Economics of Volatile Corn Prices - Essay Example

The primary reason behind rise in the prices of corn was due to its global demand against its restricted supply. The excess demand could not be met with the restricted supply, which resulted in the rise in prices of corn all over the world. Mexico is the second largest importer of corn in the world. The rise in the corn prices all over the world has affected Mexico to a great extent. Decline in demand of corn due to rise in its price can be depicted by using the following graph:- (Source: Fep, 2004) In this graph it is shown that when the price of corn in Mexico was $3 per bushel, its demand was 2 billion bushels per year and the supply was 1.

1 billion bushels per year. Thus there was an excess in demand which could not be met by the supply. As a result of the price rise to $5 per bushel, the demand decreased to 1.1 billion bushels per year and consequently excess supply is generated. The market should move towards equilibrium at a price of $4 per bushel where the demand equalises the supply. Another reason for the rise in corn prices in Mexico was the production of corn based ethanol in the United States and the European Union. The producers of corn had to suffer due to this price rise.

Another reason for the high corn prices was the draught in the United States. . Thus the country has to find ways to deal with the uncertainties of the volatile markets. The country needs to focus on the market conditions properly. The main problem that the consumers in Mexico will face is when they will visit the grocery stores. Corn and food ingredients made from corn are used in ? of the total grocery products. Thus higher prices will be found throughout the grocery stores. The livestock feed rations contain a considerable amount of corns, a extended impact would be observed on poultry and meat prices due to higher feed costs than in any other food products.

Volatility in corn prices brings in unpredictability in the market and may create risk of fundamental food security for consumers as well as governments. Financial risk generated due to the volatility of corn prices dampens investment in agricultural sector which in turn creates uncertainty among traders and producers. Thus the Mexican government must take steps to bring an alternate solution to the existing problem. There are several programs involving the cash transfer conducted by the Mexican Government in order to help the poor people there.

The procedure of agriculture by means of contracts was another procedure advised by the Mexican Government (The World Bank Group, 2013). When there is an agreement made to buy a particular quantity of corn within a fixed period of time, neither the buyer nor the seller is sure that who is going to be benefitted by the agreement. This procedure supports the producers when there is a fall in the price. The price difference is subsidized between the time of signing the contract and the time of its fulfilment.

However, corn prices have plunged from their previous position in June 2011. Ethanol is considered to be a viable source of