The problem of argricultural markets

I have never met a poor farmer, but I have never met one that didn't complain either. But they do have their cross to bear.

The problem of agricultural markets is that natural events cause good and bad years with no predictability and so farmers incomes are literally all over the place. Ironically the 'good years' for crop yields are the bad years for income.

Deps won't know the term 'inelastic' yet, but it means that demand does not vary much with price. In rich economies everyone has enough income to eat and when food prices fall they don't each much more. Equally when food prices rise people have to buy food and so demand does not go down much either. So demand for food is 'inelastic'.

The result is that when there is a bumper crop farmers have to accept very much lower prices as supply expands. The quantity consumed goes up by less than the price falls and as a result consumers expenditure (farmers incomes) is less. In the diagram above the expenditure at price P2 and quantity Q2 is more than P1 Q1.

This is the situation Australian orange growers find themselves in. The rain and the sun arrived at exactly the right times, and so everyone has a good crop. There is no point letting the oranges rot on the tree and so all the farmers sell, raising supply in the market and lowering the price. The result, in this case, is a price lower than the costs of production.

This is one reason why so many countries intervene in agricultural markets. (Note this comes up in IB all the time.)

I suspect that the fools in IT continue to block the pictures, but I can't find a link to a picture that will show what I need you to see. So use your phone or ask Mr. Camburn to use his computer.

The Age explains the plight of the orange farmers here