Although a record drought scorched the USA, farmers aren't faring as badly as people thought.
The record drought destroyed a lot of the crops in the US but farmers aren't losing so much profits. This is because the prices for agricultural products are so high. The supply of agricultural products are extremely inelastic because a farmer cannot plant more crops in the middle of the season. Agricultural products are seasonal products and so supply cannot change when a farmer wants to produce more of a product when the price increases. However, since the agricultural products are extremely inelastic if not perfectly inelastic, when price increases, demand decreases at a proportionately smaller rate and so therefore, revenue increases.
In this case, supply decreases by an extreme amount because of the drought and so revenue doesn't increase and instead decreases. However, it doesn't decrease as much as people expected because of the inelasticity of the agricultural products. Also Hurricane Isaac watered the crops just before the harvest and so some crops survived the drought increasing the expected supply. Also, a new hybrid soybean were amazingly strong against the drought and so soybeans were in more supply relative to the other crops. Also some farms are government subsidized and is covered by crop insurance. All these factors increased the supply above the expected supply and so the farmers did not lose as much profit as expected.
Also, demand for agricultural products are very inelastic. Most people rely on mostly corn and wheat for their meals and so even if there is an increase in price, people will still demand due to it's necessity. Because the demand for agricultural products are inelastic, there is an even lower decrease in quantity demanded proportionate to the increase in price.
The results of this is that prices worldwide will increase because of the shortage of supply coming from the US. Although other countries might not be affected as much as the US is affected, they will still see an increase in price. This will also increase the cost of other edible goods such as beef and chicken. The cost of feed will increase for these products and so the cost of production increases. Supplier will have to increase the price on their products if they want to stay competitive.
http://www.wday.com/event/article/id/86760/group/homepage/
The record drought destroyed a lot of the crops in the US but farmers aren't losing so much profits. This is because the prices for agricultural products are so high. The supply of agricultural products are extremely inelastic because a farmer cannot plant more crops in the middle of the season. Agricultural products are seasonal products and so supply cannot change when a farmer wants to produce more of a product when the price increases. However, since the agricultural products are extremely inelastic if not perfectly inelastic, when price increases, demand decreases at a proportionately smaller rate and so therefore, revenue increases.
In this case, supply decreases by an extreme amount because of the drought and so revenue doesn't increase and instead decreases. However, it doesn't decrease as much as people expected because of the inelasticity of the agricultural products. Also Hurricane Isaac watered the crops just before the harvest and so some crops survived the drought increasing the expected supply. Also, a new hybrid soybean were amazingly strong against the drought and so soybeans were in more supply relative to the other crops. Also some farms are government subsidized and is covered by crop insurance. All these factors increased the supply above the expected supply and so the farmers did not lose as much profit as expected.
Also, demand for agricultural products are very inelastic. Most people rely on mostly corn and wheat for their meals and so even if there is an increase in price, people will still demand due to it's necessity. Because the demand for agricultural products are inelastic, there is an even lower decrease in quantity demanded proportionate to the increase in price.
The results of this is that prices worldwide will increase because of the shortage of supply coming from the US. Although other countries might not be affected as much as the US is affected, they will still see an increase in price. This will also increase the cost of other edible goods such as beef and chicken. The cost of feed will increase for these products and so the cost of production increases. Supplier will have to increase the price on their products if they want to stay competitive.
http://www.wday.com/event/article/id/86760/group/homepage/