Following an unusually dry summer in 2023, US corn farmers expected a poor harvest and an increase in the price of corn. In anticipation of this price increase, many farmers decided not to sell corn from their previous harvest and hold in storage until the price went up. However, late rains helped the crop rebound, yielding much bigger than expected harvests for farmers. This unexpected shock to supply caused corn prices to fall dramatically. In June 2023, corn future prices reached as high as $6.30 per bushel. By February 2024, they had fallen to $4.10 per bushel.
As a result of the large harvest and tumbling prices, many farmers have decided to also put this year’s harvest into storage until the price goes back up. However, analysts do not predict a dramatic increase in demand for corn. Farmers sell a substantial share of their corn to the biofuels industry and to other farmers as feed for their livestock. However, demand in those industries has been declining. In the meantime, many farmers will have to sell some of their corn at a loss to pay off debts, which are now at higher interest rates. Many farmers have indicated they will not grow corn next year and grow crops like soy and sorghum instead. One farmer said switching crops makes economic sense because they would “lose less money.”
Discussion Questions:
- If corn farmers are experiencing economic losses in the short-run, what would you expect to happen to the equilibrium price and quantity of corn in the long-run? Explain.
- Suppose a corn farmer told you their accounting profit was positive, but their economic profit was negative. What do they mean by that?
- One of the farmers claimed to be switching to a different crop in order to “lose less money.” If the farmer knows or expects that they will still lose money, why wouldn’t they just grow nothing instead?
Sources| Reuters: https://www.reuters.com/markets/commodities/us-farmers-face-harsh-economics-with-record-corn-supplies-silos-2024-02-22/; Unsplash: Photo by Jesse Gardner on Unsplash