South-Western College Publishing - Economics  
A Tale of Two Countries: Hemp Farming
Subject Supply
Topic Supply and Demand/Equilibrium
Key Words Price, Costs, Profitability, Demand, Income
News Story

U.S. wheat farmers are worried. The price of spring wheat is $2.91 a bushel and, if a bumper crop transpires, the price could go lower. Costs are also rising, and farmers may be unable to plant in April.

The farmers are envious of Canadian farmers who can plant hemp, a non-intoxicating cousin of marijuana grown for its seed, oil, and fiber. Hemp is profitable, partly because it requires few pesticides. However, American farmers are prevented from growing it because it is identified with marijuana. The oil and clothes made from hemp are often sold in stores where drug paraphernalia is sold. However, planted hemp crops can be distinguished from marijuana by drug enforcement agencies, and, when hemp is grown in quantity, cross-pollination reduces the potency of any marijuana plants.

Tobacco farmers agree with the wheat farmers. They are faced with lower demand and much lower incomes this year. They could use their tobacco farming equipment to farm hemp. The crop could be used as bedding for cattle.

(Updated May 1, 1999)

Questions
1. In the wheat market, the farmers are experiencing lower prices and higher costs.
  a)Draw a diagram with axes representing the price and quantity of wheat. Add a supply curve and mark an initial price and quantity. Show the effect on the price and quantity of wheat of falling wheat prices. Is there a change in supply or quantity supplied? Explain your answer.
  b)On a second diagram of the supply of wheat, illustrate the effect on the price and quantity of wheat of the increased costs of growing wheat. Is there a change in supply or quantity supplied? Explain.
  c)On a third diagram, illustrate the effect of farmers' expectation that wheat prices will fall even lower in the future on the supply of wheat now. Is there a change in supply or quantity supplied? Explain.
2. Assume that, as in Canada, there is a free market for hemp in which the government does not interfere with farmers' supply decisions.
  a)Draw a price-quantity diagram of the supply of hemp and an initial price and quantity. Show the effect of lower tobacco prices. Is there a change in supply or quantity supplied? Explain your answer.
  What kinds of goods are hemp and tobacco?
3. In reality, the government prevents the farming of hemp in the U.S. In view of this, what does the supply curve for hemp look like?
Source Christopher S. Wren, "U.S. Farmers Covet a Crop That Policy on Drugs Forbids", The New York Times, April 1, 1999.

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