Weather Phenomenons vs. Crop Prices - Essay Example

? Weather Phenomenon vs. Crops Prices Commodity prices are generally influenced by a number of economic factors, the most common being the demand and supply of the commodity in the market. Nevertheless, the forces of demand and supply are also influenced by other macroeconomic factors such as the prevailing weather patterns at any given time that can either increase or reduce the production of a particular commodity. These elements are composed of what is known as weather phenomena such a drought, hurricane, wind, heavy rainfall, and snow. Drought, for example, tends to destroy crops, thereby decreasing its supply in the market and increasing prices. Other weather phenomena also affect the prices of the crops commodities in different ways, as will be discussed in the paper. Weather Phenomenon vs. Crop Prices Introduction In its literal meaning, weather refers to a state of the atmosphere, to the extent to which it is cold, hot, dry, wet, stormy, calm, cloudy, or clear. In general terms, it refers to the day-to-day temperature and rainfall activities. According to Arnold (2010), weather is associated with a number of phenomena that influence greatly the prices of crops. The phenomena include droughts, prolonged heavy rainfalls (El-Nino), hurricanes, hailstorms, lightning, clouds, snow, and wind. The objective of this paper is to explore the current weather phenomena and their impact on crop prices. Drought Drought refers to a period of a dry spell when there is no rainfall. It is one of the major weather phenomena that affect the prices of crops. This is due to the fact that during a dry spell, crops usually dry up in the farms leading to poor harvest. This in turn, will lead to shortage of crops in the market (Bolling, 2000). When such a shortage occurs, the demand of the crops in the market will likely outweigh their supply. This will result in an increase in the price of these crops, as many buyers will be competing to buy them. Such a situation is being witnessed in the Midwest of the USA, where persistent drought has seen the prices of corn increase tremendously over the past few weeks (Sosnowski, 2012). Johnson (2012) notes that 10-months corn futures and soybeans’ prices hitting unprecedentedly high since 2008 are due to the speculation that the spreading drought currently witnessed in the Midwest of the US will cut the US’s supplies of these crops, as it is the world’s largest producer of the crops. This was after the meteorological department predicted that the Midwest would experience unusually hot and dry spell in the next 10 days, as occasional light showers would be too little for more than brief crop improvements. Gim Gerlach was reported as saying that the crops are shrinking daily, while prices are shooting up for less available supply of crops for domestic use and export (Johnson, 2012). Statistically, corn futures for December supply jumped 4.4% to close at $7.725 per bushel on the Chicago Board of Trade. The trade market also had hit $7.78 high early on. This general increase in corn and soybeans due to the drought would also probably lead to inflation. Demand and supply curve: Price S2 S1 P2 D2 P1 D1 D Q2 Q1 Quantity Before the drought hit Midwest, production of corn stood at Q1 at S1 supply curve while price charged was P1and demand D1. However, after the drought hit the country, the supply curve shifted to S2 and the quantity supplied moved to Q2, thereby increasing prices from P1 to P2. The price increase in this case was caused by a fall in supply of corn, as people scrambled for the few remains, shifting the demand to D2. Adequate Rainfall Theoretically, farmers perceive rainy seasons as a period of bumper harvest. This is because the proper frequency of rainfalls leads to a good yield (Libecap & Steckel, 2010). The result would be that there would be enough supply of the crop in question to feed the nation and to export. Similarly, the forces of demand and supply would help determine the prices of the crops. Since supply would be high, this means that the prices of these crops would be low. This has been the case in Pakistan, which projects that the current favorable rainfall pattern experienced in the country favors the production of rice. As a result, it is projected that the high yield would lead to a fall in the prices of these important commodities. This is because there would be enough rice and wheat to feed the country and to sell abroad. The US has also seen a drop in the overall prices of wheat as the weather prospects improved. In this regard, the wheat prices drop by close 3% in early July. This is mainly attributed to the recent rainfall that has taken place in wheat-growing states such as Texas, Oklahoma, and Kansas, which favor wheat production. The condition of the crops is also expected to improve as rainfall will increase through September to December this year. It is reported that this will see the prices of wheat fall even further due to a projected bumper harvest expected towards the end of the year (Romig, 2012). Price S1 S2 P1 D1 D2 P2 D Q1 Q2 Quantity Since adequate rainfall is favorable for crop production, it is estimated that it will increase the supply of wheat from Q1 to Q2. This implies that prices will drop from P1 to P2, thereby increasing demand from D1 to D2 based on Ceteris Paribas principle. El Nino One of the most worrying weather phenomenon to farmers and a