South-Western EconNews

One Farmer's Loss is Another One's Grain

Subject

Comparative statics

Topic

Perfect competition

Key Words

Prices, bushel, cost of production, subsidies, demand, trade sanctions, American dollar, exports

News Story

Wheat prices are rising - much to the delight of farmers in the Pacific Northwest where the harvest is bountiful. After peaking at $5.02 per bushel in 1996, prices sank, reaching a low of $2.65. Now they are edging past $4, the cost of production. This means that farmers will not be reliant on subsidies from the federal government.

The demand for US wheat had been restrained by trade sanctions and a strong American dollar, which made exports more expensive. Now, wheat prices are higher because of problems elsewhere. Droughts have hurt the yields in the Midwest and Australia, while India has suffered its worst monsoons in 15 years.

(Updated October 10, 2002)

Questions

1.	Draw a set of two diagrams, side by side, showing the equilibrium in the US market for wheat and the equilibrium of a US wheat farmer who is breaking even. a) Show the effect of trade sanctions against the US on the wheat market equilibrium price and quantity. b) Trace the implications for the price, output and profit of the US farmer.
2.	Draw another set of diagrams of the wheat market and an individual farmer. a) Illustrate the effect of the drought in the Midwest on the price and quantity of US wheat. b) What happened as a result for the typical farmer in the Pacific Northwest? Show the implications for the price received, the output produced, and the amount of profit earned.

Source

Associated Press, "Tassels worth hassles," Rocky Mountain News, August 9, 2002.