3/15/2008

Wheat Prices On the Rise

This article addresses the increasing price of wheat and the effect on products in the grocery stores and bakeries. Part of the problem in supply lies in the increased export demand because countries such as Australia failed to produce their normal quantity. Another major problem comes from our federal government giving incentives to the farmers to produce corn for the production of ethanol. This is causing a number of issues. More farmers are replacing their wheat fields with corn fields due to the incentives, causing a reduction in the production of wheat. The supply of corn available to consumers is also lower than usual which is causing the price of items such as feed for animals to increase. The article mentions the desire by some for the government to step in and decrease the amount of wheat available for export, but I believe the government also needs to change their incentives to the farmers to better allow the market to determine production and prices.

5 comments:

Olivia said...

It’s a troubling sign when food supplies are potentially endangered not by natural disaster or environmental issue, but by the government established for the people and by the people. I hope we see a time when Americans as a whole are willing to allow the market to function properly and take what comes; both the good times and the bad times. Of course, that would require sacrifice and change, as uncomfortable as it may be.

Gavin said...

There is an abundance of farm land that can be converted to wheat production in the United States. In time, the incentive of high profits will cause farmers to switch from other crops to wheat, which will increase supply. Once supply catches up with demand we should see prices come back to normal.

Jordan said...

I also think that the situation will correct itself. High wheat prices will induce farmers to utilize more land, bringing wheat supply and prices back to a lower equilibrium.

Austin said...

I disagree somewhat with Gavin and Jordan. The market for grain is more complex than that. There are other supplies, or lack thereof that come into play. We do have a lot of land in our country, but it is a finite resource, not all of it is arable land. We also have a disturbing penchant in our society for putting houses and other developments on prime agricultural land. More to the point, we have a dwindling supply of water to allocate for farming. What are we going to do? Let Las Vegas run dry while those farmers are using a ridiculous amount of water all the time? I bet. The supply and demand curves for diesel fuel to power farm equipment also comes into play. In that vein, I am in favor of doing away with the ethanol subsidies. That seems to have been a more than usually short-sighted policy. The amount of ethanol we could produce from even the entire U.S. corn crop is negligible when compared to our thirst for petroleum. Not only that, the energy we store in ethanol doesn't even cover the energy expended to produce it. Let's dump this political ploy and search for REAL solutions. Oh, and by the way, I don't ever see commodity prices returning to previous levels. They are somewhat sticky, or inelastic, in that respect. Farmers could easily end up with a market price similar to historical values, but I don't think consumers will see it. Somewhere in the middle there are, and have historically been, some astonishing mark-ups. I don't understand why, but competition doesn't seem to fully mitigate the inertia of all those brokers and retailers who suddenly realize what consumers are willing and able to pay.

Dr. Tufte said...

I think what we are seeing is a very mild replay of the 1970's. Then and now share three things.

1) Negative supply shocks to oil (bigger in absolute size now, but relatively less important because we are less dependent).

2) A typical Keynesian response to all problems by "caffeinating" aggregate demand. The Democrats don't want to do anything different (even as different as what Clinton did in the 90's), and they won't let the Republican's do anything different.

3) Infantile microeconomic policies, like ethanol subsidies, and many environmental policies.

Austin - the problem you are discussing is a result of demand and supply both being inelastic in the short-run.