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, the decision of US government to temporarily remove the mandatory use of Ethanol for producing gasoline is likely to affect both corn and ethanol market, if market participants expect that this proposal may be continued permanently in future.
With corn being the main feedstock for ethanol which is the then used as oxygenate in gasoline, any expectation by the producers as if government will permanently remove mandatory restriction of using corn as biomass for ethanol production will ultimately lead to fall in demand of corn with corn being complimentary good for ethanol production. Also ethanol market will be badly hit with demand of ethanol for gasoline production may turn out to be zero if all the producers of gasoline refrain from using ethanol provided they expect the proposed plan of the government to continue in future.
Works Cited
Babcock, Bruce. US Agriculture Drought Disaster Jon Stewart. 24 July 2012.
Parkin, Michael. "Demand and Elasticity." Institute, CFA. Economics. Boston: Custom, 2011. 7-34.
Parkin, Michael. "Efficiency and Equity." Institute, CFA. Economics. Boston: Custom, 2011. 37-58.
