South-Western College Publishing - Economics  
Crop Forecasts Drying Up
Subject Aggregate Supply, Productivity, Inflation
Topic Aggregate Demand/Aggregate Supply
Key Words Inflation, Farm Exports
News Story

Natural disasters like droughts, floods or earthquakes can have a substantial impact on the supply of agricultural goods and therefore, agricultural prices. The Eastern United States was subject to a severe drought this past summer and many consumers feared the effect of this drought on their food bills. The Agriculture Department cut its harvest forecast for the Eastern U.S. to reflect the impact of the drought; however, crop output in the Midwest will be great enough to keep grain prices from increasing. According to forecasts by several economists, grain price changes will cause a moderate 2 percent rise in U.S. grocery prices this year.

The Agriculture Department expects the harvest of soybeans to be 1 percent larger than last year's record crop. Corn production will decrease by about 4 percent from last year's large harvest. Milk production is expected to increase by 3 percent. Milk prices, which many had feared would be most affected by the drought, are predicted to drop. The citrus crop should return to near normal levels as favorable weather in California is helping citrus growers recover from last winter's devastating freeze.

The forecast for farm incomes is not very rosy. Abundant harvests coupled with weak exports have kept farm prices for some crops from rising and have resulted in decreased prices for other crops. Some farmers face depleted crops due to the drought and constant or lowered prices. For consumers, the good news of little inflation for agricultural commodities must be tempered somewhat by the likely increase in tax payments to help farmers.

(Updated October 1, 1999)

Questions
1. What is a supply shock? What is the difference between a supply shock and other movements of the long-run supply curve?
2. The drought in the Eastern U.S. was supposed to have significantly reduced crop production. Using an aggregate supply/aggregate demand framework show the impact of this forecasted supply shock on the price level and real GDP.
3. Suppose the drought had raised agricultural prices and inflation, what options would policy makers have to moderate price increases?
Source Scott Kilman, "U.S. Cuts Crop Forecasts Amid Drought," The Wall Street Journal, September 13, 1999.

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