northwest Grain Growers:

SoftWhitePrice20120711

The prices above are for a bushel (60 pounds) of wheat. If loaf of bread weighs a pound and were composed entirely of soft white wheat flour (soft white wheat isn’t usually used for bread, but this makes the point less complicated) then the roughly $1.75 increase in price would translate into an increase in production cost of something on the order of about $0.03 per loaf. So this isn’t all that big of a deal to consumers.

It is big deal to wheat producers because the cost of production is essentially fixed by the costs of land, equipment, seed, fuel, pesticides, fertilizer, and labor. If the cost of production is $5.00/bushel then profit goes from $1.00/bushel to $2.75/bushel. This is an increase in profits of 275%.

My brother on the farm in Idaho might be able pay off the loan on that “new” (new to him but it is several years old) tractor a little bit earlier than expected.

3 thoughts on “Economic lesson

  1. It would be interesting to compare that to the vegetable and lettuce growers in CA’s central valley who have suffered under the draconioan EPA’s water-use restrictions. Since going to a low-carb/no-carb diet the price of wheat is *whatever* except in a, “first they came for the wheat-farmers…” kinda dystopian way.

  2. This is one of those confounding factors that also make it difficult to know if inflation is happening…at least, subtle inflation, although I’m sure if hyper-inflation hits, it will be blatantly obvious. Since our government has been pursuing inflationary policies, I’ve been on the lookout for inflation. So far, I’ve only noticed shrinking bags of noodles, missing ink on otter-pops, and other subtle effectsw that may or may not be the result of inflation itself.

    This is also the primary purpose of futures. When learning about various investments, I learned about how investing in futures and options is a bad idea, because they are highly volatile. I wondered why these things existed, then. For options, it turns out to be a way to encourage employees to be productive. For futures, it’s to even out the volatility of crop prices, as illustrated by Joe’s example. Basically, a grower and a consumer will agree to a price before-hand, and this is called a “future”; if the price is unusually low, the consumer will be “burned” because he coulde have gotten his food more cheaply; if the price is unusually high, the farmer will be “burned”, because he could have made a higher profit; yet both benefit from the agreement, because both have a price they can count on, and it makes planning for the future that much easier.

    Perhaps the most fascinating thing about the Free Market is seeing the variety of ways that people solve their problems!

  3. Speaking of farmers’ profits; if I can find malted barely (or malted wheat) for under a dollar PER POUND I’m doing well. They sell it in one to ten pound bags in the retail stores for around two dollars per pound, but anyone who’s serious will buy the 20 or 25 Kg bags at least.

    Malting involves alternate soaking and airing, to sprout the grains, followed by “kilning” (drying) to stop the process, and to put anywhere from a very light roast, to a black roast on it. It’s not high tech at all, but of course it costs something in equipment, time, packaging and energy to get it right.

    At $7.75 per bushel that’s $0.13 per pound. What would it be worth to you to get, say, $0.50 to $1.00 per pound?

Comments are closed.