The Midwest has for many years been known for its lucrative agriculture. Large scale production of agricultural products such as corn and soya beans characterizes a large proportion of lands in the Midwest. Considering that agriculture is a main source of income for many Midwesterners, the US department of Agriculture(USDA) has over the years conducted studies to determine the profitability of agriculture and the patterns that characterize the agricultural market in the Midwest today. In a published article in the Economist entitled Fields of Gold, it is evident that the Midwest has in the recent past become a victim of the climate changes that have faced the United States and many other parts of the world today. According to this article sponsored by the US Department of Agriculture, the Midwest has experienced prolonged drought which has affected both the quantity and the quality of the region’s agricultural yields. Large quantities of crops have continued to wither leaving farmers to calculate huge losses.
Despite the heavy losses that are incurred the demand base of these agricultural products remains high the world market. This article points out that then Midwest continues to meet the high demand of foods and bio-fuels in other countries. This has created a situation whereby, the prices of crops remain high despite the reduction of yield that has been caused by the prolonged periods of drought that have faced the region in the recent past. The high prices of products have been instrumental in encouraging farmers not to exit the market. In addition, the government through the US Department of Agriculture has provided initiatives that allow farmers to be compensated for the losses that they incur as a result of the drought. Some of the key initiatives that the government has provided are the partnering with the Federal Deposit Insurance Corporations to make sure that farmers are compensated for the incurred losses so that they can continue to invest in agriculture. Another important idea that is presented in this article is the idea that the value of agricultural land in the Midwest has gone up. This phenomenon has increased remarkably over the last decade. According to statistics carried out by the US Department of Agriculture, the land value rose by about 16 percent between 2011 and 2012. This paper explains the reasons behind the high prices for crops and the rise in land value in the Midwest using various economic concepts and theories.
- Economic concepts/theories to be applied
First of all, it is important to understand that the United States has a large land size compared to many nations across the world. Unlike many third world nations, the United States has large capital endowment. The availability of this capital in the United States allows the country to adopt technology and mechanization of agriculture. This means that the United States is able to maximize its agricultural produce through employing technology in its agricultural process. One of the key concepts that characterize a perfectly competitive market is the idea of comparative advantage. This concept is used to refer to the fact that nations should produce the goods that they can be able to produce maximally using limited resources. The type of endowments that a given country enjoys is instrumental in shaping the comparative advantage of a given country.
For example, third world countries which enjoy large amounts of human capital would be better producing goods and services that are labor intensive. In the same way, large scale agriculture would favor the United States becomes the country enjoys large amounts of capital endowment and technology compared to many other nations in the world. The idea of comparative advantage is the reason as to why the demand base for crops from the United States has remained high both for food and for the production of biofuels. Despite the problems of drought facing the Midwest affecting their agriculture the global market still views the United States as a better source of corn and other large scale crops that could be used in the production of food and biofuels.
Another concept that can be used to explain the turn of events in Midwestern agriculture is the law of supply and demand. It is worth noting that in a perfectly competitive market that is free of governmental influence the supply and demand regulated itself. This means that the equilibrium price of a given good is dictated by the market itself. In this case, the demand of crops and produces from the Midwest does not change in anyway. The level of demand remains the same. However, the fact remains that the drought that has befallen the Midwest in the recent past has created a situation whereby the level of produce supplied to the market has declined. One of the key strategies that producers in a perfectly competitive market take is the idea that when the demand of a given product is high, it is more profitable to increase the prices of a given good. The reduction in the level of produce in the Midwest has caused the prices of crops to go up. This is because the demand curve remains the same but the supply curve shifts to the left as illustrated in figure 1.1 below. This article argues that the prices are likely to go up even further in the near future. This phenomenon would come about due to the fact that the producers are assured of continued demand of their products despite the high prices that they place on their goods.
