Causes of changes in wheat prices

Since the summer of 2010, we have seen the price of wheat significantly increasing. In this article I will summarize the possible explanations why wheat prices have raised in recent months and also bring in ways of intervention you can use to try and contain the price rises.

This calendar year has seen abnormal weather patterns considerably impacting on harvests in many major wheat producing countries. This has in fact manufactured the recent spike in wheat prices throughout the world. Russia's harvest has been the most significantly afflicted by the weather. During the summer season, Russia and the Ukraine have been experiencing severe droughts and wildfires that have prevented the expansion of crops, also destroying a 3rd of the produced wheat. As a result, Russia declared a ban on all exports of the grain from the 15th August - end of December, that was then prolonged into 2011. After the inability of the Russian harvest alone wheat prices raised by 20% by themselves, illustrating a restriction in way to obtain the grain. Following this announcement the US Office of agriculture trim its projections for the next year's world production of wheat by 15. 3m tonnes to 645. 7m tonnes. However, it is important to note that wheat stocks are higher still than crisis levels witnessed in 2007-08.

This projection and halted creation have induced wheat prices to increase on the near future markets with their highest levels since the last crisis. Canada, the next major wheat exporter on the globe has been severely damaged by heavy rains that have avoided farmers planting seed products and also destroying hectares of land, considerably harming next year's harvest. India, the next largest wheat company, was struck by severe monsoon rains in August which heavily damaged their wheat storage area. They had insufficient storage, creating around 10m tonnes of wheat to be vulnerable to rotting scheduled to it being exposed to the rain. Also, Egypt, Serbia, Australia and Pakistan have been strike by major floods that have destroyed up to a fifth of the countries vegetation, reducing supply further and assisting the price boosts. The combined aftereffect of these weather disasters is shown in the diagram below

The diagram shows that supply has dropped from S1-S2. It has reduced output from Q1-Q2 and increased the purchase price from P1-P2. Here you can view that the change in price is considerably larger than the change in outcome. This is because of the fact that wheat is a necessity and for that reason is price inelastic, which is represented by the inelastic demand curve. Which means that with a decrease in the supply of wheat, even if it is below turmoil levels observed in 2007-08, there will be a large increase in price.

Another reason why prices have been growing lately is because of the swiftly increasing global society. The global people is growing so fast because appearing countries possess the fastest increasing inhabitants rates. Many emerging countries have become wealthier meaning that demand for grains is increasing faster than the populace. However, it can be argued that recent spike in wheat prices has been induced by uncertainty in the market and panic buying, because of this of export limitations and a show up in supplies. It could also be argued that recent price rises have been exaggerated due to 'Speculators'. These are buyers who purchase wheat on the goods markets expecting further price rises and are compressing source whilst making profits from doing so. This results in a nutshell term rises in the price of wheat, which is what we have observed lately.

However, there are differences between your situation in 2007-08 and the situation we have been in this season. Wheat prices rose consistently for most calendar months in 2007-08, whereas lately, prices have been somewhat more volatile. Price goes up in the weeks of July this year were no much larger, compared with monthly previous to that, than those seen from May-October 2009. For the past 3 months, the price increases have been significantly less than those people seen for the last 3 months of 2009, indicating that the situation now isn't anywhere near as bad as recently seen. One of the reasons for this is that year we have seen excess development from the US and China; which includes helped offset the problems confronted by Russia and other countries previously mentioned. The surplus from the united states and China claim that these prices increases seen this season should only be momentary. Also wheat producers have rebuilt companies again since the last crisis, expected to be at about 646m tonnes for 2010 2010 which should be sufficient to load the hole left by countries like Russia.

When confronted with increasing prices and slipping source for wheat the federal government have options on what actions can be studied to help in this particular situation. Firstly the federal government could provide designer subsidies. A designer subsidy is a repayment from the government with the purpose of potentially reducing the suggestions cost of creation for farmers, in doing so helping to add to the way to obtain wheat. This may involve subsidising the price tag on a particular type used for the development process to help lower the farmer's costs. The diagram below shows the result of a subsidy repayment made to wheat producers

Here you can see that the subsidy has helped reduce the expense of production, therefore increasing the supply of wheat from S1-S2. Also, output has increased slightly from Q1-Q2. The main thing to note this is actually the price change. As you can plainly see the purchase price for wheat has fallen noticeably from P1-P2. The key reason why the price has fallen a lot in comparison small increase in end result is the fact that wheat is price inelastic. This means that productivity is less responsive to changes in cost. However, it has helped to attain and upsurge in supply of wheat to meet increasing demands but at exactly the same time a much lower price for wheat so that it is more affordable on the market. It is also important to notice that as price is inelastic, the buyer will profit the most from this subsidy. This is mentioned by the shaded area 'P1. Q1. P2' which shows the upsurge in consumer surplus as due to the subsidy. Suppliers will also gain from this subsidy as they will receive higher net income leading to increased Producer surplus. Another good thing about this subsidy is the fact that it can help control the purchase price level as the federal government may use this to prevent the price of wheat soaring even more.

