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?
Interesting how real life can imitate economics. You know how corn prices have been soaring? Well, farmers responded just like they read an econ textbook. They increased supply. One tradeoff? A smaller soybean crop.
Here are the headlines. You can see the perspective from Iowa in the Des Moines Register.
Washington Post: “Farmers plant second-largest corn crop in nearly 7 decades, could ease food prices this year“
Des Moines Register: “Corn Plunges on Shocking USDA Report“
WSJ: “A Corn Crop Bonanza“
The Economic Lesson
On a demand and supply graph, demand slopes downward and supply slopes upward while price is our y-axis and quantity, the x-axis. Because farmers expected higher prices for corn, they switched from soybeans and wheat. As a result, the corn crop is bigger while the soybean and wheat harvests will diminish. On our graph, price falls because the corn supply curve shifts to the right.
An Economic Question: How would you draw the demand and supply graph for soybeans?