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:
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.