country at large are heavy and prolonged rainfalls commonly known as El Nino. It is a weather pattern characterized by peculiar warm water temperatures in the equatorial Oceans. This causes heavy and prolonged rainfalls and flooding, which generally cause massive damage to crops in the farms and make it hard for farmers to plant crops (Roming, 2012). The worst El Nino was experienced mainly in 2002-2003. This has been the main worry for many farmers, who argue that the eminent El Nino expected after the end of a dry spell experienced in Midwest America will certainly cause a lot of damage to crops that are already in the farm. The impact of El Nino rains is expected to negatively affect crops that do not require much rain, such as tomatoes, corn, and wheat. Once this happens, a shortage of the crops will be experienced in the domestic and world markets, which will lead to an upsurge in the prices. This is because the demand will have outweighed the supply available. However, it is also reported that El Nino not only negatively affects all crops but also favors some. Roming (2012) notes that farmers in Argentina, Brazil and Paraguay are preparing for a record soybeans crops despite the international prices remaining high due to tight global supply occasioned by South America previous season and the current dry spell affecting US crops. The South America countries like Brazil, Argentina, and Paraguay are already preparing for the coming El Nino, which arguably will soak the farms and lead to a bumper harvest of soybeans. As a result, this will increase the supply of the crop in the market and, consequently, decrease prices. This is shown in the graph below: Price S1 S2 P1 D1 P2 D2 Q1 Q2 D Quantity Q1 is the initial quantity of soybeans supplied in the market before E-Nino rains, and the price charged is P1. However, it is projected that the El Nino rains will increase the quantity supplies from Q1 to Q2, thereby resulting in a reduction of prices to P2, which will cause demand to increases to D2 up from D1. Wind (Hurricane) Wind (hurricane) is another weather phenomenon that greatly affects the production of crops, thereby influencing their prices. America is a country prone to hurricanes and strong winds. A case in point is the August 2005 Katrina that hit the US gulf coast region, leaving numerous crops destroyed (Schnepf & Chite, 2005). This incidence still is a source of panic to most farmers who were affected during the previous winds. This is because the heavy winds destroyed most of their crops such as sugarcane, corn, soybeans, and cotton, and, consequently, affected the prices of these crops (they shot up immediately after the incidence). Therefore, any prediction by the weathermen of an eminent hurricane usually leads to an increase in the prices of these commodities. This is because speculative buyers tend to rush for the commodity in readiness for the shortage (Struck, 2008). This is demonstrated using the graph below. S2 S1 P2 D2 P1 D1 Q2 Q1 D S1 shows the supply curve below any prediction of an imminent hurricane or winds. At this point, the quantity supplied is shown by Q1 and price P1. However, after an alert of possible hurricane hitting the gulf coast, supply curve shifts to S2, as demand increases to D2 due to speculation, thereby increasing the prices from P1 to P2. Conclusion Weather phenomena such as droughts, rains, El Nino, and winds play a major role in determining the price movement in the market, especially as regards agricultural crops. This is because poor weather phenomenon is mainly associated with the destruction of crops in the farm, which leads to a poor yield and underproduction. This creates an artificial shortage when the demand for the crop goes high. Based on the law of demand and supply, as the supply reduces, the prices of such commodities automatically shoot up. This scenario has been witnessed globally in the recent times. An example is the current increase in the prices of corn in the US due to the drought that has been hitting the Midwest of the country over the last few months. It is imperative, therefore, for the metrological department to be on alert and provide the relevant and timely information to farmers for them to be able to know when to plant and when not to. This will assist in stabilizing the prices of these crops in the market irrespective of the prevailing weather phenomena. References Arnold, R.A. (2010). Macroeconomics. New York, NY: Cengage Learning. Bolling, H.C. (2000). International financial crises and agriculture: Situation and outlook series. New York: Diane Publishing Co. Johnson A. Jr. (2012). Corn prices soar as Midwest bakes. Retrieved from: http://stream.wsj.com/story/markets/SS-2-5/SS-2-32232/ Libecap, G.D., & Steckel, R.H. (2010). The Economics of climate change: Adaptations past and present. Chicago: University of Chicago Press. Romig, S. (2012). Record South America soy crop won’t hurt prices. Retrieved from: http://www.marketwatch.com/story/record-south-america-soy-crop-wont-hurt-prices-2012-07-16. Struck, H. (2008). Demand and supply. New Jersey, NJ: GRIN Verlag. Sosnowski, A. (2012). Midwest corn crop likely to suffer due to heat wave and drought. Retrieved from: http://www.scientificamerican.com/article.cfm?id=midwest-corn-crop-likely-suffer-heat-wave-drought Schnepf, R., & Chite, R.M. (2005). U.S Agriculture after hurricane Katrina: status and issues. CRS Report for Congress. Sept. 12. Read More