This summer’s drought is gripping an increasingly large portion of the nation. That is good news for my former neighbors in extreme southwestern Minnesota where I grew up. They saw good rainfall in June so their crops still are in quite good condition.
Drought elsewhere is pushing up prices, and my neighbors will have a more profitable year than if weather across the nation was uniformly favorable. They are not rejoicing at the misfortune of others. In terms of topography and rainfall, those southwestern counties have more in common with eastern South Dakota than Minnesota. Drought is frequent, and we know how hard it is to see our crops shrivel up under an unrelenting sun.
That does not change the underlying fundamentals of grain markets, however. Farmers decide early in the year how many acres to plant, but Mother Nature decides what actual yields will be. Once the seed is in the ground, farmers can do virtually nothing to change output until the next growing season.
Yet the quantities of grain that users buy do not change greatly as prices move up or down. This is what economists call “inelastic demand.” Such inelastic demand, a long production cycle and varying weather cause highly variable prices. Good weather and big crops — prices fall. Bad weather and poor crops — prices rise.
The outcome can seem paradoxical to the uninitiated. Years when the nation as a whole has good crops are not years of high income for farmers as a whole. The depressed prices caused by a bumper crop more than offset the extra bushels farmers have to sell.
A poor crop, whatever the cause, raises prices. Average farm incomes tend to be higher when yields are hurt in at least some prime crop regions.
For farmers whose crops are destroyed by drought, flood or hail, resulting high prices only rub salt in their wounds. Those farmers who harvest a crop, however, enjoy much higher incomes than they would if weather had been uniformly good.
The best position is to have a good local crop in a year when the national crop is poor. Of course, the worst position is to have a poor crop when national average yields are high and prices are low. I experienced the worst when a Sept. 4, 1974, frost in our valley devastated our corn and soybeans in a year when national average yields were good.
Farmers in counties like Cottonwood, Murray and Nobles would like a good rain about now. Their corn and soybeans show drought stress. But their overall condition is so much better than in the rest of the state and much of the Corn Belt that 2006 still might be a more profitable year than if the entire Midwest had good weather.
The $3 gasoline we are buying also results from inelastic demand. But in this case, political developments, rather than the weather, are shifting supply back and forth.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.