Agriculture, the global economy, and inflation


The drought monitor report as of Tuesday, June 14 indicated no real change for our area as we continue in moderate drought. However, with the forecasted heat and winds, conditions will likely go downhill rapidly. The six to ten-day outlook (June 21 to 25) indicates a 70 to 80% chance of above normal temperatures and normal to slightly above normal precipitation. The eight to 14-day outlook (June 23 to 29) indicates a 60 to 70% chance of above normal temperatures and normal precipitation. The heat of this past week certainly sped up the start of wheat harvest and rapidly ripened later wheat. As long as rain holds off and with the expected yields, this should be a rapid harvest.

Unless you have been asleep for the last year, you are aware of the highest inflation rate over the last 40 years. Food and energy prices have especially spiked. Economic inflation is defined as “a situation of rising prices in the economy; a sustained increase in the general price level in an economy; an increase in the cost of living as the price of goods and services rise.” In plain English, the money available to purchase goods and services purchases less. Let’s focus on food today and how a free market economy is supposed to work, especially in ag.

Briefly, there are some key principles to a free market economy.

• Numerous buyers and sellers so the ability to set prices isn’t concentrated in the hands of a few. In agriculture, producers of ag commodities are “price takers” in that they can accept or reject a price for their goods but have no control over the price. This allows the Laws of Supply and Demand to work. As the price of a good increases, the amount producers are willing to provide increases while at the same time the amount a consumer is willing to buy decreases. The idea is that prices will find the equilibrium price where both buyers and sellers are doing the best they can. Things cause the prices to move off the equilibrium value but will return to it in free markets. Conditions can also cause a change in the actual equilibrium price.

• Freedom of entry and exit is another key point. This means there are minimal barriers for producers to enter into or leave the market for a given good and service. So, when there is a glut and lower prices, producers move out of the market. When there is a shortage with higher prices, more producers enter the market and production. Naturally in agriculture this is all within the limits of how long it takes to produce a commodity.

• And perfect information (remember this specifically refers to perfect competition in a free market and ag) which means everyone has all the necessary information to make decisions. Think producer and commodity groups along with the research and extension service. This allows for informed decisions and none has an unfair advantage with insider information.

• Finally, in a free market and being a price taker, both in what a producer purchases for their operation and what they can sell it for, producers can only maximize profits by being efficient and that means minimizing costs. They have no control over prices so their profit is determined by minimizing costs and optimizing, not maximizing, output.

Next week we will link this to inflation.

Dr. Victor L. Martin is the agriculture instructor/coordinator for Barton Community College. He can be reached at 620-792-9207, ext. 207, or martinv@bartonccc.edu.

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