These days, teaching college economics is as easy as falling off a log. To prep for class, just grab the morning newspaper and head out the door. The day’s lesson probably is among the headlines.
Take the U.S. Department of Agriculture’s Monday release of its annual planting intentions survey. It shows that in 2008 farmers intend to plant less corn and more soybeans and wheat than analysts had anticipated. This demonstrates key aspects of “supply,” a required topic in any microeconomics course.
Supply is the willingness of producers to sell differing quantities of their product at each price in a wide range of possible prices. For corn, that might mean every possible price between one cent and $25 per bushel, even though the practical range in the real world has been in the $1 to $6 range for decades.
This willingness to produce different quantities at different prices is not independent of other things that are happening. Supply depends on the cost of production. Changes in the prices of seed, fertilizers, pesticides, diesel fuel and other inputs alter the price farmers must get for their crop in order for them to be willing to produce a crop in any given quantity.
Changes in the expected profitability of alternative crops also affect willingness to produce. Soybeans and corn use many of the same inputs. So, as soybean prices rise relative to corn, farmers switch some land from corn to beans.
Both factors are at work right now. Farmers reportedly expect the price of soybeans to be better, relative to corn, for 2008 than last year. At the margin, some acreage would shift even if input prices stayed constant.
However, fertilizer continues to get more expensive. Corn needs nitrogen for high yields. Most nitrogen fertilizer is made from natural gas. Natural gas prices continue upwards. Hence, more expensive fertilizer and higher corn production costs.
Soybeans are legumes. They fix their own nitrogen from the atmosphere. Additional synthetic nitrogen isn’t needed. Any increase in nitrogen prices tilts the table a bit toward soybeans away from corn.
Finally, crop rotations enter in. Crops often are more productive when planted in alternate years. Corn and soybeans work particularly well together.
Corn benefits from nitrogen fixed by the previous year’s soybeans. Planting soybeans after corn disrupts the population growth of insects that reduce corn yields. A population of corn borers established during a year of corn production largely dies out in the absence of a host plant when soybeans grow in the same field the following year. A farmer planting “corn-on-corn” needs to buy insecticides that are not necessary for “corn-on-beans” and more fertilizer. So large corn acreages one year, as in 2007, mean smaller ones the next year.
Time always is scarce for farmers. They can plant corn earlier in the spring than soybeans and harvest it later in the fall. Plant all of your acres to corn or all to beans, and you must cover all your acres in fewer weeks than if you plant some of both. Most farmers have not taken microeconomics. But they know how to use scarce resources better than any Ph.D. economist.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.