As disclosed in the annual crop report, 2013, the crop of soybean and corn were quite low iin production during 2012 on account of drought in Midwestern areas of USA. With low production/supply and continued demand in the market, prices of these food crops suffered a high shock and were at high levels because of shortage in the market.
However, this year the condition seem favorable with corn production expected to be record high with the increase of 28%, while production of soybean is expected to be more than 8%, as compared to last year . Now with the production of crop and soybean likely to be improved, unlike previous year, the market is likley to experience excess supply of both corn and soybean. However, if the farmers will bring their produce at existing high price of 2012, they will not able to sell their stock as the cosnumers will refrain their purchase at high prices of 2012. Thus, farmers will start selling their produce at reduced prices. As the price starts falling, this puts upward pressure on quantity demanded and at the same time quantity supplied starts falling and this process of increasing demand and falling supply will continue till market forces achieves equilibrium at new price level which will be below price levels of 2012 and equilibrium quantity which will be above 2012 levels.
In another case, courtesy the worst drought of 2012 in 50 years, the record high prices of corn forced the federal government to follow a mandate to stop using corn based ethanol as fuel on temporary basis. Since 40% of crop production in US is processed for fuel production and with 60% rise in corn prices during 2012, gasoline prices shoot up by 40% by the time of july with ethanol requirement aggravating rise in food(corn) costs and spreading the effect to the prices of gasoline.
Thus with the mandate to cut ethanol use for fuel production and with fall in demand of corn for ethanol production, the 40% crop which was used for the fuel production will be infused in domestic market and is likely to increase the supply. With increased supply of corn and well supported demand for the food crop, the prices will fall. However, it is expected that even mandate of cutting down ethanol production to control corn prices will end up in lowering the corn prices by 5% only as export to china and other countries along with ethanol policies in Europe also contribute to higher prices of corn.
Also the ethanol market will be badly hit with demand of ethanol for gasoline production might reach zero because of mandate from federal government to avoid ethanol for gasoline production citing high prices of corn which is primarily used as biofuel for ethanol production.
Works Cited
Babcock, Bruce. US Agriculture Drought Disaster Jon Stewart. 24 July 2012.
Bloomberg View. End the Ethanol Mandate. 17 August 2012. 16 September 2013 <http://www.bloomberg.com/news/2012-08-16/ethanol-in-gas-tanks-makes-food-on-your-table-cost-more.html>.
Parkin, Michael. "Demand and Elasticity." Institute, CFA. Economics. Boston: Custom, 2011. 7-34.
