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Corn and Ethanol Prices - Assignment Example

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The agricultural sector is one of the primary sectors in an economy. Production in this sector significantly influences the productivity of other sectors in the same economy…
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Corn and Ethanol Prices
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Corn and Ethanol Prices Affiliation: The economy is made up of numerous sectors, all of which contribute to the total output of that economy. The agricultural sector is one of the primary sectors in an economy. Production in this sector significantly influences the productivity of other sectors in the same economy. This is due to the fact that the output of the agricultural sector is used an input in other sectors. The article "Feeling Parched" highlights the consequences of drought in the production of corn, and the subsequent economic effects posed that occurrence in the State of Lowa and beyond.
Drought conditions in Lowa resulted in reduced corn output levels, posing significant threats to related activities that use corn in one way or another. The article outlines that due to declined corn harvests as a result of drought, corn prices went up. This scenario pushed up commodity prices of related products, especially processed corn products or complements to corn products (Dvorchak, 2012). Corn producers and corn product manufacturers were faced with critical decisions to make in relation to the appropriate course of action to be taken. While these scenarios were taking place in Lowa, their impacts were bound to be experienced across the entire economy.
The first category in this line is the farmers. While their output was low, market prices were going up. The implication of this was that supplies that they demanded became relatively expensive, especially those that were manufactured using corn; like livestock feed. Consequently, the farmers needed to reduce their livestock herds. To do so, they sold their livestock for slaughter. This increases livestock supply for slaughter purposes, triggering a fall in animal protein products in the meat markets. However, prices of processed corn products were going up, responding to low corn supply in the market.
Amid the events that had occurred in Lowa, insurance claims were bound to increase. This is more so with the farmers, where their produce is insured against loss. The primary role of insurance companies is to reduce risks by designing measures and policies to mitigate risks at a premium that is charged to clients (intext). Insurance and reinsurance activities heightened, with beneficiaries filing claims accordingly relative to the underlying uncertainties in Lowa and in the national economy at large.
Production of ethanol utilizes a significant percentage of national total corn output. The drought conditions in Lowa implied that the supply of corn would be inconsistent as demand rises. This argument is informed by the fact that drought conditions directly affect corn production. Production levels fall, while demand remains constant if not increasing (intext). With drought, the supply of corn declines. Due to reduced corn output, demand for corn would increase, thereby triggering upward movement in corn prices.
The demand and supply trends subsequently influence future prices of ethanol. Given that corn is a primary raw material in the production of ethanol, declined supply, increased demand, and higher prices for corn would result in a change in future ethanol prices. Reduced corn supply would result in higher ethanol production costs, and ethanol prices would increase in future. However, if the next year is followed by a bumper corn harvest, the scenario reverses. As the situation stands in Lowa, future ethanol prices are bound to go up.
Dvorchak, G. (2012). "Feeling Parched". Consumer Cyclicals. The Street, Inc.:
http://www.realmoney.thestreetcom/articles/08/15/2012/feeling-parched Read More
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