Figure 1.I: Diagram showing the supply curve shifting towards the left
Figure 1.2: Diagram showing the effect of a declines supply to the equilibrium price
Description of Diagrams
Fig 1.1 illustrates the effect of the decline in crop produce in the Midwest on the supply curve of the agricultural market. In Fig 1.1 the supply curve shifts from its initial place towards the left as illustrated by new supply curve s2. Fig 1.2 shows the effect of this shift of the supply curve on the market prices. In Fig 1.2, the initial equilibrium price was p1. However after the supply curve shifted towards the left to become s2, the new equilibrium price is p2. The price p2 is higher that p1 illustrating that the shifts of the supply curve to the left caused the prices of the agricultural produce to rise by the value of (p2 – p1).
It is also important to look at the role of government in shaping the outcome of a given market. Various economists have argued that governments can in some cases improve the outcome of a given market. In the case of the Midwest government, through the US department of Agriculture, has improved the outcome of the market by making sure that farmers are compensated for the losses that they make in the production of crops. In this way, farmers are not deterred by the possible risk of losses to exit the market. In this way, supply of the market remains steady. The US Department of Agriculture has also extended its initiatives to farmers such that they are able to buy farm inputs at subsidized prices so that their cost of production is as low as possible.
The rise of land value in the Midwest is also another idea presented in the article that is worth looking at. It is important to note that the production of large scale agriculture is land-intensive. This means that large tracks of land are needed in order to enhance the production process. However, it is worthy not to forget that the United States and the Midwest is not solely dependent on agriculture for the generation of agriculture. The Midwest produces other goods and services that do not necessary require large tracks of land. In spite of having all these activities taking place in the Midwest, the fact remains that agriculture tends to have better paybacks that other sectors because the region has comparative advantage in the production of agricultural goods. The profitability of agriculture, which is labor intensive, increases the demand for more land that is necessary in increasing the level of agricultural production. The increase in demand of more land for agricultural production causes the prices of land in the Midwest to go up as per the law of supply and demand. This explains why the value of land in the Midwest has gone up in recent years. At the end of the article, there are criticisms about the idea that the value of land in the Midwest has gone up. One of the criticisms that are used is the fact that in the state of Kansas for instance, there was a higher debt to asset ratio. According to the article, this debt to asset ratio was approximated to be more than 40 percent higher in 2010 compared to 1979. Despite the use of statistics to substantiate this argument, It is important to note that as a result of the high prices of land in the Midwest, the ability of farmers to buy these lands declines. This means that farmers have to take up loans and other sources of revenue to get these lands. This means that their debts emanate from the fact they have taken up loans to buy these lands. It is therefore plausible to argue that this might have caused the value to debt to asset ratio to be higher in 2010 compared to the ration on 1979.
This article presents economic phenomena that can be explained using various economic concepts and theories. First of all, the article presents the idea that the demand for US agricultural products for food and biofuels has remained high. This concept can be explained using the concept of comparative advantage. The United States has a comparative advantage in the production of these agricultural products due to the availability of capital and technology. Comparative advantage in the part of the United States makes the world prices of the products to be lower compared to if other countries begun to buy the some products from other nations that did not have comparative advantage in the production of the same agricultural goods and services.
Another fact that is brought out in the article is the fact that the prices of agricultural produce in the Midwest have remained high. This phenomenon can be explained using the concept of supply and demand. When the demand of a given good or service is high, producers tend to increase the prices of the good by reducing the supply of the good to the market. Therefore, the decline in the level of production of agricultural crops in the Midwest has worked to the advantage of the producers. In addition, the profitability of agriculture in the Midwest has caused the value of land in the Midwest to rise. This is because agriculture is land intensive and considering that the Midwest has a comparative advantage in the production of agricultural produce the region would be better off putting more land under agriculture.
In conclusion, this article is a good example of how real-life economic phenomena can be explained using economic concepts and theories. In the article, Midwest agricultural market is used as the real-life economic phenomenon. Some of the economic concepts that this paper has employed in the explanation of why the Midwest agricultural market has remained profitable includes the concept of comparative advantage, the law of supply and demand, the role of government in improving market outcome, as well as the idea of trade off for example the putting of more land under agriculture which has led to higher land prices
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