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Tuesday, January 30, 2007

Principles of microeconomics: The corn market

Logan Hawkes from Crop News Weekly provides a cogent warning to farmers considering jumping into the corn market:
As another month comes to a close, a new Congress settles into the business of the new year, and driven by a strong market, more and more farmers are considering switching to corn for the spring planting season. And while corn is certainly showing strength in the marketplace, thanks in part to an expanding ethanol market, producers should exercise caution before leaping on the bandwagon. A careful analysis may offer evidence that sticking with your current crop, like soybeans may, in the long run, prove more profitable. Not that there is anything wrong with entering the corn market. But there are so many unknown variables to consider, like how many more acres of corn are going to planted this year compared to last; how many farmers have already made plans to jump to corn production; will the corn market remain strong throughout the year? Whether you give corn a second look or not, you owe it to yourself to think long and hard before making a final decision.
In other words, just because there might be gold at the end of the government mandated rainbow, farmers might want to be wary of jumping with both feet into the corn market. As I mentioned below, it is possible that land that is less productive in producing corn will be dedicated to corn production in the short to medium run. This will make the cost of producing corn higher than it is today and will reduce the returns on producing corn.

Hawkes provides sound advice, and sounds much like a professor of economics teaching the theory of perfect competition.

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