However, there are some drawbacks when working with subsidises. For example, it can distort market prices possibly creating doubt in the market which can increase prices one again but also result in a misallocation of resources. Also if a subsidy was presented with to the agricultural industry it might create huge controversy especially after coming out of a recession and many companies in decline, including the car industry, greatly looking for such fund. Also a subsidy can synthetically support farmers who are unproductive and require structural change which can lead to higher charges for the government and higher charges for the consumers over time. Another drawback is that subsidies are extremely expensive and are funded by the taxpayer's money which originates from long term increases in taxation. So that it can be argued that subsidies provide partially phony benefits to consumers. Also increased government spending involves an opportunity cost as the money might have been spent in other places on for example, education. Subsidies may also lead to a street to redemption in production on production consequently of too little competition from other farmers or a lower incentive to increase whole wheat production as they are protected by the subsidy.

Another option the government have is preparing a maximum price for whole wheat. This involves the government legally imposing a cost limit on the marketplace to be able to restrict the price exceeding that particular level and becoming too much. However, it can only just succeed when set beneath the free market equilibrium price. The diagrams below show the procedure of any maximum price

The diagram on the departed shows the initial market prior to the imposed maximum price. Here you can view that where demand equals source, we have a cost (P*) and productivity (Q*) equilibrium also with an equal amount of consumer and designer surplus. The diagram on the right shows a maximum price being presented into the market, suggested by 'Pmax'. As you can see, as a result of the utmost price quantity provided agreements to Q2 and amount demanded extends to Q1, creating unwanted demand at that price. Excess demand is established here because the purchase price has been held beneath the original equilibrium price P*. From a maximum price being released consumers gain from less price sold for whole wheat; however, consumer welfare has still fallen due to the contraction of number supplied. Also, as you can see, consequently of the maximum price the degrees of consumer and developer surplus have evolved. The brand new area for consumer surplus compatible the trapezium C. B. D. Pmax, indicating an increase in consumer surplus because of the cheap for whole wheat. However, designer surplus has fallen and compatible E. C. Pmax. Also there has been a lack of economic welfare indicated by the triangle ABC.

However, the problem of contracted resource and unwanted demand can cause problems. If the federal government simply created a maximum price without further intervention, wheat would be sold at an initial come first serve basis which could mean that folks who appreciate and demand it the most might not exactly acquire it. Firms may also sell their wheat stocks to their preferred customers and other people would be neglected and their gain access to would be restricted. All this would show unfair for everyone, therefore, rationing the whole wheat stocks would need to be adopted to try and overcome these problems. Another problem with the use of maximum prices is the fact it can lead to the manifestation of underground market segments. This is when consumers are unable to buy sufficient levels of whole wheat in a legal market and are therefore ready to wheat at high prices, even above the standard free selling price P*. Also maximum prices decrease the amount of wheat that is produced in doing so reducing food products. Because of this, farmers will earn less income and may decide to move from wheat farming altogether and move to dairy farming, for example. This will reduce the way to obtain wheat even further, building a multiplier effect. Here the government will then have to try and encourage source further or carry out direct government creation or giving tax reliefs for farmers. The federal government may try to decrease the demand for wheat by promoting the production for other grains to be able to minimise the excess demand.

Overall, I think that there is no perfect solution in order to try and offset the problem of increasing whole wheat prices and restricting source for wheat. In order for intervention to work and achieve maximum monetary efficiency, I believe the federal government should use a number of policies to be able to attain lower prices and also to promote increased way to obtain whole wheat. Another option that administration have is by using the Buffer Stocks and options' scheme. This might involve the federal government purchasing whole wheat and storing it during good harvests and then setting it free during bad harvests. This will balance demand and supply in the long run, also providing a fixed stabilised price. This may prevent situations of extra demand and contracting resource, along with souring prices for whole wheat. I also assume that the recent jumps in wheat prices are just a brief term impact to the quick contractions in supply. Surpluses in america and China should help fill up the hole still left by other countries over another few years. Also, lots of the affected countries talked about are now experiencing more favourable climate, meaning supply should return to normal within the next 12 months. Finally, there is no reason why supply should stay contracting within the next year. Whether or not wheat prices remain as they are or continue to rise somewhat, farmers will be attracted to this and spend more land to wheat farming, making use of this as an opportunity to increase their incomes but at the same type help gain wheat securities to a normal level.

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