Peanut prices respond to demand and supply

Peanuts or Cotton?

Oct 12, 2011 • Businesses, Demand, Supply, and Markets, Thinking Economically • 175 Views    No Comments

Farmers decided to plant fewer peanuts when cotton prices soared. The result? Now peanut prices are skyrocketing. Here is the story.

Perhaps it all began with higher cotton prices. Responding, peanut farmers switched some acreage to cotton. Combine that decision with an unusually dry growing season in Georgia, the leading peanut producer, and too many scorched nuts and what do you get? A peanut shortage.

What will happen because of the peanut shortage? Peanut butter will cost us 40% more. And, to be sure they have enough of their basic peanut butter products, Smucker, the world’s largest peanut buyer, has temporarily stopped producing its reduced-fat creamy spread.

The NY Times said we had an acreage war between food and clothing. And here, a past econlife post discusses cotton prices.

The Economic Lesson

The peanuts story is a classic economics tale. On a supply and demand graph, the supply curve shifts upward and to the left when producers switch to a more attractive alternative. The result is less supply and a higher price.

An Economic Question: Now that peanuts are so pricey, what might you predict is the next supply curve move?

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