In June 2012, the United States faced one of their most challenging natural disasters whereby they experienced a severe drought condition which was very brutal since 1988 (Sanburn, 2012, http://moneyland.time.com/2012/07/12/thanks-to-heat-wave-grocery-prices-are-likely-to-spike-by-the-fall/). Not only that, by that fall itself, the Americans also encountered more pain as at that point of time they were facing an increase of food prices such as beef, milk, pork and other goods many farmers suffered from this blazing heat wave. Despite reports stated by the United States Department of Agriculture (USDA) that farmers had planted the largest crop of corn to perk up economy and demand from developing countries, the harvest production has been decreasing ever since 1937. Nonetheless, it will still be the largest by far as compared to other states that was considered the biggest corn producing states; Indiana, Missouri and Kentucky.
The main focus is on how the heat wave has affected the supply of crops is the US market. Drought can be said to be one of the factors that has brought changes to the supply of corn in the US marketplace. Supply is defined as when you have the resources and technology to produce a product which is profitable; you plan to produce it and therefore selling to earn income. The higher the price of goods, the higher the quantity supplied. Drought has caused a decrease in the corn productions causing the price to increase from $5 to $7.50. Due to this matter, farmers are having a really hard time as corn is used as the main source to feed their livestock as it is their basis of income. Thus, the supply of corn decreases resulting in the increase in price. On the other hand, the cost of production to sustain the livestock increases due to the drought. For example, price factors of production such as ranches increases from $75 to $80. Hence, it can be seen that the overall cost of production for livestock increases causing the supply of livestock decreases.
Besides that, another determinant of supply that is displayed through this issue is the number of suppliers. It is stated that Indiana, Missouri and Kentucky are the country’s biggest corn producing states in the US which means that there is numerous number of suppliers in the US market. Despite having these suppliers, due to the drought, the production of corn is still insufficient. Hence, according to the announcement made by the USDA, prices of both corn and soybean have increased. In addition, another factor of supply would be the price of related goods. Soybeans and wheat are considered as substitutes for corn which in return is also affected by the drought. With this in mind, all the products that contains corn, wheat and soybeans including cereals, vitamin and cooking oil are all affected by the drought which leads to higher prices affecting mainly consumers.
The elasticity of demand is defined as the sensitivity of the quantity demanded to a change in price, ceteris paribus. The elasticity can be measured with unit-free measurement known as price elasticity of demand. There are a few aspects that influence the elasticity of demand such as the closeness of substitutes and the time elapsed since the price change. In terms of closeness of substitutes, the closer substitute of a good, the more elastic is the demand for it. In this case, corn is considered as a necessity good as it has not many close substitutes. Besides that, corn is vital for our daily needs such as cooking oil, corn flour, confectioner’s sugar, baking powder and other daily necessities. Despite the sudden increase in price, Americans will still have to purchase corn regardless of the price as it is an essential good in their daily lives. Hence, in general, necessity goods have an inelastic demand.
Besides that, for the time elapsed since price change, the longer the time elapsed, the more elastic is the demand for corn. In this case, the drought that occurred was an unexpected even as natural disasters are never predictable. The Americans could not help but suffer as all their crops were affected badly. As such, the time frame for the drought would be considered short as it’s time frame is lesser than a year therefore, causing the demand for corn yields to be inelastic.
For resource substitution possibilities, it means that only some goods and services can be produced only by using special productive resources. Such items have low and sometimes even zero elasticity of supply because items like that are hard to be substituted. Due to this statement, cheese and butter are considered productive resources. As the price of milk rises, the quantity supplied will reduce by a little because milk is a necessity to produce cheese and butter. It is hard to find other substitutes for milk because the factors of production are unique and thus, the price elasticity of supply will be inelastic.
The second determinant is time elapsed for price elasticity of supply. For example planting corn. Corn takes a few months to harvest that even the price changes, the farmer will not be able to plant anything. This is because when the price of corn fluctuates, the time needed for corn production will still remain the same. Therefore, the price elasticity of supply will be inelastic if the production is long term.
In a nutshell, the USDA’s prediction of expecting a record crop of 60% of the corn grown in the US has only worsened due to the situation. This burning heat wave definitely did not benefit both farmers and consumers of the market. Furthermore, the Americans also suffered more pain in the form of higher food prices. The government should play a major role in helping their citizens in any form of aid such as providing better technology for watering the corn or even providing incentives and subsidizing the farmers in any possible way. All in all, this drought definitely gave the Americans a tough time and did not at all give any positive impact on the corn industry.
Link: http://moneyland.time.com/2012/07/12/thanks-to-heat-wave-grocery-prices-are-likely-to-spike-by-the-fall
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