To estimate the size of the corn crop, the U.S. Department of Agriculture (USDA) hires corn counters. Calculating stalk stats and assessing cob size, they observe 15 foot sections in thousands of fields. Add to that weather predictions, yield trends, and other pertinent data and you get an estimate for how much corn will be harvested. Once you also know about stockpiles (corn in silos and other storage facilities), a picture of the supply side of the market emerges.
What happens then? In corn (futures) markets, prices respond.
According to the WSJ, inaccurate USDA forecasting has led to more corn price volatility. June 30, 2010 for example, when the USDA said stockpiles were smaller than expected, prices spiked and a rancher had to paid an extra $200,000 for his feed. When prices fell, China was observed “swooping in.”
Do you want to better understand futures markets? This is a clear explanation of how the orange crop affected prices in (Eddie Murphy’s) Trading Places wonderful climax. A more academic discussion is here.
Our bottom line? Discussed in an econlife post, according to Michael Pollan, more than one-quarter of all supermarket items are affected by the price of corn.
The Economic Lesson
The three basic economic systems are tradition, command and the market. Reflected by corn futures, in reality, most economies are mixtures.
An Economic Question: Name several economies you believe have much more of a market than government influence. Then check the Index of Economic Freedom to see if you are correct.Read More