Ample Supplies and Durum Prices - Essay Example

Economic Analysis This paper analyzes the article called “Ample supplies keep durum prices in check” that was written by Mark Conlon on 24th of March, 2010 for the “The Prairie Star.” The article basically is about the prices of durum in the year 2009 and also the expected prices in the year 2010. The purpose of the essay is to elaborate upon the economic theories used in the article. Also, the paper analyzes the different economic situations by the means of graphs. The main theme of the article is that the prices of durum have been consistent throughout the year 2009 despite the fact that demand has risen1. In normal circumstances, keeping other things constant (ceteris paribus), as the demand rises (the supply is held constant), the price of the good also increases. This is because as the demand for a good rises, the willingness and the ability of the buyers to buy rises. As a result, buyers are willing to buy more, and hence the price of the good rises. This can be shown in the diagram that is drawn below. Fig 2.1 From Figure 2.1 it can be seen that as demand rises (due to some exogenous variable), the demand curve shifts to the right (from AB to CD). The supply is fixed and so the new equilibrium is F instead of E that was initially the equilibrium. Since the supply is fixed it can be seen that the prices have risen from P1 to P2, such that P1< P2. This result is what is observed normally i.e. when the supply is held constant. However according to the article, the prices have been kept constant even when the demand is rising. In the article, Erica Olsen, the marketing specialist for North Dakota Wheat Commission states that the prices of durum throughout the year 2009 have not been changed. In fact they have remained in a range of $4 to $ 4.20, so that the average price is $ 4.10.2 She states that the demand for durum has increased worldwide and so has increased the exports of America. The estimated number of exports was reported as 838000 bushels in the year 2009.3 Normally, this increased number of exports may lead to a shortage of durum in the domestic country. Consequently, the prices may increase more as the supply falls to the left (there is a shortage). This phenomenon can be seen in the figure below. Fig 2..2 In the figure, the demand is already high. With an increase in exports the supply in the domestic market should fall. (The supply curve should shift from UX to YZ). The equilibrium should shift to G from E. Hence the price should increase more, this time to P3 where P3> P2. However this is not what was observed in America in the previous year. The reason given for the prices being consistent when they were supposed to be rising was that the supply was high too. Even with the increase in the demand for the durum worldwide there were so many durum producing regions worldwide that the supply did not fall. The supply being high created a surplus. A surplus in the economy meant the prices that had risen due to the initial increase in the demand were brought back into equilibrium due to an increase in the supply. Because there were approximately equal but opposite changes in the demand and supply of durum, these changes did not have any significant effect on the price of durum. The Quantity however increased. This mechanism is explained in the figure as follows. Fig 2.3 As the demand rises from AB to CD initially, the equilibrium of the economy shifts from E to F. However, since the supply is high at the same time, a surplus is created. As a result, the supply shifts to the right from UX to YZ. The equilibrium moves from F to G and hence the price level is more or less restored. This is the reason why the price of durum has almost remained the same. Since there has been no significant change in the production and sale of durum (because the prices have been approximately fixed), the market for durum is expected to be the same for the next year as the Wheat Commission of the US suggests in the article. However things may change drastically because of the fact that the 33% of the durum that was produced in the desert areas has fallen because of climatic conditions4. Also since the prices have been consistent more or less the producers of the Northern durum might stop producing. This is because the producers might have expected the prices rise. With no incentive to earn more profits, as a result of increases in prices, the producers might feel discouraged. The reduction of the production of Northern durum which is estimated at 15% along with the 33% fall in the desert durum might have adverse effects on the supply. Canada has also estimated its durum production to fall to an average level of 140 million in 2010 as compared to the 200 million that were produced in the previous year.5 As the supply will fall the supply curve will shift to the left. With demand the same as it was before (approximately), a reduction in the supply would lead to a shortage. The producers would start charging more and hence, the prices of durum would be raised significantly. This is what was shown in Fig 2.2. To conclude, the article discusses the increase in the demand for durum by quoting certain figures. Also, it elaborates on the fact that the prices have not changed in 2009 because of the high supply of durum. Using quotes from the Wealth Commission and Agriculture Canada the author tries to make his point about the prices being consistent. In the end, he states that the supply is likely to fall, and so prices may rise. However he also mentions that this is not what will be observed very soon. The reason given is that the stocks from the last year are quite plentiful and would definitely last till the end of 2010. All in all, the prices are expected to remain the same even through 2010. Bibliography Conlon, Mark. “Ample Supplies keep durum prices in check,” The Prairie Star. http://www.theprairiestar.com/articles/2010/04/01/ag_news/markets/market14.tx Wilkins, Nick, Yurekli, Ayda and Hu, Teh-wei. “Economic Analysis of Tobacco Demand,” World Bank Economics of Tobacco Toolkit,” Washington DC, World Bank, 2007 Read More