Supply and Demand of Grain in the United States

Market of Grain in the United States

In the United States, millions of Americans are confronting the latest trends in the commodities markets where the costs of agricultural products have driven up costs of breakfasts of average Americans. Over the past year, the price of orange juice has increased a quarter, and the price of milk has also risen by 5%, and egg by a fifth. The issues have made General Mills and Kellogg's to increase the prices of their breakfast cereal products. The cause of an increase is due to a recent rise in the price of grains such as wheat and corn. Underpinning the rise in the price of grains is that the demand has outpaced the supply because of the growing demand for cereals for the production of biofuels such as ethanol. Thus, the author is trying to reveal the factors that lead to an increase in the price of grain, which include the rise in the use of grains for the production of biofuels.

Moreover, the use of cereal in making biofuel has tripled since 2000 where ethanol distilleries consume a fifth of the U.S. corn making the demand of grain accelerating. In the 1990s, the demand for biofuel increased by 1.2% yearly. Ten years after, the demand for grain has increased by 1.4%, and will increase by 1.9% annually according to Goldman projects. In 2009, the demand for corn has exceeded the supply, moreover, farmers are growing lesser wheat pushing an increase in the price of corn up. An increase in the price of grain has also led to increasing in the prices of eggs because the grain used to feed poultry has become more expensive.

1.Agflation

Agflation is defined as an increase in the food prices because of the rise in demand for agricultural products that drives up the inflation. Thus, agflation is a combined word of agricultural products and inflation. The term inflation is the rise in the price of goods and services, thus, agflation is an increase in the prices of the agricultural products. The agflation is not due to an increase in money supply but an interaction in demand and supply. For example, when a demand of cereal is more than the supply, there will be an increase in the price of corn.

2. Major problem facing the market for crops

The major problem facing the market of crops is that the world is running short of certain categories of crops because of underproduction. Moreover, there has been a decline in the human consumption because of moderate growth of population. An increase in the production of biofuels has also increased the demand for cereals. These factors have made the demand for agricultural products to be greater than supply leading to increasing the prices of crops.

3. Cause of this problem

The cause of the problem has been due to the increase in demand that is more than the supply agricultural products. The law of demand states that increase demand over the supply will lead to an increase in the prices of goods and services. Thus, the problems have arisen because of a decline in the production of cereals, which has led to an increase in the prices of cereals. Moreover, an increase in the price has led to an increase in the price of the complementary agricultural products such as eggs and milk.

4.Causes of Rising in the cost of meat and eggs

In the United States, most grains are used to feed livestock, however, farmers are struggling to keep up with the demand. Thus, the grain used to feed livestock and poultry have become more expensive leading to an increase in the costs of eggs and meat.

5. How is the biofuel subsidized by the government?

Method the government employs in providing the biofuel subsidies is by providing the excise tax credits for the company that produces the biofuel, the strategy encourages an increase in the production of biofuel. A tariff protection against biofuel imports is another form of subsidy. Tax exemption is another form of biofuel subsidize where the government exempts biofuel producers from paying taxes. The government also offers subsidies to factors of production used to produce biofuel. For example, the government offers support for labor who work in the biofuel producing companies. The government also targets in reducing the costs of capital used to produce biofuel.

3- Supply and Demand model

The study uses the graphical illustration to explain the reason the price of grain is rising. As being revealed in Fig 1, a decline in the supply of the corn pushes up the price of corn because the demand is more than the supply. In fig 2, a shift in demand of food grain to the right will increase the price of grain. The factor that affects the demand and supply is an increase in demand for the grain while supply remains equal. Moreover, the government support and price support have also led to the increase the price of the grain. Additionally, a decline in the supply of the grain while the demand remains equal affects demand and supply. As being revealed in Fig 3, the price of an egg is going to the United States because of a decline in supply while the demand remains equal. Thus, the demand for the eggs in the United States is higher than supply.

Fig 1: Demand and Supply of Corn

Fig 2: Demand and Supply of Food Grain

Fig 3: Market Price of Egg

4- Recommendations for policy

The government should encourage a production of genetically modified wheat to increase production of worn and wheat. The government should increase subsidies for farmers to encourage the production of wheat. The government should also participate in the mass agricultural production of wheat and corn to reduce the prices.

Reference

Agricultural Commodities Biofuelled Grain Prices to go the way of the Oil Price. (2007, June 21). The Economist.