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The Cost of a Corn Flake

Nov 11, 2010 • Businesses, Demand, Supply, and Markets, International Trade and Finance • 91 Views    No Comments

Telling us that corn prices are soaring, NPR asked, “Why Not Corn Flakes?” After all, approximately 13 ounces of an 18-ounce box of corn flakes is corn. The corn, though, only adds close to 4 cents to the price. So, even if corn prices continue to soar, a 33% increase means less than 2 cents more for our flakes.

As we have heard from Michael Pollan, corn touches our food supply in countless ways. We might see skinnier animals being sold by farmers who are paying more for corn feed and higher prices for beef, pork, and chicken. It is also possible that Coke and Pepsi will substitute sucrose for high-fructose corn syrup. Citing higher commodity costs, McDonald’s just announced it was raising menu prices.

The Economic Lesson

A classic economic scenario, drought in Russia and too much rain in some U.S. corn fields shifted the corn supply curve to the left. Meanwhile, congressional ethanol mandates and some panic buying from Asia are shifting the demand curve to the right. Supply down. Demand up. The resut? Higher prices.

You know what follows. Through the wonder of the market, the invisible hand tells farmers to plant more corn. 

 

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