As disclosed in the annual crop report, 2013, the crop of soybean and corn were quite low in 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 has increased upto 28% and corn inventory by the end of September was estimated to be 824 Million bushels, while production of soybean increased by more than 8% and the output inventory was estimated to be 141 Million bushels. The inventory levels were higher than expected by the commodity analyst with corn and soybean production more than average production estimated. Thus, as a result, both corn and soybean prices went plunging down with corn being earmarked the worst performing commodity. The prices went lower after the reports were published because the inventory value shown following the last year drought of 2012, were manifold than what analyst and other market participants were expecting and the current year crop is declared to be the biggest US harvest of all time.
Also, the current weather conditions were conducive for both corn and soybean production and US farmers expects continued large harvests that will ease concerns over tight supplies on accound of better weather conditions. By the end of September, around 7% of Corn Crop and 3% of Soybean had already been harvested. Th effect of mass harvesting of these food crops was also seen on Commodity Exchange with Corn Futures for December delivery decreasing by 2.8% to $4.41(lowest corn contract price since September 2nd, 2010) and Soybean Futures declining by 3.8% to $12.82 for ¾ of a bushel(lowest soybean contract price since Feb 24th, 2012).
Studying the Economic Impact of Mass Production:
Now with the production of crop and soybean likely to be improved, unlike previous year, the market is likely 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 consumers 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.
The impact of such a sharp decline in corn and soybean prices is because of concerned high elasticity for these food crops in the consumer spending habit. Once the prices of these commodities rises, consumers on account of elastic demand for these food crops will refrain from purchasing these commodities or will just probably look for their cheap alternatives and once the prices falls they are happy to take more of it.
Conclusion:
Works Cited
Babcock, B. (2012, July 24). US Agriculture Drought Disaster. (J. Stewart, Interviewer)
Parkin, M. (2011). Demand and Elasticity. In CFA Institute, Economics (pp. 7-34). Boston: Custom.
Portlock, S. (2013, September 30). Corn, Soybean Futures Fall After Crop Report. Retrieved November 8, 2013, from Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702303643304579107332377427464
